                   Case: 16-16544          Date Filed: 01/22/2018   Page: 1 of 34


                                                                                    [PUBLISH]

                      IN THE UNITED STATES COURT OF APPEALS

                                   FOR THE ELEVENTH CIRCUIT
                                     ________________________

                                            No. 16-16544
                                      ________________________

                                 D.C. Docket No. 1:14-cv-22739-JLK

U.S. COMMODITY FUTURES TRADING COMMISSION,

llllllllllllllllllllllllllllllllllllllll                             Plaintiff - Appellee,

versus

SOUTHERN TRUST METALS, INC.,
LORELEY OVERSEAS CORPORATION,
ROBERT ESCOBIO,

llllllllllllllllllllllllllllllllllllllll                        Defendants - Appellants.
                                       ________________________

                            Appeal from the United States District Court
                                for the Southern District of Florida
                                  ________________________

                                           (January 22, 2018)
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Before JORDAN, HULL, and GILMAN, ∗ Circuit Judges.

GILMAN, Circuit Judge:

       This is a commodities-fraud case. The U.S. Commodity Futures Trading

Commission (CFTC) began investigating Southern Trust Metals, Inc., Loreley

Overseas Corporation, and Robert Escobio (collectively, the Defendants) in

response to an investor’s complaint. That complaint also prompted the National

Futures Association (NFA)—a private, self-regulatory organization for the futures

industry—to open an investigation, which proceeded in tandem with the CFTC’s.

The NFA’s investigation ended in a settlement. Afterwards, the CFTC filed this

lawsuit, alleging that the Defendants violated the Commodities Exchange Act

(CEA) when they failed to register as futures commission merchants, transacted

the purchase and sale of contracts for the future delivery of a commodity (futures)

outside of a registered exchange, and promised to invest customers’ money in

precious metals (metals) but instead invested the funds in futures. The district

court, after a bench trial, entered judgment for the CFTC on all claims.

       For the reasons set forth below, we AFFIRM the judgment of the district

court except as to the restitution award for the group of investors whose losses

were associated solely with the registration violations. As to that portion of the


       ∗
        Honorable Ronald Lee Gilman, United States Circuit Judge for the Sixth Circuit, sitting
by designation.


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restitution award, we VACATE the judgment and REMAND with instructions to

consider other equitable remedies.



                              I. BACKGROUND

A.    Factual background

      Escobio is the Chief Executive Officer (CEO) and largest shareholder of the

Southern Trust Securities Holding Corporation (Holding Corporation).          The

Holding Corporation owns Loreley, a British Virgin Islands corporation, which in

turn owns Southern Trust, a Florida corporation. Escobio formed Southern Trust

to provide commodities investment services, and he serves as its director and CEO.

      Southern Trust represented that it was able to facilitate customers’

investment in precious metals. Its website and brochure stated that customers “can

take physical possession of [their] metals in New York or London.”            The

company’s brokers told customers much the same story—that the customers were

purchasing metals stored in places like New York, London, and Hong Kong. At

least one of Southern Trust’s brokers told customers that Southern Trust charged

“storage fees” for the metals.     To open a trading account at Southern Trust,

customers completed an account-opening form containing language that

“[p]hysical precious metals can either be delivered directly to the customer’s

designated point of delivery or to a recognized depository, which provides insured


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non-segregated storage.”     Southern Trust also represented that it could loan

customers money to purchase metals.

      But Southern Trust did not in fact deal in metals; it dealt only in contracts

for the future delivery of metals.       Such contracts are a type of derivative

investment. Southern Trust, however, was not registered with the CFTC as a

futures commission merchant and thus could not trade futures on registered

exchanges.      So Escobio, through Loreley, engaged two foreign brokerages—

Berkeley Futures Limited and Hantec Markets Limited—to handle the

transactions.

      Escobio opened trading accounts at Berkeley and Hantec in Loreley’s name,

not in the names of Southern Trust’s customers. The accounts were numbered, and

Southern Trust maintained records linking its customers to the specific numbered

accounts.

      Opening these accounts required Escobio to review documents describing

Berkeley’s and Hantec’s investment products. One of Hantec’s account-opening

documents, the “Product Disclosure Statement,” explains that “bullion trading”

“operates in the same manner as foreign exchange trading” in that “[w]hat you are

actually buying is a [c]ontract” that “derives its value from” a “physical underlying

asset” such as “Loco London Gold.” That document’s “Glossary” defines “Loco

London Gold” to “mean[] not only that the gold is held in London but also that the


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price quoted is for delivery there.” Elsewhere, the document explains that in

“bullion trading,” “[Hantec] do[es] not deliver the physical underlying assets (i.e.

gold or silver) to you, and you have no legal right to it.” The Berkeley documents

similarly confirm that the account holder intends “to speculate in derivative

products.” None of the account-opening documents mention making loans for the

purchase of metals.

      After setting up the trading accounts at Berkeley and Hantec, Southern Trust

sent its customers’ money to Loreley, which in turn invested the funds, through

Berkeley and Hantec, in futures. Escobio received monthly account statements

showing that all investments were in futures, not metals. Those statements do not

reflect any loans to Southern Trust’s customers.

      Southern Trust never informed its customers that their money was being

transferred to Loreley, Berkeley, or Hantec. Nor did it inform customers who

wished to invest in metals (the group comprising the vast majority of its customers)

that their money was instead being invested in futures.         Southern Trust still

charged those customers interest on fictitious loans, which it falsely told them were

made in order to facilitate their investment in metals.

      After receiving a complaint from one of Southern Trust’s customers, the

NFA opened an investigation. Around the same time, Escobio asked Berkeley and

Hantec about the nature of Loreley’s investments. Escobio contended at trial that


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he did so simply to confirm his understanding that Loreley was investing in metals.

The CFTC maintained, however, and the district court ultimately concluded, that

Escobio had done so in anticipation of litigation, and that he had carefully framed

his inquiries to elicit responses that would support the defense he later asserted—

that he did not know that his customers’ money was being invested in futures.

      In response to Escobio’s inquiry, Hantec’s CEO said: “I can confirm that

you hold accounts with us that only trade Silver Bullion.” Hantec’s CEO clarified

at his deposition, however, that “Silver Bullion” is industry lingo for contracts for

the future delivery of silver and that he could not have intended any other meaning

because trading in “physical metals is not something that Hantec does.”

      A Berkeley employee similarly responded to Escobio’s inquiry, writing that

“all Loreley accounts with the prefix XILOR were silver bullion accounts” that

“only traded in OTC [off-exchange] silver bullion and never traded any futures

contracts.” But Berkeley’s CEO testified at his deposition that Berkeley had never

delivered metals to any of its customers, including Loreley, nor stored any metals

on their behalf. He also testified that, despite Escobio’s contrary assertion, he

never told Escobio that the trades Berkeley handled for Loreley would lead to the

storage of metals.

      None of Southern Trust’s investments led to the delivery of metals.

Hantec’s CEO testified that he told Escobio that Hantec could arrange for the


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delivery of metals, but that he did so only in response to a hypothetical question.

According to Hantec’s CEO, Escobio inquired in the abstract about Hantec’s

ability to arrange delivery: “It’s an inquiry from a client. Robert [Escobio] did not

tell me, ‘I would like to deliver metal.’ He asked me, ‘If I wanted to deliver a

metal, can you arrange it?’ and I said, ‘Let me go find out.’” Hantec’s CEO

continued: “I talked to . . . one of my contacts at Standard Chartered bank who

gave me information and I went back to Robert and explained” that Hantec could

arrange delivery. This response was memorialized in a letter to Escobio, stating

that “any Gold or Silver you purchase from us is held for your account and upon

full payment we are able to arrange delivery for you when requested.” But the

Defendants never asked Hantec to arrange delivery, and no delivery ever occurred.

      The NFA’s investigation ended in a settlement. Although the NFA’s and the

CFTC’s investigators had cooperated with each other, their investigations were

independent. The Defendants’ settlement agreement with the NFA therefore does

not mention the CFTC or the CFTC’s investigation.

      As the CFTC’s investigation moved forward, the Defendants continued to

produce documents in response to its requests. The Defendants’ lawyers knew at

the time of the NFA settlement that the CFTC might bring its own enforcement

action, but they did not suggest to the CFTC or to anyone else that such an action

would violate their settlement agreement with the NFA.


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B.    Procedural background

      In July 2014, the CFTC filed its complaint, seeking equitable relief and

penalties under the CEA. The complaint alleges that the Defendants engaged in

two illegal schemes, which we will refer to as the “unregistered-futures scheme”

and the “leveraged-metals scheme.”

      As to the unregistered-futures scheme, the complaint alleges that, even

though the Defendants were not registered as futures commission merchants, they

accepted money from customers who wished to invest in futures. Because the

Defendants were unregistered, moreover, they could not trade futures on a

registered exchange.     They therefore sought to trade indirectly, through

intermediaries.   To that end, the Defendants funneled the customers’ money

through Loreley to foreign brokerage firms—Berkeley and Hantec—licensed to

trade futures. Those brokerage firms made the actual investments.

      As to the leveraged-metals scheme, the complaint alleges that the

Defendants accepted money from customers who wished to invest in metals with

borrowed money. But instead of issuing loans to those customers and investing

their money in metals, the Defendants took the customers’ money and invested it

in futures. No loans existed, but the Defendants charged loan interest anyway.

      At the summary-judgment stage of the case, the parties filed dueling

motions. The district court granted the CFTC’s motion in part, holding that the


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Defendants had conducted off-exchange transactions and had failed to register as

futures commission merchants. It denied the Defendants’ motion in full, rejecting

their affirmative defenses that (1) their settlement with the FTA equitably estopped

the CFTC from bringing suit, and (2) they actually delivered metals so as to bring

their transactions within an exception to the CEA’s registration requirements.

      The CFTC’s fraud claim then proceeded to trial. After a bench trial, the

district court found that the Defendants had engaged in fraud, ordered them to pay

restitution in the full amount of the customers’ losses, and imposed fines. The

court also permanently enjoined the Defendants from employment in the

commodities-trading industry. On appeal, the Defendants challenge the court’s

rulings both on summary judgment and at trial.

                                 II. ANALYSIS

A.    Standard of review

      On an appeal from a judgment in a bench trial, we review the district court’s

conclusions of law de novo. HGI Assocs., Inc. v. Wetmore Printing Co., 427 F.3d

867, 873 (11th Cir. 2005). We also review de novo the district court’s application

of law to facts. United States v. Frank, 599 F.3d 1221, 1228 (11th Cir. 2010). The

district court’s findings of fact, on the other hand, are evaluated under the

clear-error standard. HGI, 427 F.3d at 873. “We will not find clear error unless

our review of the record leaves us ‘with the definite and firm conviction that a


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mistake has been committed.’” Coggin v. Comm’r of Internal Revenue, 71 F.3d

855, 860 (11th Cir. 1996) (quoting United States v. Gypsum Co., 333 U.S. 364, 395

(1948)). Finally, when the district court has issued a permanent injunction, we

review the scope of the injunction under the abuse-of-discretion standard.

Commodity Futures Trading Comm’n v. Wilshire Inv. Mgmt. Corp., 531 F.3d

1339, 1343 (11th Cir. 2008).

B.    Equitable estoppel does not bar the CFTC’s claims.

      To start with, the Defendants challenge the district court’s summary-

judgment ruling that their settlement with the NFA does not preclude the CFTC’s

claims. The district court held that equitable estoppel does not apply because

(1) the Defendants do not dispute that the NFA is a private, nongovernmental

organization through which the commodities-trading industry regulates itself;

(2) the CFTC was not a party to the settlement; and (3) settlements with private,

nongovernmental organizations do not preclude subsequent claims by government

regulators.

      Although this circuit has not yet addressed whether a settlement between a

nongovernmental regulator and a regulated company may preclude subsequent

claims by a governmental regulator, the circuits that have addressed the issue have

uniformly answered in the negative. See, e.g., Graham v. S.E.C., 222 F.3d 994,

1007 n.25 (D.C. Cir. 2000) (“Of course, even if the NASD had done something to


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bind itself, that would not have bound the SEC.”); Jones v. S.E.C., 115 F.3d 1173,

1179–81 (4th Cir. 1997) (“We have found no statutory, regulatory, or historical

reference to support [the] argument that NASD discipline of its members was

intended to preclude this disciplinary action by the SEC itself against a securities

professional.”).

      In Jones, the Securities and Exchange Commission (SEC) brought

administrative claims against a securities trader after the trader settled a claim by

the National Association of Securities Dealers (NASD). 115 F.3d at 1180. The

Fourth Circuit rejected the trader’s argument that the settlement precluded the

SEC’s claims, reasoning that private and public regulators “represent distinct

interests” and “bring two separate vantage points to enforcement efforts—one from

the industry itself and the other from the regulator.” Id.

      This outcome accords with the courts’ general reluctance to apply principles

of equitable estoppel to the government.          “The Supreme Court has never

established that the doctrine of equitable estoppel can be applied against the

government and, in fact, has implied that it can not be.” Tovar-Alvarez v. U.S.

Atty. Gen., 427 F.3d 1350, 1353–54 (11th Cir. 2005) (citing Office of Pers. Mgmt.

v. Richmond, 496 U.S. 414, 422 (1990)). “[I]t is well settled that the [g]overnment

may not be estopped on the same terms as any other litigant.” Heckler v. Cmty.

Health Servs. of Crawford Cty., 467 U.S. 51, 60 (1984).


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      This circuit has repeatedly opined that, even assuming that equitable

estoppel could apply against the government, “it would require a showing of

affirmative misconduct on the government’s part.” Tovar-Alvarez, 427 F.3d at

1354; see also Sanz v. U.S. Sec. Ins. Co., 328 F.3d 1314, 1319–20 (11th Cir. 2003)

(“[E]ven if estoppel is available against the Government, it is warranted only if

affirmative and egregious misconduct by government agents exists.”).

      The present case is analogous to Jones. Here, the uncontradicted evidence

shows that the NFA, like the NASD, is a private, nongovernmental organization

and that the CFTC was not a party to the Defendants’ settlement with the NFA.

The record, moreover, contains no evidence of affirmative misconduct by the

government.     So even if equitable estoppel theoretically could apply to the

government, it does not apply here.

      A second, independent ground also exists for affirming the district court’s

denial of summary judgment based on the Defendants’ estoppel defense: the

record reflects a genuine dispute of material fact regarding the element of

reasonable reliance. See Heckler, 467 U.S. at 59 (noting that “the party claiming

the estoppel must have relied on its adversary’s conduct” and that the “reliance

must have been reasonable”). Especially noteworthy is the fact that the settlement

agreement makes no mention of the CFTC or its investigation, so the Defendants’

purported reliance lacks a textual basis. The only language in the agreement that


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even arguably suggests reliance is a clause providing that the agreement “shall

resolve and terminate all complaints, investigations and audits relating to [the

Defendants].”

      But interpreting this language to embrace the CFTC’s investigation is

unreasonable. For one thing, the notion that the NFA would agree to terminate

investigations outside its control—and that the Defendants would accept such an

unfulfillable obligation as consideration for their own concessions—defies

common sense. Further, a literal interpretation of “all complaints, investigations

and audits relating to [the Defendants]” would impose on the Defendants

obligations that they surely did not intend, such as the obligation to terminate their

own routine, internal accounting audits. Such audits would, after all, be “audits

relating to [the Defendants].”

      The lack of textual support for the Defendants’ estoppel argument creates a

genuine dispute concerning the reasonableness of their reliance. At the same time,

other evidence creates a genuine dispute about whether there was any reliance at

all. First, the Defendants continued to produce documents in response to requests

from the CFTC’s investigators after the settlement. This fact tends to negate any

reliance because the Defendants presumably would not have continued cooperating

with the CFTC if they had truly believed that their settlement with the NFA had

terminated the CFTC’s investigation. Second, the Defendants’ lawyers, while


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preparing to defend against that action, never suggested to the CFTC or anyone

else that such an action might violate the settlement agreement with the NFA. For

these reasons, we find no error in the district court’s denial of the Defendants’

motion for summary judgment based on the affirmative defense of equitable

estoppel.

C.    Summary judgment in favor of the CFTC on its claims for registration
      violations was appropriate.

      We now turn to the merits of this case. The CEA imposes registration

requirements on commodities traders and the exchanges where they trade.

Section 6d of the CEA makes it “unlawful for any person to be a futures

commission merchant unless . . . such person shall have registered [as such] . . .

with the [CFTC].”     7 U.S.C. § 6d(a)(1).      The statute also requires that all

transactions be “conducted on or subject to the rules of a board of trade which has

been designated or registered by the [CFTC].”           Id. § 6(a).   Together, these

provisions require that only registered traders handle transactions and that they do

so on a registered exchange.

      An exception exists, however, for transactions that result in “actual delivery

within 28 days.” Id. § 2(c)(2)(D)(ii)(III)(aa). Actual delivery means “giving real

and immediate possession” of the commodity “to the buyer or the buyer’s agent.”

U.S. Commodity Futures Trading Comm’n v. Hunter Wise Commodities, LLC, 749

F.3d 967, 979 (11th Cir. 2014) (internal quotation marks omitted). “‘Actual’ is
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that which ‘exist[s] in fact’ and is ‘real,’ rather than constructive.” Id. (quoting

Black’s Law Dictionary 494 (9th ed. 2009)).

      This exception is an affirmative defense on which the commodities trader

bears the burden of proof. See Schlemmer v. Buffalo, R & P R Co, 205 U.S. 1, 10

(1907) (explaining that the “general rule of law is[] that a proviso carves special

exceptions only out of the body of the act; and those who set up any such

exception must establish it”); see also Corning Glass Works v. Brennan, 417 U.S.

188, 196–97 (1974) (“[T]he application of an exemption under the Fair Labor

Standards Act is a matter of affirmative defense on which the employer has the

burden of proof.”); Mulhall v. Advance Sec., Inc., 19 F.3d 586, 590 (11th Cir.

1994) (“[T]he exceptions granted within the EPA constitute affirmative

defenses.”).

      The Defendants concede that they were not registered as futures commission

merchants and that the trades at issue did not occur on a registered exchange. But

they seek refuge in the exception for transactions resulting in actual delivery.

      As set forth in the factual background of this opinion, however, there is no

basis in the record for the Defendants’ contention that actual delivery ever

occurred. The record instead supports the holding of the district court that the

Defendants failed to establish their affirmative defense of “actual delivery.” See

Hunter Wise Commodities, 749 F.3d at 979. We therefore find no error in the


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court’s grant of summary judgment in favor of the CFTC on its claims that the

Defendants engaged in off-exchange transactions and failed to register as futures

commission merchants.

D.    The district court did not err in concluding that the Defendants
      committed fraud under 7 U.S.C. §§ 6b(a) and 9, and under 17 C.F.R.
      § 180.1.

      We next turn to the issue of fraud. For our purposes, 7 U.S.C. § 6b(a),

7 U.S.C. § 9, and 17 C.F.R. § 180.1 are redundant.             Section 6b(a) makes it

“unlawful . . . for any person . . . in connection with . . . any contract of sale of any

commodity . . . for future delivery . . . to cheat or defraud or attempt to cheat or

defraud the other person . . . [or] willfully to make . . . any false report or statement

. . . [or] willfully to deceive or attempt to deceive the other person by any means

whatsoever.”    7 U.S.C. §§ 6b(a).      Section 9 of the same chapter is similar,

providing that “[i]t shall be unlawful for any person . . . to use . . . in connection

with any . . . contract of sale of any commodity . . . for future delivery . . . any

manipulative or deceptive device or contrivance.” Id. § 9(1). Finally, 17 C.F.R.

§ 180.1(a) declares it “unlawful for any person . . . in connection with any . . .

contract of sale of any commodity . . . or contract for future delivery . . . to

intentionally or recklessly . . . use . . . any manipulative device, scheme, or artifice

to defraud; . . . [or] [m]ake . . . any untrue or misleading statement of a material

fact or to omit to state a material fact necessary . . . to make the statements made


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not untrue or misleading; . . . [or] [e]ngage . . . in any act . . . which operates . . . as

a fraud or deceit upon any person.”

       The CFTC must prove the same three elements to establish liability under

each of the above provisions: “(1) the making of a misrepresentation, misleading

statement, or a deceptive omission; (2) scienter; and (3) materiality.” Commodity

Futures Trading Comm’n v. R.J. Fitzgerald & Co., Inc., 310 F.3d 1321, 1328 (11th

Cir. 2002). “Unlike a cause of action for fraud under the common law of [t]orts,

‘reliance’ on the representations is not a requisite element . . . .” Id. at n.6.

       1. Misrepresentation, misleading statement, or deceptive omission

       The district court’s factual findings on the “misrepresentation” element

reflect no clear error. With the many references to “physical metals,” “physical

possession,” and “storage,” Southern Trust’s brochure, website, brokers, and

account-opening documents collectively represented that the company offered

investments in metals. Abundant evidence shows, however, that after accepting

the customers’ money, Southern Trust sent the funds to Loreley, which in turn sent

them to Berkeley and Hantec for investment in futures. The Defendants do not

dispute that the accounts at Berkeley and Hantec were in Loreley’s name, not in

the names of Southern Trust’s customers. Moreover, the evidence shows that

Southern Trust never informed its customers that their money was being




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transferred to Loreley, Berkeley, or Hantec and, consequently, that the customers

did not know that those firms held their money.

      The district court correctly applied the law to these facts. “Whether a

misrepresentation has been made depends on the ‘overall message’ and the

‘common understanding of the information conveyed.’” R.J. Fitzgerald, 310 F.3d

at 1328 (quoting Hammond v. Smith Barney Harris Upham & Co., Comm. Fut. L.

Rep. (CCH) 36,657 & n.12 (CFTC Mar. 1, 1990)). We find the case of U.S.

Commodity Futures Trading Commission v. Hunter Wise Commodities, LLC,

21 F. Supp. 3d 1317 (S.D. Fla. 2014), squarely on point. The district court in

Hunter Wise concluded, after a bench trial, that the defendant “misrepresented

facts about the precious metals transactions it oversaw” and provided a deceptive

“‘overall message’” when it “led the retail customers to believe metals were stored

on their behalf.”    Id. at 1338 (quoting R.J. Fitzgerald, 310 F.3d at 1328).

Moreover, the court found that the defendant “failed to inform [the retail

customers] that the metals it purchased were on a financed basis, it did not own the

metals, and the metals, if there were any at all, were not in the retail customers’

names.” Id.; see also U.S. Commodity Futures Trading Comm’n v. Hunter Wise

Commodities, LLC, 749 F.3d 967, 980–82 (11th Cir. 2014) (affirming the district

court’s issuance of a preliminary injunction because the CFTC presented a prima

facie case of fraud under 7 U.S.C. § 6b).


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      Southern Trust orchestrated a nearly identical scheme in the present case. It

misrepresented to customers the fundamental nature of their investments, telling

them that they were investing in metals when in fact they were investing in futures,

and charging a fictitious storage fee despite the customers having no metals to

store. Finally, Southern Trust failed to tell the customers that it passed their money

through Loreley to Berkeley and Hantec, with the customers having no knowledge

of or relationship with these entities. The district court therefore did not err in

concluding that the CFTC satisfied its burden, under the preponderance-of-the-

evidence standard, to prove the first element necessary to establish fraud.

      2. Scienter

      Regarding the element of scienter, Escobio does not dispute that he was the

CEO of both Southern Trust and the Holding Corporation, and that he had

substantial prior experience in commodities trading. He also does not dispute that

he signed the account-opening documents for Loreley’s trading accounts at both

Berkeley and Hantec.        Those documents, as well as the monthly account

statements that Escobio received, make clear that Loreley was investing the

customers’ money in futures, not metals. Further, Escobio knew that the accounts

at Hantec and Berkeley bore Loreley’s name, not the names of Southern Trust’s

customers. Based on these facts, the district court did not clearly err in finding that

Escobio knew that he was investing his customers’ money in futures.


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      Nor did the district court clearly err in finding that Escobio knew that

Berkeley and Hantec did not make any loans to Southern Trust’s customers, even

though Southern Trust charged its customers interest on the purported loans.

Neither the account-opening documents nor the monthly statements from Berkeley

or Hantec reflect any loans from those companies. Moreover, the Defendants point

to no evidence—other than Escobio’s uncorroborated testimony—of any loans

from Berkeley or Hantec, and the district court discounted Escobio’s testimony on

that point, as on others, because it determined that he lacked credibility. This

circuit applies a “strong rule of deference” in reviewing a district court’s

determination of a witness’s credibility at a bench trial. Childrey v. Bennett, 997

F.2d 830, 834 n.5 (11th Cir. 1993). Given this standard, as well as the numerous

conflicts between Escobio’s testimony and the documentary evidence, the court

was entitled to find that Escobio lacked credibility and to discount his testimony

accordingly.

      The district court also correctly applied the law to these facts. “[S]cienter is

established if Defendant intended to defraud, manipulate, or deceive, or if

Defendant’s conduct represents an extreme departure from the standards of

ordinary care.” Commodity Futures Trading Comm’n v. R.J. Fitzgerald & Co.,

Inc., 310 F.3d 1321, 1328 (11th Cir. 2002). Adapting “federal securities law” to

the commodities-fraud context, this circuit has stated that scienter is shown “when


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Defendant’s     conduct     involves    ‘highly    unreasonable     omissions    or

misrepresentations . . . that present a danger of misleading [customers] which is

either known to the Defendant or so obvious that Defendant must have been aware

of it.’” Id. (quoting Ziemba v. Cascade Int’l, Inc., 256 F.3d 1194, 1202 (11th Cir.

2001)).

      The evidence shows that the Defendants either intended to mislead Southern

Trust’s customers or made highly unreasonable misrepresentations that posed an

obvious danger of misleading them. Escobio’s deep involvement in managing the

futures-trading accounts at Berkeley and Hantec, as well as his extensive industry

experience, support the inference that he knew that he was investing his customers’

money in futures. Hantec’s CEO, at his deposition, put it this way: “Under no

circumstance is [it] plausible” that Escobio believed that he was trading in metals.

Escobio also surely knew that Berkeley and Hantec had made no loans to Southern

Trust’s customers and, therefore, that the customers were being charged interest on

loans that did not exist. The district court thus did not err in concluding that the

CFTC had proved scienter.

      3. Materiality

      This brings us to the third and final element—materiality. “A representation

or omission is ‘material’ if a reasonable investor would consider it important in

deciding whether to make an investment.” Fitzgerald, 310 F.3d at 1328–29. The


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Defendants’ briefing on this element addresses only the materiality of their

omission that the customers’ money would pass through Loreley to Berkeley and

Hantec. If that were the only omission or misrepresentation in this case, we might

need   to   examine the     materiality element     more    closely.      But other

misrepresentations found by the district court easily qualify as material. The

Defendants, for example, represented that they were investing customers’ money

in metals when in fact they were investing it in futures. Moreover, the Defendants

represented that customers owed interest on loans used to purchase metals, but the

loans did not exist.     A reasonable investor would consider each of these

misrepresentations important in deciding whether to invest.        Accordingly, the

district court did not err in concluding that these misrepresentations were material.

We therefore agree with the district court’s overall conclusion that fraud was

established under 7 U.S.C. §§ 6b(a) and 9, and under 17 C.F.R. § 180.1.

E.     The district court did not err in permanently enjoining the Defendants
       from employment in the commodities-trading industry.

       Turning now to the propriety of the injunction issued against the Defendants,

we note that a district court’s issuance of an injunction is reviewed under the

abuse-of-discretion standard. Commodity Futures Trading Comm’n v. Wilshire

Inv. Mgmt. Corp., 531 F.3d 1339, 1347 (11th Cir. 2008) (applying this standard to

a permanent injunction issued under the CEA). “[S]o long as [the district court’s]

decision does not amount to a clear error of judgment[,] we will not reverse even if
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we would have gone the other way had the choice been ours to make.” S.E.C. v.

ETS Payphones, Inc., 408 F.3d 727, 733 (11th Cir. 2005).

      “[U]pon a proper showing,” the CEA allows a district court to grant “a

permanent or temporary injunction.” 7 U.S.C. § 13a-1(b). “‘[T]he ultimate test

[for an injunction] is whether the defendant’s past conduct indicates that there is a

reasonable likelihood of further violations in the future.’” Wilshire, 531 F.3d at

1346 (quoting SEC v. Caterinicchia, 613 F.2d 102, 105 (5th Cir. 1980)). This test

entails weighing the following six factors:

      the egregiousness of the defendant’s actions, the isolated or recurrent
      nature of the infraction, the degree of scienter involved, the sincerity
      of the defendant’s assurances against future violations, the
      defendant’s recognition of the wrongful nature of his conduct, and the
      likelihood that the defendant’s occupation will present opportunities
      for future violations.

SEC v. Carriba Air, Inc., 681 F.2d 1318, 1322 (11th Cir. 1982). A court need not

make a finding on every factor. See Wilshire, 531 F.3d at 1346–47 (holding that a

district court that considered only three of the six factors did not abuse its

discretion in issuing an injunction).

      Escobio argues that the injunction should be vacated because the district

court, in weighing the Carriba Air factors, erred in not concluding that his

cooperation with the NFA’s investigation resolved the last three factors in his

favor. But the court had discretion in how to interpret Escobio’s cooperation with

the NFA. This discretion would have allowed the court, for example, to interpret
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Escobio’s cooperation not as contrition, but as a self-interested effort to strike a

favorable deal with the NFA and, perhaps, to avoid criminal prosecution.

Escobio’s denial of wrongdoing at his deposition, at trial, and throughout the

NFA’s and the CFTC’s investigations further belies his acceptance of

responsibility. The same is true of his attempt to deflect blame onto Berkeley and

Hantec, which he claims duped him into trading futures. In sum, the court applied

the correct legal standard, and its factual findings contain no clear error. We

therefore find no fault in its issuance of a permanent injunction.

F.    Restitution is proper only for losses sustained in the leveraged-metals
      scheme, not for losses sustained in the unregistered-futures scheme.

      This brings us to the final issue in this case—restitution. The district court

awarded restitution for losses arising from both schemes.            First, it awarded

$1,543,892 for losses sustained in the leveraged-metals scheme, in which the

Defendants accepted customers’ money for investment in metals but instead

invested the funds in futures. Second, the court awarded $559,725 for losses

sustained in the unregistered-futures scheme, in which the Defendants accepted

customers’ money for investment in futures—and actually invested the funds in

futures through Loreley’s accounts at Berkeley and Hantec—but failed to register

as futures commission merchants or to conduct the transactions on a registered

exchange. The Defendants challenge both awards, arguing that the CFTC failed to



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prove, as required by the CEA, that the Defendants’ violations of the CEA

proximately caused their customers’ losses.

      1. The district court relied on a definition of proximate cause
         subsequently rejected by the Supreme Court.

      Under the CEA, a “court may impose . . . on any person found in the action

to have committed any violation[] equitable remedies including . . . restitution to

persons who have sustained losses proximately caused by such violation (in the

amount of such losses).” 7 U.S.C. § 13a-1(d)(3). This statutory language, by its

terms, permits restitution only for losses proximately caused by a violation.

      In its restitution analysis, the district court concluded that the “Defendants’

violations proximately caused their customers’ losses” because those losses “were

a reasonably foreseeable result of the Defendants’ violations.” The court derived

this foreseeability-based formulation of proximate cause from a recent decision of

this court holding that, for proximate cause to exist under the Fair Housing Act

(FHA), “[t]he defendant must have been reasonably able to foresee the kind of

harm that was actually suffered.” See City of Miami v. Bank of Am. Corp., 800

F.3d 1262, 1282 (11th Cir. 2015).

      That decision, however, was subsequently reversed by the Supreme Court in

Bank of America Corp. v. City of Miami, 137 S. Ct. 1296 (2017). The Court

concluded that, “[i]n the context of the FHA, foreseeability alone does not ensure

the close connection that proximate cause requires” between the complained-of
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conduct and the alleged harm. Id. at 1306. As the Court explained, the FHA

incorporates the concept of proximate cause developed at common law, where

“directness principles” apply. Id. Proximate cause under the FHA thus “requires

‘some direct relation between the injury asserted and the injurious conduct

alleged.’” Id. (quoting Holmes v. Sec. Inv’r Protection Corp., 503 U.S. 258, 268

(1992)). Such a “direct relation” usually does not exist “beyond the first step” in a

causal chain. Id. (quoting Hemi Group, LLC v. City of New York, N.Y., 559 U.S. 1,

10 (2010)).

      We have found no circuit court opinion examining proximate cause under

the CEA, but the statute surely demands more than foreseeability alone. Section

13a-1(d)(3) of the CEA, like the FHA provision examined in Bank of America,

“sounds basically in tort” because it defines a new legal duty and authorizes the

courts to award compensation for injuries caused by a defendant’s wrongful

breach.   See Curtis v. Loether, 415 U.S. 189, 195 (1974) (explaining why a

damages action under the Civil Rights Act of 1964 “is analogous to a number of

tort actions recognized at common law”).

      Congress, moreover, has given no indication, either in the CEA’s text or

otherwise, that it intended to depart from the common-law conception of proximate

cause. See Bank of America, 137 S. Ct. at 1305 (“We assume Congress ‘is familiar

with the common-law rule and does not mean to displace it sub silentio’ in federal


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causes of action.” (quoting Lexmark Int’l, Inc. v. Static Control Components, Inc.,

134 S. Ct. 1377, 1390 (2014))). We thus conclude that the common-law rules

governing proximate cause apply here.          Those rules include the notion that

proximate cause encompasses cause in fact, requiring proof of “but-for” causation.

W. Page Keeton et al., Prosser and Keeton on the Law of Torts § 30 (5th ed. 1984).

      2. The district court erred in finding that the registration violation
         alone proximately caused any loss.

      With regard to the unregistered-futures scheme, the district court’s finding of

proximate cause rested on the premise that the Defendants’ “business was illegal

from the outset” and that the Defendants “never should have accepted customer

funds for the purpose of trading futures transactions without first registering as a

futures commission merchant with the CFTC.” The court reasoned that because

the transactions were illegal, the losses were foreseeable. But such reasoning

mistakes correlation for causation.      As a general matter, losing money is a

foreseeable result of investing with an unregistered trader, but this is not because a

trader’s failure to register will itself cause any loss. More likely, any loss will

result from some other factor, such as the trader’s incompetence or dishonesty,

which the failure to register correlates with but does not cause. The intrinsic

qualities of the trader—not his or her failure to register—would be the likely cause

of the loss, to say nothing of market fluctuations.



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      Consider the analogous circumstance of a client being represented by an

unlicensed lawyer. The lawyer’s lack of licensure might indicate incompetence or

a lack of integrity, but normally it will not in and of itself cause a client’s loss in

court. Indeed, a client might well prevail in court despite the lawyer’s status. Or,

if there is a loss, the loss could flow from factors wholly unrelated to the lawyer’s

status, such as an unfavorable precedent, a judicial error, or a jury’s caprice.

      A recent decision from this court illustrates the point that a fraudster’s

failure to observe registration requirements does not necessarily cause his victim’s

loss. In Alvarez v. United States, 862 F.3d 1297, 1300 (11th Cir. 2017), a group of

federal employees sued the defendant for negligence per se after he sold them

fraudulent, unregistered securities. The court rejected the plaintiffs’ argument that

the seller’s failure to register the securities had caused the losses, concluding

instead that the losses had occurred because the securities were fraudulent. This

point was made by the Alvarez court in the following passage:

      As the district court correctly explained, “had the FEBG Bond Fund
      been legitimate, the fact of its being unregistered would have had no
      effect on plaintiffs. And conversely, if McLeod had registered the
      fraudulent securities (lying about them to do so since they didn’t
      exist), plaintiffs would still have suffered the same harm. Plaintiffs’
      injuries flow from the securities and McLeod’s representations which
      underlay them being fraudulent, not because they were unregistered.”

Id. at 1302 (quoting the district court’s opinion).




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      The same logic applies here.       In the unregistered-futures scheme, the

Defendants invested their customers’ money in futures through Loreley’s accounts

at Berkeley and Hantec. The customers who lost money in this scheme intended to

invest in futures, and the CFTC does not dispute that the Defendants in fact

facilitated the investments that those customers wished to make. According to the

district court, the Defendants’ only CEA violations in the unregistered-futures

scheme were their failure to register as futures commission traders and their failure

to disclose the roles of Berkeley, Hantec, and Loreley in making the investments.

      But the record contains no evidence that the customers who lost money in

the unregistered-futures scheme did so because of these violations. As in Alvarez,

there has been no showing that the registration violations caused the losses. Nor

has the CFTC pointed to any evidence that the losses flowed from the Defendants’

omissions regarding the roles of Loreley, Berkeley, or Hantec. The CFTC has not

shown, for instance, that the customers who intended to invest in futures would

have refrained from doing so if they had known of Loreley’s, Berkeley’s, or

Hantec’s involvement. Nor has the CFTC shown that those entities’ involvement

delayed the execution of the trades or otherwise caused the investors to receive

anything less than what they had bargained for.

      Because the CFTC did not prove that the Defendants’ violations in the

unregistered-futures scheme caused any loss, we vacate the restitution award


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related to that scheme and remand the issue to the district court with instructions to

consider whether any other equitable remedy is appropriate. We particularly note

the statutory subsection under which the court may order the disgorgement of

gains, in appropriate circumstances, without regard to proximate cause.

See 7 U.S.C. § 13a-1(d)(3) (“[T]he court may impose . . . on any person found . . .

to have committed any violation[] equitable remedies including . . . disgorgement

of gains received in connection with such violation.” (emphasis added)). The

district court may, but need not, consider on remand whether disgorgement is

appropriate in the present case.

      3. Sufficient evidence supports the award of restitution for losses
         sustained in the leveraged-metals scheme.

      The district court did not err, however, in awarding restitution for losses in

the leveraged-metals scheme, in which the Defendants promised to invest the

customers’ money in metals but instead invested the funds in futures.              To

constitute a proximate cause, the fraud must stand in “direct relation” to the loss.

Bank of Am. Corp. v. City of Miami, 137 S. Ct. 1296, 1306 (2017). This does not

mean that the fraud must be the “sole and exclusive cause” of the loss; it means

only that the fraud must be a “substantial” or “significant contributing cause.”

FindWhat Investor Group v. FindWhat.com, 658 F.3d 1282, 1309 (11th Cir. 2011)

(citing Robbins v. Koger Properties, Inc., 116 F.3d 1441, 1447 (11th Cir. 1997)).

The courts’ “‘general tendency’” when considering whether a but-for cause
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qualifies as a proximate cause is “‘not to go beyond the first step’” in the causal

chain. Bank of Am. Corp., 137 S. Ct. at 1306 (quoting Hemi Group, LLC v. City of

New York, N.Y., 559 U.S. 1, 10 (2010)).

      In the present case, the fraud is directly related to the losses because the

Defendants took their customers’ money and, contrary to the customers’

instructions, invested the funds in futures. But the customers wished to invest in

metals, not futures, so there is no question that the Defendants’ unilateral act of

investing the funds in futures was a “substantial” or “significant contributing”

cause of the loss. Whether additional causes exist is irrelevant. Moreover, the

Defendants’ act of investing the customers’ funds in futures is inextricable from

the fraud because that act rendered false the Defendants’ representations about the

nature of the investments being made and directly led to the investors’ losses when

market conditions deteriorated.

      The Defendants argue, however, that market conditions should be viewed as

the sole proximate cause of the losses on the theory that the drop in metals prices

would have caused the same losses even if their customers’ money had been

invested in metals. But this argument ignores crucial differences between metals

and futures.     For one thing, futures involve an element of leverage, which

magnifies gains and losses:

      When you speculate in the futures markets, you have the ability to
      purchase contracts on margin. This means you can control a large
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      amount of metal at a fraction of its value. Leverage can amplify
      returns and risk. Small price swings in either direction could mean
      significant gains, or you could lose significantly more than you
      initially invested.

U.S. Commodity Futures Trading Comm’n, The Risks of Buying Gold,

Silver & Platinum, http://www.cftc.gov/idc/groups/public/@cpfraudawarenessandp

rotection/documents/file/cppreciousmetalsfraudbrochure.pdf; see also Thomas A.

Russo & Marlisa Vinciguerra, Financial Innovation and Uncertain Regulation:

Selected Issues Regarding New Product Development, 69 Tex. L. Rev. 1431, 1488

(1991) (explaining that “futures trading is inherently risky and involves the

possibility of losses greater than a customer’s investments of funds”).

Accordingly, the argument that the Defendants’ customers would have experienced

losses of the same magnitude if their money had been invested in metals is flawed.

      Another crucial difference between metals and futures is that metals can be

held indefinitely, whereas futures almost always have expiration dates.

See Commodity Futures Trading Comm’n v. Zelener, 373 F.3d 861, 867 (7th Cir.

2004) (noting that “normal futures contracts have defined expiration or delivery

dates”); see also Patricia A. O’Hara, The Elusive Concept of Control in Churning

Claims Under Federal Securities and Commodities Law, 75 Geo. L.J. 1875, 1894

n.55 (1987) (“[C]ommodity futures are by definition a short-term investment with

a specified delivery date, generally not too removed in time. The trader must

either close his position prior to the delivery date or perform the contract.”).
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      When metals prices fall, a metals investor can avoid losses by not selling the

metals until prices (hopefully) recover. But a futures investor makes or loses

money immediately when prices change. See Roberta Romano, A Thumbnail

Sketch of Derivative Securities and Their Regulation, 55 Md. L. Rev. 1, 18 (1996)

(explaining that “holders of futures contracts recognize gains and losses

immediately because of the daily settlement process”); see also id. (“Margin

accounts are adjusted daily in response to changes in the value of positions, a

process that is called ‘marking to market.’ If a customer’s position experiences a

gain, his account balance is increased and he may withdraw the profit from the

account. If he experiences a loss, his account balance is reduced.”). This means

that a futures investor cannot “ride out” unfavorable market movements in the

same way as a metals investor.

      Given the inherent differences between metals and futures, the Defendants’

argument that conditions in the metals market were the sole proximate cause of

their customers’ losses is untenable. If the Defendants had placed their customers’

money in a slot machine instead of in the metals market, surely they could not

escape liability by pointing to the unpredictable odds in a casino as the sole

proximate cause for the losses. Crediting the Defendants’ argument would create

perverse incentives for commodities traders. See United States v. Turk, 626 F.3d

743, 750 (2d Cir. 2010) (rejecting a similar argument because it would “encourage


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would-be fraudsters to roll the dice on the chips of others, assuming all of the

upside benefit and little of the downside risk”). We therefore find no error in the

district court’s restitution award for losses sustained in the leveraged-metals

scheme.

                               III. CONCLUSION

      For all of the reasons set forth above, we AFFIRM the judgment of the

district court except as to the restitution award for the group of investors whose

losses were associated solely with the registration violations. As to that portion of

the restitution award, we VACATE the judgment and REMAND with instructions

to consider other equitable remedies.




                                         34
