
USCA1 Opinion

	




          J      u      l      y   1      2      ,   1      9      9      6                            United States Court of Appeals                                For the First Circuit                                 ____________________        No. 95-2106                         CARR INVESTMENTS, INC., EDWARD CARR                                AND RODMAN & RENSHAW,                                     Petitioners,                                          v.                         COMMODITY FUTURES TRADING COMMISSION                                AND RICHARD C. DAVIS,                                     Respondents.                                 ____________________                        ON PETITION FOR REVIEW OF AN ORDER OF                        THE COMMODITY FUTURES TRADING COMMISSION                                 ____________________                                        Before                               Torruella, Chief Judge,                                          ___________                          Boudin and Stahl, Circuit Judges.                                            ______________                                 ____________________                                     Errata Sheet                                     Errata Sheet            The opinion of this Court issued on June 24, 1996, is amended as        follows:            On cover sheet delete "respondents" and insert "respondent            Commodity Futures Trading Commission and Jeffrey V. Boxer for                                                     ________________            respondent Richard C. Davis."                            United States Court of Appeals                                For the First Circuit                                 ____________________        No. 95-2106                         CARR INVESTMENTS, INC., EDWARD CARR                                AND RODMAN & RENSHAW,                                     Petitioners,                                          v.                         COMMODITY FUTURES TRADING COMMISSION                                AND RICHARD C. DAVIS,                                     Respondents.                                 ____________________                        ON PETITION FOR REVIEW OF AN ORDER OF                        THE COMMODITY FUTURES TRADING COMMISSION                                 ____________________                                        Before                               Torruella, Chief Judge,                                          ___________                          Boudin and Stahl, Circuit Judges.                                            ______________                                 ____________________            Jeffry M. Henderson with whom Daniel G. Dolan, Jr. and Henderson            ___________________           ____________________     _________        & Becker were on brief for petitioners.        ________            George G. Wilder, Attorney, with whom Pat G. Nicolette, Acting            ________________                      ________________        General Counsel, Jay L. Witkin, Deputy General Counsel, and William S.                         _____________                              __________        Liebman, Assistant General Counsel, Commodity Futures Trading        _______        Commission, were on brief for respondent Commodity Futures Trading        Commission and Jeffrey V. Boxer for respondent Richard C. Davis.                       ________________                                 ____________________                                    June 24, 1996                                 ____________________                      STAHL, Circuit Judge.  Appellants Carr Investments,                      STAHL, Circuit Judge.                             _____________            Inc. and Edward Carr seek review of an order of the Commodity            Futures Trading Commission reversing, as an abuse of            discretion, an administrative law judge's decision to award            them attorney's fees and costs.  Because we find that the            Commission's decision was not the product of reasoned            decisionmaking, we vacate its order and remand for further            consideration consistent with this opinion.                                          I.                                          I.                                          __                                      Background                                      Background                                      __________            A.  The Relevant Facts            ______________________                      In January 1992, Richard Davis opened a futures and            options trading account with Carr Investments, Inc. ("CII"),            a commodity futures brokerage firm.  Edward Carr was Davis's            account executive.  In March 1992, Davis gave Carr            discretionary authority to trade his account.  Over the            subsequent months, Davis deposited a total of $66,500 into            the account, and Carr actively traded options and futures            contracts on Davis's behalf.  However, by December 1992,            trading losses had exhausted Davis's $66,500 account balance,            and the account was closed.                      Vexed by the loss, Davis filed a reparation            complaint with the Commodity Futures Trading Commission            ("CFTC" or "the Commission") charging CII and Carr with            fraudulently inducing him to open the account, churning,            breach of fiduciary duty, and unauthorized trading, all in            violation of the Commodity Exchange Act and certain of the                                         -3-                                          3            Commission's regulations.  Davis sought to recover $66,500 in            out-of-pocket losses and $78,155 in lost profits.  Davis also            requested that the case proceed under the Commission's            voluntary decisional proceeding, 17 C.F.R.    12.100-.106,            and paid the required $25 filing fee, 49 Fed. Reg. 6692 (Feb.            22, 1984).1                      A voluntary decisional proceeding is a "no-frills"            adjudication by a CFTC Judgment Officer based on the parties'            documentary and tangible submissions of proof.  Both parties            must elect this proceeding for it to apply.  17 C.F.R.              12.26(a).  In agreeing to a voluntary decisional proceeding,            the parties waive their rights to an oral evidentiary            hearing, to a written statement of findings of fact and            conclusions of law, to the recovery of attorney's fees and            costs, and to appeal the final decision to the Commission.             Id.    12.100(b), 12.105-.106.            ___                      In their answer, however, CII and Carr elected the            Commission's formal decisional proceeding, a "full-blown"            adjudication by an administrative law judge ("ALJ") that            includes all of the rights waived in a voluntary decisional            proceeding.  Id.    12.300-.315.  At the relevant time, in                         ___            order to invoke a formal decisional proceeding, the amount of                                            ____________________            1.  Although the regulations governing reparation proceedings            were  amended in 1994 to  increase the amount  of filing fees            and the amount  in controversy,  59 Fed. Reg.  9637 (Mar.  1,            1994), we cite  to the  regulations in effect  in 1993,  when            Davis filed his complaint.                                         -4-                                          4            the claim had to exceed $10,000 and only one of the parties            needed to elect it.  49 Fed. Reg. 6630 (Feb. 22, 1984).  By            electing the formal decisional procedure, respondents had to            pay a $175 filing fee.  Id. at 6629.  Finding these                                    ___            requirements satisfied here, the Commission commenced a            formal decisional proceeding and assigned the case to an ALJ.             After considering the evidence presented at an oral            evidentiary hearing and the parties' post-hearing memoranda,            the ALJ issued his decision.            B.  The ALJ's Decision            ______________________                      The ALJ's decision had two principal holdings.             First, the ALJ held that Davis failed to establish CII's and            Carr's liability on any of his four claims.  Specifically,            the ALJ found that Davis had undermined the merits of all but            one of his claims (as well as his credibility) by disavowing,            at the evidentiary hearing, the key facts alleged in his            complaint.  The ALJ noted that minutes after Davis's attorney            outlined his claims in opening argument, Davis recanted many            of them, testifying that Carr had not guaranteed him any            profit much less "enormous profits," and that he was aware of            the risks associated with options and futures trading.  In            fact, the ALJ observed, Davis conceded that he was an            extremely sophisticated and experienced investor.  As for            Davis's remaining claim, the ALJ concluded that the record            contained no credible evidence of unauthorized trading.                                         -5-                                          5                      Second, citing his discretion under 17 C.F.R.              12.314(c) and CFTC precedent for awarding attorney's fees and            costs to a prevailing litigant if the losing party acted in            bad faith, the ALJ held that Davis's bad faith in pursuing            the action warranted an award of attorney's fees and costs to            CII and Carr.  The ALJ inferred Davis's bad faith from the            following facts:  the gross contradictions between the            representations in his filings and his testimony at the            evidentiary hearing, his contradictory testimony on whether            he had in fact read the complaint, his concession that            certain of his discovery responses and statements in his            complaint were misleading, and his assertion in post-hearing            filings of allegations he had repudiated at the evidentiary            hearing.  Citing the dual purpose of compensating CII and            Carr and deterring other complainants from such abusive            conduct, the ALJ ordered Davis to pay CII and Carr $19,417.75            for attorney's fees and costs incurred in defending the            litigation.            C.  The CFTC's Order            ____________________                      Davis appealed the ALJ's decision to the            Commission, challenging, inter alia, the "no liability"                                     _____ ____            determination and the propriety of the fee award.  After            reviewing the parties' appellate briefs and the record below,            the Commission issued its order, affirming the ALJ's "no            liability" determination but reversing the fee award.  In                                         -6-                                          6            affirming the ALJ's "no liability" determination, the            Commission summarily adopted the findings and conclusions of            the ALJ.  In reversing the fee award, however, the Commission            supplied its own analysis, sustaining the ALJ's finding of            Davis's bad faith but concluding that the ALJ's fee award was            an abuse of discretion because of "four mitigating factors."                      First, the Commission referred generally to the            circumstances under which Davis signed the complaint.             Specifically, the Commission noted that the complaint in the            record contained only a faxed copy of the signature page,            although there was no evidence that the faxed signature was            not in fact that of Davis.  Recognizing the ALJ's "strenuous            efforts" to determine whether Davis had read the complaint            (i.e., the ALJ garnered conflicting testimony from Davis on             ____            this issue), the Commission nevertheless concluded that it            was reluctant to award attorney's fees and costs "in the            absence of Davis's original signature."                       Second, the Commission noted the relative            culpability of Davis and his attorney.  Although it sustained            the ALJ's finding of Davis's bad faith, the Commission found            that Davis's attorney, not Davis, was responsible for the            majority of the problems that the ALJ relied upon in deciding            to assess attorney's fees and costs against Davis.  Noting            that its regulations, unlike Rule 11 of the Federal Rules of            Civil Procedure, permit the assessment of attorney's fees and                                         -7-                                          7            costs against parties only, and not against attorneys, the            Commission concluded that assessing fees and costs against            Davis was inappropriate because Davis's lawyer was more            culpable than Davis.                      Third, the Commission relied upon the ALJ's            inclusion in the fee award of expenses for CII and Carr's            hotel, meals, air fare, and taxis.  Noting that its case law            prohibits the inclusion of travel expenses in an award of            costs, the Commission apparently concluded that the ALJ's            inclusion of these prohibited expenses undercut the ALJ's            decision to grant a fee award.                      Fourth and finally, the Commission cited the fact            that CII and Carr, not Davis, had elected the formal            decisional proceeding.  Davis, the Commission noted, had            requested a voluntary decisional proceeding, in which            attorney's fees and costs are not assessable.  The Commission            concluded that it would be unfair, therefore, to assess            attorney's fees and costs against Davis for his misuse of a            forum that he had not chosen.  Also under this factor, the            Commission cited the ALJ's inclusion in the award of CII and            Carr's $175 filing fee and transcript fee, costs attributable            to their choice of a formal decisional proceeding.                                         -8-                                          8                                         II.                                         II.                                         ___                                       Analysis                                       Analysis                                       ________                      CII and Carr appeal the Commission's reversal of            the ALJ's decision to award them attorney's fees and costs,            arguing that the conclusion that the ALJ abused his            discretion is not supported in the Commission's order.  The            Commission's four "mitigating factors," they argue, are            largely irrelevant to whether a fee award should have been            assessed and do not establish, either independently or            collectively, that the ALJ's decision to award fees was an            abuse of his discretion.                      In so arguing, CII and Carr challenge the            Commission's application of the law to the facts.  Some            question exists in the context of this case as to how a court            should review the Commission's decision.  For instance, where            a decision involves agency expertise, courts generally have            applied a deferential "reasonableness" or "rationality"            standard of review.  See Monex Int'l, Ltd. v. CFTC, 83 F.3d                                 ___ _________________    ____            1130, 1996 WL 250438, at *3 (9th Cir. May 16, 1996); Morris                                                                 ______            v. CFTC, 980 F.2d 1289, 1293 (9th Cir. 1992); Malolely v.               ____                                       ________            R.J. O'Brien & Assocs., Inc., 819 F.2d 1435, 1440-41 (8th            ____________________________            Cir. 1987); cf. Northeast Utils. Serv. Co. v. FERC, 993 F.2d                        ___ __________________________    ____            937, 943-44 (1st Cir. 1993) (holding under "substantial            evidence" standard of review that "we defer to the agency's            expertise . . . so long as its decision is . . . reached by                                         -9-                                          9            `reasoned decisionmaking'").  Where agency expertise is not            involved, however, courts have reviewed under the more            probing de novo standard.  See Northeast Utils., 993 F.2d at                    __ ____            ___ ________________            944 (holding that "pure" legal errors, those requiring no            deference to agency expertise, are reviewed de novo); Morris,                                                        __ ____   ______            980 F.2d at 1293.  Because we find that the Commission's            decision cannot survive either standard of review, we need            not enter this thicket.  We will apply the more deferential            "reasonableness" standard, and assume arguendo that the                                                  ________            decision to reverse the ALJ's fee award for abuse of            discretion involved the Commission's expertise.                      So framed, the issue before us is whether the            Commission's conclusion that the ALJ abused his discretion in            awarding attorney's fees and costs is the product of reasoned            and rational decisionmaking, i.e., whether there is a                                         ____            rational connection between the Commission's conclusion and            the reasons it propounded.  CFTC precedent establishes that            under abuse of discretion review the Commission will not            second-guess an ALJ's decision so long as it reflects a            reasoned application of the appropriate factors.  See In re                                                              ___ _____            JCC, Inc., [1992-1994 Transfer Binder] Comm. Fut. L. Rep.            _________            (CCH)   26,080, at 41,580 (CFTC May 12, 1994) (reviewing            ALJ's decision to award civil monetary sanctions for abuse of            discretion); In re Newman, [1990-1992 Transfer Binder] Comm.                         ____________            Fut. L. Rep. (CCH)   25,356, at 39,191 (CFTC Aug. 6, 1992)                                         -10-                                          10            (same).  Thus, we must ask whether the Commission's            discussion of the four mitigating factors rationally explains            why the ALJ did not make a reasoned application of the             factors appropriate to the decision whether to award fees and            costs.  Mindful that the scope of review under this standard            is narrow and that a reviewing court should not substitute            its judgment for that of the Commission, see Burlington Truck                                                     ___ ________________            Lines v. United States, 371 U.S. 156, 168 (1962) (citing as a            _____    _____________            fundamental rule of administrative law that "an agency's            discretionary order be upheld, if at all, on the same basis            articulated in the order by the agency itself"), we            nevertheless find that the four mitigating factors, as relied            upon by the Commission in its order, do not provide reasoned            support for its conclusion that the ALJ abused his            discretion.                      For its first factor, the Commission listed Davis's            failure to file a complaint bearing his original signature            and cited two regulations, 17 C.F.R.    12.12, 12.13, as            support.  Assuming arguendo that these regulations required                               ________            Davis to file a complaint bearing an original signature, it            is nevertheless unclear how Davis's violation of these            regulations undermined the ALJ's decision to assess            attorney's fees and costs against him.  There is no            suggestion that the signature on the complaint was not            Davis's or that he did not wish to pursue this action.  To                                         -11-                                          11            the contrary, by sustaining the ALJ's findings, the            Commission found that Davis had consciously filed and pursued            this action in bad faith.  Under these circumstances, where            the connection between Davis's failure to file a complaint            bearing an original signature and the ALJ's abuse of            discretion is far from self-evident, the Commission had to do            more than cite regulations of questionable applicability.2             This is particularly true where consideration of this factor            appears to frustrate the equitable and deterrent purposes of            fee awards by insulating from sanctions bad faith            complainants who file a copy of the complaint's signature            page in lieu of an original.                                            ____________________            2.  In discussing the first  factor, the Commission also made            oblique  references to  the circumstances  under which  Davis            signed the  complaint and the  ALJ's efforts to  determine if            Davis had  read the complaint  and stood  behind it.   To the            extent  that the  Commission was thereby  introducing, albeit            unartfully, a factor distinct from the originality of Davis's            signature, i.e.,  the uncertainty  of whether Davis  read the                       ____            complaint  before  signing  it,  the  Commission   failed  to            establish that the ALJ should have separately considered this            factor in deciding whether to award fees but did not.                        Our review of the ALJ's decision reveals that he in            fact relied on  Davis's equivocation about whether  or not he            had ever read the complaint in  concluding that Davis pursued            this  action in  bad  faith.   Therefore,  not only  can  the            Commission  not complain that the ALJ failed to consider this            "factor,"  the  Commission   implicitly  adopted  the   ALJ's            analysis  thereof  in  sustaining  the  bad  faith  findings.            Moreover,  even if the  Commission had not  adopted the ALJ's            analysis, but had concluded instead that Davis never read the            complaint  before  signing it,  this  conclusion  still would            likely have supported a bad  faith finding because under CFTC            regulations   Davis's  signature  on   the  complaint  was  a            certification that  he had read  it, knew  its contents,  and            attested  to the  truth  of its  statements.   17  C.F.R.                12.12(b), 12.13(2).                                         -12-                                          12                      Also unclear from the Commission's order is how            Davis's lesser culpability relative to that of his attorney,            the second factor, undercut the ALJ's decision to assess            attorney's fees and costs against Davis.  Without            elaboration, the Commission simply concluded that because its            regulations only envision assessing a fee award against            parties and not also against their attorneys, it would be            unfair to assess fees against Davis where his attorney was            more culpable than he was.  The Commission's determination            that Davis's attorney was more culpable than Davis, however,            in no way negates its finding that Davis was also culpable.                      CFTC precedent and Regulation   12.314(c) provide            that where a losing party to a formal decisional proceeding            acts in bad faith, the ALJ may require him to pay his            opponent's attorney's fees and costs.  See Sherwood v. Madda                                                   ___ ________    _____            Trading Co., [1977-1980 Transfer Binder] Comm. Fut. L. Rep.            ___________            (CCH)   20,728, at 23,023-025 (CFTC Jan. 5, 1979); see also                                                               ___ ____            Scarborough v. Madda Trading Co., [1977-1980 Transfer Binder]            ___________    _________________            Comm. Fut. L. Rep. (CCH)   20,841, at 23,448 (CFTC June 11,            1979); 17 C.F.R.   12.314(c).  The Commission did not point            to any exception for a party who, although he acted in bad            faith, did not act as badly as his attorney.  To the            contrary, CFTC precedent suggests that where, as here, both            the party and his attorney acted in bad faith, and the            attorney's action caused monetary loss to the opposing party,                                         -13-                                          13            "the award of attorney fees is perhaps the only adequate            remedy" to compensate the opposing party for defending            against a frivolous action.  Sherwood, [1977-1980 Transfer                                         ________            Binder] Comm. Fut. L. Rep. (CCH)   20,728, at 23,025 n.33            (noting that while the Commission may impose civil monetary            sanctions against errant attorneys, those monies are not paid            to the opposing party).  In light of contrary precedent, the            Commission was remiss simply in relying on Davis's attorney's            greater relative culpability without also explaining how this            greater culpability sufficiently excused Davis's culpability            to a degree no longer warranting attorney's fees sanctions.                      For its third factor, the Commission pointed to the            fact that the ALJ improperly included travel expenses in his            calculation of the award's costs.  In its brief to this            court, however, the Commission effectively conceded that the            inclusion in the award of prohibited costs did not support            its conclusion that the ALJ's decision to award fees and            costs was an abuse of discretion, stating that "Fairly read            in the context of the opinion as a whole, it is clear that            [the third factor] was more in the nature of clarification            than a substantive basis for setting aside the award."  We            agree, and we also extend this concession to a related            argument, incorporated in the fourth factor, that the ALJ's            inclusion of fees attributable to CII and Carr's choice of            the formal decisional proceeding (i.e., the $175 filing fee                                              ____                                         -14-                                          14            and the transcript fee) justified its reversal of the entire            fee award.                      Finally, as its fourth factor, the Commission cited            the fact that CII and Carr elected the formal decisional            proceeding and that Davis had elected a voluntary decisional            procedure in which attorney's fees and costs are not            assessable.  From these facts, the Commission concluded that            it would therefore be unfair to assess attorney's fees and            costs against Davis for misuse of a forum he did not choose.             In so deciding, the Commission proclaimed that it was not            suggesting "that a reparation complainant may completely            insulate himself from an award of attorney fees and costs--no            matter how frivolous his complaint or how vexatious his            subsequent conduct--simply by initially requesting a            voluntary decisional proceeding."                        While the Commission expressed this sentiment, it            failed to explain what was distinctive about Davis's case            that made consideration of the request for a voluntary            decisional proceeding permissible here.  By failing to draw            any lines limiting application of this factor to a discrete            class of cases or to explain why Davis's situation warranted            exception, the Commission did precisely what it rejected:  it            insulated Davis from attorney's fees and costs solely because            he elected the voluntary decisional proceeding.  CFTC            Regulation   12.314(c), however, provides that attorney's                                         -15-                                          15            fees and costs are a right associated with the formal            decisional proceeding.  17 C.F.R.   12.314(c).  It does not            take exception for a complainant who, although he elected a            voluntary decisional proceeding in his complaint, continued            to pursue his action in the reparations forum after the            respondent elected a formal decisional proceeding.             Accordingly, where the Commission's consideration of a            complainant's choice of a voluntary decisional proceeding            contradicts its own stated intention as well as its            regulations, it must explain how this factor nonetheless            undermined the ALJ's fee award decision.  The Commission            failed to do so here.                      In sum, because the Commission's discussion of the            four mitigating factors did not rationally explain why the            ALJ's fee award decision was not a reasoned application of            appropriate factors, we find wholly unreasonable the            Commission's conclusion that the ALJ abused his discretion.             In so holding, however, we do not necessarily preclude the            Commission from finding that the ALJ abused his discretion in            awarding attorney's fees and costs against Davis.  We simply            require that the Commission supply a reasoned analysis for            doing so.  Such analysis is notably absent from the present            order.                                         -16-                                          16                                         III.                                         III.                                         ____                                      Conclusion                                      Conclusion                                      __________                      For the reasons stated above, we vacate the                                                       ______            Commission's order and remand for further consideration                                   ______            consistent with this opinion.                                         -17-                                          17
