                                                      [PUBLISH]


             IN THE UNITED STATES COURT OF APPEALS

                    FOR THE ELEVENTH CIRCUIT            FILED
                                                   U.S. COURT OF
                                                      APPEALS
                                                 ELEVENTH CIRCUIT
                               No. 01-14780
                                                    OCT 29, 2002
                                                  THOMAS K. KAHN
                                                       CLERK
                  D.C. Docket No. 99-01558-CV-T-23F

COMMODITY FUTURES TRADING COMMISSION,

                                                Plaintiff-Appellant,

                          versus

R.J. FITZGERALD & CO., INC.,
RAYMOND FITZGERALD,
LEIZA FITZGERALD,
GREG BURNETT,
CHUCK KOWALSKI,

                                                Defendants-Cross-
                                                Claimants-Third-Party-
                                                Plaintiffs-Appellees,

AL CORINGRATO,

                                                Defendant-Cross-
                                                Defendant,

SCOTT EUBANKS,
JOHN RODGERS, et al.,

                                                Third-Party-Defendants.
                      Appeal from the United States District Court
                          for the Middle District of Florida

                                     (October 29, 2002)

Before TJOFLAT, WILSON and COWEN*, Circuit Judges.

COWEN, Circuit Judge:

       Presented in this appeal is the question of liability for fraud and related

allegations under the Commodities Exchange Act, 7 U.S.C. §§ 1 et seq., (the

“CEA” or “Act”) and accompanying regulations. Plaintiff/Appellant Commodities

Futures Trading Commission (“CFTC”) appeals from a judgment finding all

Defendants not liable under the Act for various solicitation and trading activities

carried out at R.J. Fitzgerald & Company, Inc. (“RJFCO”). After reviewing the

record in this matter, considering the submissions of the parties, and having

benefitted from oral argument, we conclude that the District Court erred in not

finding liability under the Act as a matter of law for two specific solicitation

devices utilized by RJFCO: (1) a television commercial that aired on the “CNBC”

cable network in March 1998 (The “Commercial”) and (2) a promotional seminar

for potential RJFCO customers that also took place in 1998 (the “Seminar”). For

_______________________________________
*Honorable Robert E. Cowen , U.S. Circuit Judge for the Third Circuit, sitting by designation.


                                               2
the reasons expressed below, we will reverse as to Raymond Fitzgerald, Leiza

Fitzgerald and RJFCO, and remand only for enforcement proceedings against those

two individuals and the firm.

                              I. Procedural Background

      In 1999, CFTC commenced this CEA enforcement case by filing a

Complaint against Defendants/Appellees RJFCO, Raymond Fitzgerald, Leiza

Fitzgerald, Chuck Kowlaski, and Greg Burnett, alleging that they were involved in

fraudulent solicitations to attract potential customers throughout the United States

to invest in commodity options, in violation of the Act and related federal

regulations.1 This Complaint was dismissed essentially for failure to plead fraud

with particularity.

      The District Court then required CFTC to file an Amended Complaint

detailing every fact it intended to prove in establishing liability under the ACT.

CFTC complied with that request, filing an extensive 138 page, 15 count

Complaint which sets the framework for the instant case. The Amended Complaint

alleged that Defendants, or some individual Defendants, violated the Act by: (1)

committing fraud by misrepresentation or omission of material facts in connection



      1
         The Complaint also named as a Defendant RJFCO employee Al Coringrato who settled
the claim before trial.

                                            3
with the solicitation, maintenance, or execution of commodity futures transactions;

(2) operating an introducing brokerage firm to cheat, defraud, deceive, or attempt

to cheat, defraud or deceive clients; (3) trading client accounts excessively in order

to generate commissions without regard to customer interests (“churning”); (4)

failing to provide risk disclosure statements prior to the opening of RJFCO

customer accounts; and (5) failing to supervise firm personnel diligently.

Defendant Raymond Fitzgerald was charged with “controlling person” liability

under the Act. The various allegations in the Amended Complaint encompass

claims grounded in 7 U.S.C. § 6c(b), 17 C.F.R. § 33.10(a) and (c), 17 C.F.R. §

166.3, and 7 U.S.C. § 13c(b).

      Counts one, two, seven and nine alleged that Raymond Fitzgerald, as

principal of RJFCO, RJFCO, Leiza Fitzgerald and Greg Burnett committed fraud

by misrepresentation or omission of material facts in connection with the

solicitation of commodity futures transactions. Counts three, ten and fifteen

charged Raymond Fitzgerald, as principal of RJFCO, RJFCO, Greg Burnett and

Chuck Kowalski with operating an introducing brokerage to cheat, defraud,

deceive, or attempt to cheat, defraud or deceive clients. Counts four and eleven

charged Raymond Fitzgerald, RJFCO, and Greg Burnett with committing fraud by

trading client accounts excessively to generate commissions without regard to


                                          4
client interests. Count five charged Raymond Fitzgerald and RJFCO with failing

to provide adequate risk disclosure statements prior to opening customer accounts.

Counts six, eight, and twelve charged Raymond Fitzgerald, Leiza Fitzgerald and

Greg Burnett with failing to supervise diligently the sales practices and

solicitations of RJFCO brokers.

       After some of the claims in the Amended Complaint were dismissed on

summary judgment, the parties agreed, pursuant to 28 U.S.C. § 636(c) and Fed. R.

Civ. P. 73, to conduct a bench trial before a Magistrate Judge2. That trial

commenced on February 26, 2001. On March 8, 2001, the Court heard oral

argument and granted what it labeled a “directed verdict” against a significant part

of the CFTC’s case. Germaine to this appeal, and as will be explained further

below, the District Court granted relief to Defendants on that part of the CFTC’s

claim that the Commercial violated the Act as well as on the claim that Defendants

had a duty to disclose their specific trading record (i.e., their success rate) to

potential customers.

       The trial pressed forward to completion on the remaining claims in the

Amended Complaint and concluded on March 19, 2001. Thereafter, the District



       2
       Trial before the Magistrate Judge will hereafter be referred to as the “District Court” or
the “Court.”

                                                5
Court entered extensive findings of fact and conclusions of law, ruling in favor of

all Defendants on all counts in the Amended Complaint. See CFTC v. R.J.

Fitzgerald & Co., Inc., 173 F. Supp.2d 1295 (M.D. Fla. 2001). CFTC appeals,

essentially arguing that regardless of the Court’s factual findings based on witness

credibility, Defendants committed fraud and other CEA violations as a matter of

law.

                                II. Background Facts

       A. The Defendants

       RJFCO was a full service “introducing broker” at all times relevant to this

appeal. See 7 U.S.C. § 1a. RJFCO’s obligations to those with whom it dealt were

guaranteed by Iowa Grain Company (“Iowa Grain”), a registered futures

commission merchant. RJFCO opened for business in 1992. It operated as a firm

designed to service small customer accounts, where the customer base had little

experience in commodities markets. RJFCO operated in a perhaps unique manner

in the commodities industry in that it used one team of sales brokers for generating

customers via telephone calls and a separate team of brokers and traders to do the

actual trades and monitor accounts. Defendant Raymond Fitzgerald was the

principal of RJFCO and was responsible for all decisions, actions, and trading

recommendations made or entered into by the firm. Defendant Leiza Fitzgerald’s


                                          6
responsibilities at RJFCO involved developing training materials and training sales

brokers. Greg Burnett was an associated person at RJFCO and was responsible for

supervising traders and brokers. Chuck Kowalski was RJFCO’s chief financial

analyst, responsible for studying the commodities markets and developing trades

and trade strategies.

      B. Customer Solicitation Devices

      At the heart of this appeal are two solicitation devices used by RJFCO to

attract customers to invest in options on futures contracts: the Commercial and the

Seminar.

             1. The Commercial

       The Commercial stated that “the El Nino [weather phenomenon] has struck

where expected, and if patterns continue, the effects could be devastating.

Droughts, floods, and other adverse conditions could drastically alter the supply

and demand dynamics of the corn market . . . .” The Commercial also declared that

“[w]ith the giant developing nations, such as China and Russia badly in need of

grains and world grain supplies put to the test, conditions may exist for profits as

high as 200 to 300 percent.” This was accompanied by a graphic statement on the

television screen that the percentages were a mathematical example of leverage.




                                          7
The Commercial further asserted that “the potential of the corn market may never

be greater. Tight U.S. reserves coupled with domestic and worldwide demands

could be the formula for a trade you won’t want to miss. Find out how as little as

$5,000 could translate into profits as high as 200 to 300 percent. Call R.J.

Fitzgerald today . . . .”

       The Commercial was initially drafted by an advertising agency. When

Raymond Fitzgerald first received the script, he edited it to add additional risk

disclosures that would appear just above the firm’s phone number, so that anyone

watching the Commercial would see the risk disclosure. He further insisted that

this disclosure appear more than half the time the Commercial was running. After

his edits were done, he sent the script to Iowa Grain’s chief compliance officer,

Anne Farris. Iowa Grain approved the script on February 18, 1998.

       The Commercial actually ran on CNBC for the first half of March, 1998, but

did not generate much business. In total, it appeared about eight or nine times and

was then discontinued. At some point after its discontinuation, Raymond

Fitzgerald was contacted by a National Futures Association (“NFA”)3 compliance

officer, who expressed concern over the Commercial’s content. More specifically,


       3
          The National Futures Association (“NFA”) is a congressionally authorized futures
industry self regulatory organization. The purpose of the NFA is to assure high standards of
business conduct by its Members and to protect the public interest.

                                               8
the NFA officer, David Croom, informed Raymond Fitzgerald that the Commercial

was in apparent violation of NFA rules because: (1) it was misleading in that it

failed to tell potential customers that the options spoken of were “out-of-the money

options” that would require a dramatic move in the options premium value in order

for the customer to see gains equal to that claimed in the Commercial; (2)

misleadingly gave the impression that weather events were inevitable; (3) did not

display the risk of loss statement prominently enough on the screen; and (4)

downplayed the risk of loss. In response to this concern, Raymond Fitzgerald

informed Croom that the Commercial had already been discontinued and would

not be aired again.

      At the close of CFTC’s case, and before the defense was presented, the

District Court entered a directed verdict in favor of Defendants on the part of the

claim that the Commercial was fraudulent and violated the CEA. The District

Court addressed the Commercial again in its opinion issued after the bench trial,

stating that the Commercial was not “misleading or deceptive” and that there was

no “intent to defraud.” 173 F. Supp.2d at 1310.

             2. RJFCO’s 1998 Promotional Seminar

      In addition to the Commercial, CFTC alleged CEA violations occurred in a

promotional seminar used by RJFCO to attract customers. The Seminar was


                                          9
developed by Leiza Fitzgerald and RJFCO brokers Scott Campbell and Tom West

after they attended a training session on the topic conducted by the National

Introducing Brokers Association.4

       The Seminar informed customers that weather patterns, political events, and

historical trends can affect the prices of certain commodities. The Seminar also

told customers that technical analysis could assist them in the commodity options

market, since “history often repeats itself” and “past price action can provide you

with clues to future action.” Customers were told they could “take advantage” of

“fundamental” market moves such as weather events and political events and

“technical theory” such as past market movements through either futures or options

investing. The Seminar also drew a distinction between investment instruments

based on the quantum of risk involved:

               Which one you choose depends on how aggressive or what
               degree of risk you wish to take on.

               If you are highly aggressive and looking for unlimited profit
               potential as well as unlimited risk than [sic] it would be the
               futures. But most would like something less aggressive,


       4
          Leiza Fitzgerald developed the script of this Seminar based in part on materials from an
NFA workbook and manuals from the Chicago Board of Trade. Testimony adduced at the bench
trial revealed that RJFCO employees would read the promotional scripts given to them by Leiza
Fitzgerald verbatim. The Seminar provided general background on the firm and how the
commodities market operates. At the beginning of the Seminar, participants received written
risk disclosure material. As with the Commercial, the content of the Seminar was approved by
Iowa Grain before it went into action.

                                               10
               something offering unlimited profit potential but limited risk--
               option trade [sic].


On the topic of risk, the Seminar additionally told potential customers: “options on

futures allow investors and risk mangers to define risk and limit it to the loss of a

premium paid for the right to buy or sell a futures contract while still providing . . .

unlimited profit potential.”

       The RJFCO employees who conducted the Seminar offered what the

Seminar script deemed a “very exciting” illustration of how profits could be made

on options. Specifically, the Seminar focused on the commodity heating oil,

explaining that for the last eighteen years, there was an average increase in that

commodity “of 22 cents from the low to the high in the price range” and that a

$5,000 investment on a heating oil futures contract would result in $46,200 if there

was a 22 cent move in the price. Customers were told that if they wanted “limited

risk,” they could invest in an option contract, where they would receive

“approximately 50% of that profit–46,200 divided by 2 equals $23,100.”5

       In its opinion following the bench trial, the District Court concluded that the

Seminar did not violate the CEA. The District Court explained that there was


       5
          Finally, the Seminar had more general advice for potential RJFCO customers: a “big
reason” people lose money is “greed” and that “you will never go broke taking a profit, just take
it one piece at a time.”

                                               11
nothing “patently or latently misleading or deceitful” about the profit illustrations

used in the seminar. 173 F. Supp.2d at 1311.

                                   III. Discussion

      The District Court had jurisdiction over this case under 7 U.S.C. § 13a-1 and

28 U.S.C. § 1331. We have jurisdiction pursuant to 28 U.S.C. § 636(c)(3) and 28

U.S.C. § 1291.

      It is somewhat unclear from the briefing what specific parts of the judgment

below are being challenged by CFTC, especially given the large number of

allegations in the extremely lengthy Amended Complaint. CFTC’s initial brief

requests that this Court “reverse the district court’s judgment and remand with

instructions to enter judgment in favor of appellant CFTC on the Amended

Complaint.” Appellant’s Brief at 57. However, we can construe the CFTC’s

appellate position from the briefing and from oral argument. It specifically

challenges these discrete aspects of the District Court’s judgment: (1) the

Commercial did not violate the Act; (2) the Seminar did not violate the Act; (3)

Defendants had no duty to disclose their trading record to potential customers; (4)

Defendants did not excessively trade their customers’ accounts without regard to

customer interest; and (5) Raymond Fitzgerald did not have “controlling person”

liability under the Act. As explained below, we agree that the District Court erred


                                          12
in not finding liability as a matter of law under the Act for the Commercial, the

Seminar, and for failure to disclose RJFCO’s trading record in both. We further

agree that Raymond Fitzgerald is liable in this case as a “controlling person” at the

firm. We do not disturb the District Court’s judgment as to the remaining alleged

points of error.

      A. The Commercial

      CFTC argues that the District Court erred because the Commercial is

fraudulent as a matter of law. Upon review of the full text of the Commercial, we

are constrained to agree. The CEA and its accompanying regulations directly

proscribe attempts to deceive and defraud in connection with futures and options

trading. 17 C.F.R. § 33.10 provides:

      It shall be unlawful for any person directly or indirectly:
                    (a) To cheat or defraud or attempt to cheat or
                    defraud any other person;
                    (c) To deceive or attempt to deceive any other person by
                    any means whatsoever
      in or in connection with an offer to enter into, the entry into, the
      confirmation of the execution of, or the maintenance of, any
      commodity option transaction.


See also 7 U.S.C. § 6b(a)(i), (iii) (proscribing similar conduct in connection with a

futures contract).




                                         13
       In order to establish liability for fraud, CFTC had the burden of proving

three elements: (1) the making of a misrepresentation, misleading statement, or a

deceptive omission; (2) scienter; and (3) materiality. See Hammond v. Smith

Barney Harris Upham & Co., [1987-1990 Transfer Binder] Comm. Fut. L. Rep.

(CCH) 24,617 (CFTC Mar.1, 1990); CFTC v. Trinity Finan. Group, Inc., Comm

Fut. L. Rep. 27,179 (S.D. Fla. Sept. 29, 1997), aff’d in relevant part, CFTC v.

Sidoti, 178 F.3d 1132 (11th Cir. 1999). Failure to establish any one of these

elements is dispositive and would preclude CFTC’s fraud/deception claims.6

       Whether a misrepresentation has been made depends on the “overall

message” and the “common understanding of the information conveyed.”

Hammond, Comm. Fut. L. Rep. at 36,657 & n.12. For purposes of fraud or deceit

in an enforcement action, scienter 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. See, e.g., Messer v. E.F. Hutton & Co., 847

F.2d 673, 677-79 (11th Cir. 1988). In the similar context of federal securities law,

we have previously stated that scienter is met when Defendant’s conduct involves

“highly unreasonable omissions or misrepresentations . . . that present a danger of


       6
         Unlike a cause of action for fraud under the common law of Torts, “reliance” on the
representations is not a requisite element in an enforcement action. See, e.g., CFTC v.
Rosenberg, 85 F. Supp.2d 424, 446 (D.N.J. 2000).

                                              14
misleading [customers] which is either known to the Defendant or so obvious that

Defendant must have been aware of it.” Ziemba v. Cascade Int’l, Inc., 256 F.3d

1194, 1202 (11th Cir. 2001). A representation or omission is “material” if a

reasonable investor would consider it important in deciding whether to make an

investment. See Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128,

153-54, 92 S. Ct. 1456, 1472 (1972); R & W Technical Servs., Ltd. v. CFTC, 205

F.3d 165, 169 (5th Cir. 2000).

      In applying these various elements to the present case, we are guided by the

principle that the CEA is a remedial statute that serves the crucial purpose of

protecting the innocent individual investor–who may know little about the

intricacies and complexities of the commodities market–from being misled or

deceived. As the Fifth Circuit recently explained in R & W:

             In 1974, Congress gave the [CFTC] even greater enforcement
             powers, in part because of the fear that unscrupulous
             individuals were encouraging amateurs to trade in the
             commodities markets through fraudulent advertising. Remedial
             statutes are to be construed liberally, and in an era of increasing
             individual participation in commodities markets, the need for
             such protection has not lessened.


Id. at 173 (citations omitted) (emphasis added).

      The parties obviously do not contest the textual content of the Commercial.

The actual words of the Commercial and how the Commercial physically appeared

                                          15
on television are undisputed matters of record and do not require us to second

guess what the District Court concluded with regard to witness demeanor and

credibility at the bench trial. That being said, we are persuaded that these

undisputed facts demonstrate fraud and deception as a matter of law.

      Read for its overall message, and how that message would be interpreted by

an objectively reasonable television viewer, the Commercial overemphasizes

profit potential and downplays risk of loss, presenting an unbalanced image of the

two. The Commercial suggests to the potential investor, that truly enormous

profits (200-300%) can be made on options on futures contracts by looking at

known and expected weather patterns. More specifically, the Commercial

affirmatively represents to potential RJFCO customers that El Nino had struck

“where expected” and that if the “patterns continue,” “huge profits” of “200 to

300%” could be realized. The Commercial also improperly overstated the profit

potential by suggesting to potential customers that they should not pass up such a

tremendous chance to make money. Rather, viewers are told to call RJFCO “now”

because there may “never” be such an opportunity in the corn market again. (“The

potential of the corn market may never be greater [and] “could be the formula for a

trade you won’t want to miss. Find out how as little as $5,000 could translate into

profits as high as 200 to 300 percent. Call R.J. Fitzgerald today.”). Against these


                                         16
highly alluring statements is only boilerplate risk disclosure language. We agree

with CFTC’s position that these statements directly contravene the legal principles

established in prior commodities fraud cases. See, e.g., Trinity Finan. Group,

Comm. Fut. L. Rep. 27, 179, aff’d in relevant part, Sidoti, 178 F.3d 1132; In re

JCC, Inc., [1992-1994 Transfer Binder] Comm. Fut. L. Rep. (CCH) 26,080 (CFTC

May 12, 1994), aff’d, JCC, Inc. v. CFTC, 63 F.3d 1557 (11th Cir. 1995); Bishop v.

First Investors Group, [1996-1998 Transfer Binder] Comm. Fut. L. Rep. (CCH)

27,004, 44,841 (CFTC Mar. 26, 1997); In re Staryk, [1996-1998 Transfer Binder]

Comm. Fut. L. Rep. 27,206, 45,809 (CFTC Dec. 18, 1997). As we have indicated

in various prior commodities cases, the fact that the Commercial had a general risk

disclosure statement does not automatically preclude liability under the CEA where

the overall message is clearly and objectively misleading or deceptive. See

Clayton Brokerage Co. v. CFTC, 794 F.2d 573, 580-81 (11th Cir. 1986); JCC, 63

F.3d at 1565 n.23, 1569-70; Sidoti, 178 F.3d at 1136 (“we seriously doubt whether

boilerplate risk disclosure language could ever render an earlier material

misrepresentation immaterial.”); see also Bishop, Comm Fut. L. Rep. at 44,841.

Contrary to Defendants’ argument, we see no absolute, bright-line requirement in

these cases that a solicitation offer a “clear guarantee[]” of profits before liability is

triggered. Appellees’ Brief at 40. Nor should there be. Such an exacting standard


                                           17
would thrust the door of deception wide open, allowing clearly misleading

statements to escape CFTC enforcement, thereby thwarting the underlying purpose

of the Act. Brokers would have free reign to abuse their knowledge by subtly

manipulating customer beliefs about the functioning of commodities markets,

afforded safe haven so long as no actual “guarantee” is made.

      Having determined that the Commercial contained deceptive and misleading

statements, we next consider the element of scienter. This element is also met here

as a matter of law. Defendant acted recklessly with regard to the statements aired

on television. This recklessness is premised on the fact that this Court and the

CFTC have previously condemned attempts to attract customers by: (1) linking

profit expectations on commodities options to known and expected weather events,

seasonal trends, and historical highs; (2) suggesting that the commodities market

can be correctly timed to generate large profits; and (3) substantially inflating

option profit expectations while downplaying risk of loss. We hold that

Defendant, as a federally registered professional, knowledgeable in the nuances

and complexities of the industry, deviated in an extreme manner from the standards

of ordinary care.

      The final element, materiality, is satisfied as well. It is too obvious for

debate that a reasonable listener’s choice-making process would be substantially


                                          18
affected by emphatic statements on profit potential (“200-300%”) and the

suggestion that known and expected weather events are the vehicle for achieving

those enormous profits. A reasonable investor would also be heavily influenced by

the suggestion in the Commercial that, due to weather events, the present day

offers an opportunity like no other to make money in the corn market. See In re

JCC, Comm. Fut. L. Rep. at 41,576 n.23 (“When the language of a solicitation

obscures the important distinction between the possibility of substantial profit and

the probability that it will be earned, it is likely to be materially misleading to

customers.”). See also CFTC v. Noble Wealth Data, 90 F. Supp.2d 676, 686 (D.

Md. 2000) (representations about profit potential and risk “go to the heart of a

customer’s investment decision and are therefore material as a matter of law”),

aff’d in part and vacated in part, 278 F.3d 319 (4th Cir. 2000).

      Defendants argue that scienter is lacking with regard to the Commercial

because Raymond Fitzgerald edited the Commercial to include more disclosures,

sought and received approval from Iowa Grain, and assured NFA official Croom

that the Commercial had already been discontinued after Croom expressed concern

over its misleading content. None of these arguments can overcome the CFTC’s

position that prior cases establish the illegality of the Commercial’s content as a

matter of law. Moreover, Defendants should not be able to escape liability under


                                           19
the Act by simply claiming that a related private business entity (Iowa Grain)

issued its stamp of approval. Iowa Grain does not determine with legal finality

what constitutes deceptive solicitations under the CEA and its regulations.

       Defendants further argue that CFTC has not established “clear error” in the

District Court’s finding that the Commercial was not “deceptive or misleading,”

asserting that CFTC cannot possibly leap the barrier of this highly deferential

standard of review. We are not persuaded. It is too well-settled for dispute that

findings of fact which flow directly from the observation of witnesses at trial

cannot be reversed unless clearly erroneous. But that doctrine of appellate review

is not implicated here. This is not a situation where we must defer to a trial court’s

conclusion of fact because that conclusion rests on the unique opportunity to

personally scrutinize live testimony at trial and measure credibility word by word.

Rather, the precise language in the Commercial is an undisputed part of the

appellate record. The fraudulent and deceptive nature of that language is, as CFTC

posits, established as a matter of law in precedent. The precise error at the district

court level is definitively legal in nature: it is the failure to recognize that the

outcome of CFTC’s claim on the uncontested words in the Commercial is

controlled by case law. See generally Lincoln v. Board of Regents, 697 F.2d 928,




                                            20
939 (11th Cir. 1983) (if legal error taints fact finding process, de novo review may

be used by appellate court).7

       B. The Promotional Seminar

       Much of the discussion above on the illegality of the Commercial applies to

the Seminar as well. We hold that the Seminar is also fraudulent and deceptive as

a matter of law. Like the Commercial, the Seminar, when viewed in its entirety,

suggests to a reasonable listener that RJFCO has a reliable strategy in place for

increasing profits and limiting losses.8 Like the Commercial, it presents a

distinctly unbalanced picture between the potential for profit and the potential for

loss in options, inflating one while downplaying the other. The Seminar also

impermissibly suggests that profits on options on futures contracts (the specific

type of investment they were promoting) are proportionally related to the cash


       7
          As part of their argument that the Commercial is not deceptive, Defendants assert that
investors had, in the past, actually made profits as large as 200-300%. However, just because
such profits are possible, or have happened to some degree in the past, does not mean that the
Commercial’s total message is not misleading. See JCC, 63 F.3d at 1568 n.34. Even literally
true statements can be extremely and impermissibly deceptive when viewed in their overall
context. See, e.g., In re Staryk, Comm. Fut. L. Rep. at 45,809.
       8
          This Circuit has clearly explained previously that brokers must be extremely careful
when making representations in the commodities market because the standard pro forma risk
disclosures do not “warn the customer to disbelieve representations that certain trading
strategies can . . . overcome inherent market risks, or that certain commodities are less volatile.
Those unfamiliar with the workings of markets are unlikely to understand that no broker can
eliminate or diminish risk.” Clayton, 794 F.2d at 580-81 (emphasis added). We note that
RJFCO designed its business specifically to deal with smaller, less experienced customers. See
R.J. Fitzgerald, 173 F. Supp.2d at 1297.

                                                21
market. See CFTC v. Commonwealth Finan. Group, Inc., 874 F. Supp. 1345,

1352 (S.D. Fla. 1994), vacated on other grounds, Slip Op. No. 94-5182, 79 F.3d

1159 (11th Cir. 1996); Bishop, Comm. Fut. L. Rep. at 44,841 (deceptive to tell

customer that one could earn $420 for every penny increase in heating oil); In re

JCC, Comm. Fut. L. Rep. 26,080 (fraud to tell customer that every time sugar

moves ten cents, you make $67,000); Trinity Finan. Group, Comm. Fut. L. Rep.

27,179 (deceptive to use cash prices to predict proportional profits on heating oil

options).

      Furthermore, as with the Commercial, the Seminar, in its heating oil

mathematical illustration, misleads potential customers by suggesting that

historical movements and known and expected seasonal patterns can be used

reliably to predict profits on options. The Seminar gave those in attendance a

deceptive impression that known seasonal trends will lead to their quick success

and that options provide a scenario of “limited risk.” In this regard, we are

especially concerned with the Seminar’s suggestion toward the end of the

undisputed script that “greed” is a major reason people do not make money in

commodities and that a customer “will never go broke taking a profit.” Despite the

Seminar’s use of risk disclosure material, the overall impression is that RJFCO is

going to make customers money if they invest in options. Such conduct simply


                                         22
cannot survive under the Act, its underlying purpose, its regulations, and the

interpretive case law.    As with the Commercial, the statements in the Seminar

are clearly material because an objectively reasonable investor’s decision-making

process would be substantially affected by the Seminar’s discussion on limited

risk, cyclical heating oil-weather patterns, and examples and illustrations of large

profits. Such representations, as a matter of law, alter the total mix of relevant

information available to the potential commodity option investor. Scienter is also

established on this record as a matter of law for the same reasons as with the

Commercial. Precedent has condemned materially similar representations in the

past, including specific representations on heating oil. We hold that Defendants

acted with the requisite recklessness and departed in an extreme manner from the

ordinary standards of care.

      C. Fraudulent Omission: Non-Disclosure of the Firm’s Success Record

      As explained above, CFTC contends, and we agree, that liability is

established with regard to the language used in the Commercial and the Seminar.

As an additional violation of the Act, CFTC claims that these two solicitation

devices were fraudulent as a matter of law because they spoke of RJFCO’s strategy

for enormous profit potential without simultaneously informing potential RJFCO




                                          23
customers that more than 95% of the firm’s clientele lost money in the types of

investments being advertised.9 We agree.

       Given the extremely rosy picture for profit potential painted in the Seminar

and in the Commercial, a reasonable investor surely would want to know–before

committing money to a broker–that 95% or more of RJFCO investors lost money.

Such a disclosure would have gone a long way in balancing out, for example, the

affirmative representation in the Commercial that the grain market was ripe for

“huge” profits of “200-300 percent” and to telephone RJFCO “now” because such

a corn market opportunity may “never” exist again. It would also have done much

to counteract the assertion of “limited risk” in the Seminar. It is misleading and

deceptive to speak of “limited risk” and “200-300" percent profits without also

telling the reasonable listener that the overwhelming bulk of firm customers lose

money. See Ziemba, 256 F.3d at 1206 (duty to disclose arises where a

“defendant’s failure to speak would render the defendant’s own prior speech

misleading or deceptive”) (emphasis in original); Rudolph v. Arthur Anderson &

Co., 800 F.2d 1040, 1043 (11th Cir. 1986) (same); see also Modlin v. Cane, [1999-

2000 Transfer Binder] Comm. Fut. L. Rep. (CCH) 28,059, 49,550 (CFTC March

15, 2000) (“a reasonable investor who hires a broker . . . would clearly find it

       9
        RJFCO’s principal, Raymond Fitzgerald, testified that more than 95% of Defendants’
customers lost money.

                                            24
material to learn that that broker had never closed an account with a profit.”); W.

Page Keeton et al., Prosser and Keeton on Torts § 106 at 738 (5th ed. 1984) (“half

of the truth may obviously amount to a lie, if it is understood to be the whole.”).10

       In its determination that there was no duty to disclose, the District Court was

influenced by the fact that there was no evidence that other firms in the

commodities industry did any worse than RJFCO and that RJFCO did not

affirmatively represent that it had an attractive success rate. Given the highly

misleading nature of the Commercial and Seminar, we fail to discern the legal

significance of those facts in this case. As CFTC has persuasively argued, the Act

should not foster a “race to the bottom,” where liability for unquestionably

deceptive activity is based in part on whether your competitors are not doing any

better than you are. The focus of the inquiry is not on how well or how poorly

others firms have done or even, in some circumstances, whether a firm has

affirmatively boasted about a particular win-loss record. Rather, the judicial cross

hairs in this case fall squarely on what the investor would reasonably want to know

before deciding to commit money to a broker. See, e.g., 17 C.F.R. § 33.7(f);

Sidoti, 178 F.3d at 1136 n.3 (explaining that § 33.7(f) “bolsters” 17 C.F.R. § 33.10


       10
           One RJFCO customer testified at trial that if he had been told during a telephone
solicitation that about 96% of RJFCO customers lost money, he probably “would have hung up
the phone.”

                                             25
by stating that standard risk disclosures do not relieve a broker from the obligation

of disclosing all material facts to potential or existing options customers). This of

course brings us back, as it should, to the underlying remedial purpose of the Act:

protecting the individual investor from being misled or deceived in the highly risky

arena of commodities investment. The omission of highly material information is

pernicious because it strikes at the very core of individual autonomy. The law

vigorously protects the right of private individuals to exercise free choice in the

marketplace. Such freedom of choice is eviscerated, and the autonomy of the

individual severely undermined, if decision-altering information is withheld.

      D. Excessive Trading of Customer Accounts

      CFTC argues that the district court erred by finding that Defendants did not

excessively trade client accounts without regard to client interest, in contravention

of the Act. We do not agree. This “churning” claim stems from a specific trading

strategy developed by Defendant Kowalski in 1998 known as “synthetic futures.”

The details of that strategy were sufficiently explained in the District Court, see

173 F. Supp.2d at 1306-1309, and do not warrant repetition here. In order to

succeed on a churning claim, CFTC had to establish that Defendants intentionally

or recklessly traded client accounts in excess, without regard to client interest, and

that Defendants controlled the accounts in question. See, e.g., Patch v. Concorde


                                          26
Trading Group, Inc., [1994-1996 Transfer Binder] Comm. Fut. L. Rep. (CCH)

26,253, 42,125 (CFTC Oct. 31, 1994). Unlike the Commercial and the Seminar,

the churning claim is intimately connected with factual conclusions derived from

witness testimony and credibility assessments made at the bench trial. For

example, the requisite element of control over customer accounts in this case is an

inquiry that turns upon the credit given to witnesses by the trier of fact. We have

reviewed the District Court’s analysis of this claim and cannot find that entering

judgment in favor of Defendants on this claim was erroneous.

      E. “Controlling Person” Liability under the Act

      CFTC asserts that the District Court erred by finding Raymond Fitzgerald

not liable as a “controlling person” under the provisions of 7 U.S.C. § 13c(b). We

agree. “A fundamental purpose of Section 13b is to allow the Commission to reach

behind the corporate entity to the controlling individuals of the corporation and to

impose liability for violations of the Act directly on such individuals as well as the

corporation itself.” JCC, 63 F.3d at 1567 (internal quotations and citation omitted).

In order to succeed on a 13c(b) claim, CFTC must show that Defendant, as a

controlling person, did not act in good faith or knowingly induced, directly or

indirectly, the conduct which constitutes a violation of the Act. To satisfy the latter

standard, CFTC must show that the controlling person had actual or constructive


                                          27
knowledge of the core activities that make up the violation at issue and allowed

them to continue. Id. at 1568. Section 13c(b), therefore, is about power, and

imposing liability for those who fail to exercise it to prevent illegal conduct.

      Applying this legal standard to the record, we conclude that Raymond

Fitzgerald meets the criteria for 13c(b) liability. First, we note that Raymond

Fitzgerald openly concedes that he was a “controlling person” at RJFCO.

Appellees’ Brief at 62. Raymond Fitzgerald was RJFCO’s principal and exercised

the ultimate choice-making power within the firm regarding its business decisions.

See 173 F. Supp.2d at 1297. He reviewed and approved the activities that we hold

today violated the Act and its regulations–the Seminar and the Commercial. He

was ultimately responsible for compliance with all applicable rules on commodities

solicitations. He had the power and the authority to prevent the Seminar from

being conducted, or to alter its content to comply with extant law.

                                   IV. Conclusion

      This case serves as a pungent reminder that caveat emptor has no place in

the realm of federal commodities fraud. Congress, the CFTC, and the Judiciary

have determined that customers must be zealously protected from deceptive

statements by brokers who deal in these highly complex and inherently risky

financial instruments. Upon review of the record and controlling law, we conclude


                                          28
that the District Court erred in finding that the Commercial and the Seminar did not

violate the CEA and its regulations. Both were deceptive and misleading,

unquestionably material to the potential customer, and promulgated with the

requisite scienter. These two solicitation devices also violate the Act because they

failed to disclose extremely material information that any reasonable investor

would want to know before committing money.

      Raymond Fitzgerald is liable for the Commercial and Seminar under 7

U.S.C. § 6c(b) and 17 C.F.R. § 33.10. Leiza Fitzgerald is liable for her

involvement with the Seminar under § 6c(b) and § 33.10. For purposes of this

CEA violation by Leiza Fitzgerald, Raymond Fitzgerald is a controlling person and

is liable under § 13c(b). RJFCO is liable for the individual violations of Raymond

Fitzgerald and Leiza Fitzgerald pursuant to 7 U.S.C. § 2(a)(1)(B). As to all other

Defendants, we will affirm the order of the District Court. We remand the matter

for enforcement proceedings on the above violations by Raymond Fitzgerald,

Leiza Fitzgerald and RJFC). To the extent that we did not discuss other points of

error raised by CFTC or by Defendants, we deem them without merit. Each party

to bear its own costs.




                                         29
TJOFLAT, Circuit Judge, concurring:

      I write separately only to underscore the extent of the misrepresentations

committed by the defendants and to make a broader point about “clarity” – the two

issues most troubling the dissent.

      One particular passage in the dissent contains the essence of the dispute in

this case: “The fact of the matter is, in options, you are either going to lose big or

win big – that is why brokerage firms like RFJCO can advertise potential profits of

up to 200 to 300% and must also warn that this type of investment involves a high

risk of loss (only investment capital should be used).” The dissent evidently feels

that by proclaiming that only “investment capital should be used,” together with an

equally generic disclaimer, a reasonable investor should be put on notice that

commodities trading is extraordinarily volatile and the risk of loss enormous.

Recognizing that “[c]ommodities brokerage firms need to disclose both the

potential and risks involved in options trading,” the dissent concludes that “RFCO

does just that – disclosing the appropriate amount of profit potential as well as the

adequate amount of risk.”

      The crux of my disagreement with the dissent, then, lies in the necessary

congruence between claims of potential profit and the concomitant risk involved.

The dissent evidently believes that commodities brokerage firms can advertise


                                           30
about enormous profits (replete with constant repetition, explanation points, and

satellite photographs of hurricanes) while making brief mention of the risk involved

– a discussion of risk sugar-coated with assertions about how this risk can be

“limited” while still providing “unlimited profit potential.” In my view, such

lopsided advertising is hardly a disclosure of the “the adequate amount of risk” as

the dissent proclaims. It certainly failed to convey the magnitude of the risk

involved (remember: 95% of the firm’s clientele lost money on the advertised

investments).

      The deception regarding the substantial risk was compounded with more

deception about how, precisely, the potential gains were going to be realized. The

discussion about El Niño and urgency in the timing of the investment created an

heir of inevitability – as if the defendant had some special knowledge with which to

exploit an asymmetry of information in the market. All of this is fine, the dissent

argues, so long as the advertiser skirts the line by peppering his language with

conditional language (“could” and “may”) and does not say that profits are

absolutely inevitable. Viewed from the perspective of a reasonable investor – not

an investment banker at Merrill Lynch or a futures specialist for ADM1 – a

misleading expectation of investment success can certainly be made even if


       1
        The advertisement in this case was obviously aimed at the novice commodities investor.

                                             31
conditional language is used. This misleading picture is exactly the sort that the

defendants painted. Perhaps the dissent would rather have a world of caveat

emptor: “If it is the case that investors ‘surely’ wanted to know [information about

the past success of the defendants’ clients] before they invested, then why didn’t

they ask?” says the dissent. But this is not the world Congress envisioned when it

enacted the commodities laws.

       The dissent further bemoans the lack of clarity in the law. While it is

undoubtedly true that the terms chosen by Congress – “defraud” and “deceive” –

lack the precision necessary to guide behavior in all transactions, this “problem” is

a necessary byproduct of the inherent difficulty in legal drafting. Language of

general applicability – the stuff of statutes and common law rules – is simply

incapable of conveying the entire range of permissible and impermissible conduct.

The law is replete with nebulous phrases such as “proximate cause” and “rule of

reason.” Some cases may entail post hoc judicial refinement, resulting in the

unavoidable problem of a civil defendant without notice that his precise conduct

could result in liability.

       Whatever problems may be created by nebulous rules, I am confident that in

this case, the defendants had ample notice that their heavily unbalanced portrait of

options trading – a picture far different from reality – was impermissible. When an


                                          32
investor seeks to invest his money, he is principally concerned with two factors:

return and risk. A rational investor with no peculiar aversion to risk would be

indifferent between having $5 and a one-in-ten chance at winning $50. Change the

risk factor to one-in-eighty and the bet becomes unattractive even to the most risk-

seeking individual. The defendants in this case knew that by trumpeting enormous

returns and downplaying the risk involved, a reasonable (if unsophisticated)

investor would be enticed to make a bet that he would not otherwise make were the

full picture disclosed. As the majority opinion points out, “it is misleading and

deceptive to speak of ‘limited risk’ and ‘200-300’ percent profits without also

telling the reasonable listener that the overwhelming bulk of firm customers lose

money.” Don’t make an active attempt to instill in the investor a grossly inaccurate

picture of the risk-to-reward ratio. That is the rule in this case – a rule I find to be

abundantly clear.




                                           33
WILSON, Circuit Judge, dissenting:

I am troubled by the majority’s holding, because it provides no useful guidance to

commodities brokerage firms as to how to bring their solicitation and advertising

activities into compliance with the law. Our case law already contains a confusing

and vague definition of what constitutes “fraud” under the Commodities Exchange

Act (CEA) and Commission Rule 33.10; the majority’s opinion only adds to the

uncertainty of this body of law. On this record, I would have found that R.J.

Fitzgerald & Co. (RJFCO) was not involved in fraudulent solicitations, nor did they

attempt to cheat, defraud, or deceive clients under Commission Rule 33.10.

Therefore, I respectfully dissent.

                                     DISCUSSION

      The majority contends that the statements made by RJFCO in the commercial

and the promotional seminar “directly contravene the legal principles established in

prior commodities fraud cases.” The majority cites the following four cases to

support its finding that RJFCO committed fraud: (1) CFTC v. Trinity Fin. Group,

Inc., [1996-1998 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 27,179 (CFTC

Sept. 29, 1997), aff’d in relevant part and vacated in part, CFTC v. Sidoti, 178 F.3d

1132 (11th Cir. 1999); (2) In re JCC, Inc., [1992-1994 Transfer Binder] Comm.

Fut. L. Rep. (CCH) ¶ 26,080 (CFTC May 12, 1994), aff’d, JCC, Inc. v. CFTC, 63


                                         34
F.3d 1557 (11th Cir. 1995); (3) Bishop v. First Investors Group of the Palm

Beaches, Inc., [1996-1998 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 27,004

(CFTC Mar. 26, 1997); (4) In re Staryk, [1994-1996 Transfer Binder] Comm. Fut.

L. Rep. (CCH) ¶ 26,701 (CFTC June 5, 1996), aff’d in relevant part and vacated in

part, [1996-1998 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 27,206 (CFTC

Dec. 18, 1997).

      A comparison of the facts of these four cases to the facts in this case should

lead to the conclusion that RJFCO’s statements are dissimilar and legally

distinguishable from all four cases.

I. RJFCO did not falsely misrepresent profit potential or claim that seasonal trends

                             practically guaranteed profits.

      It is clear from prior case law that a broker registered as an associated person

(AP) must not misrepresent the likelihood of profit to any current or prospective

customer. See, e.g., In re JCC, Inc., [1992-1994 Transfer Binder] Comm. Fut. L.

Rep. (CCH) at 41,576; In re Staryk, [1996-1998 Transfer Binder] Comm. Fut. L.

Rep. (CCH) at 45,809. As the commission in In re JCC, Inc. stated, “[w]hen the

language of a solicitation obscures the important distinction between the possibility

of substantial profit and the probability it will be earned, it is likely to be materially

misleading to customers.” [1992-1994 Transfer Binder] Comm. Fut. L. Rep. (CCH)


                                            35
at 41,576 n.23 (emphasis added). More specifically, an AP must not represent that

an anticipated seasonal trend, such as winter and summer, will “almost guarantee

profits.” Sidoti, 178 F.3d at 1135–36.

      For example, the APs in Trinity Financial Group, Inc. “misrepresented the

profit potential of . . . commodity options by falsely telling . . . customers that they

were practically guaranteed to make a profit because of the cyclical and/or seasonal

nature of the gasoline and heating oil markets.” [1996-1998 Transfer Binder]

Comm. Fut. L. Rep. (CCH) at 45,628. One AP told a customer “that heating oil

was cyclical in nature and that this was a pattern that he had seen over the past ten

years, and that he had consistently made money on it.” Id. Another AP said that

“heating oil always went up during the winter and that if he invested $10,000, he

would make $60,000 to $70,000 by the end of the year.” Id. Yet another AP said

that in the heating oil market “the trend is to buy in the summer months and sell it in

the winter months. And he made the analogy, . . . when do you buy a fur coat? Do

you buy a fur coat in the winter months or do you buy it in the summer months?”

Id.

      In In re JCC, Inc., the scripts given to the APs “often emphasized historical

market moves that earned customers substantial profits, and encouraged customers




                                           36
to anticipate similar profits.” [1992-1994 Transfer Binder] Comm. Fut. L. Rep.

(CCH) at 41,576. For example, one customer related that an AP told him that

       I should purchase a position in heating oil, that it was a sure thing that
       every Fall heating oil goes up. It was guaranteed that I’d make $3,000
       by Spring, no ifs, ands, or buts. It was a sure thing. . . . After [the
       heating oil losses], he called me with the same story about crude oil
       and that time I was going to make $8,000.

Id. The commission in In re JCC, Inc. held that,

       [g]iven the distorted view of the likelihood of profit and loss fostered
       by the blatant misrepresentations discussed above, such history-based
       statements do not escape our scrutiny merely because such a profit
       was possible, indeed, had actually been earned at a particular
       historical point . . . Without additional historical context, such as the
       frequency of the described market movement and whether market
       fundamentals or related circumstances have changed since the last
       occurrence, and some cautionary language about the difficulty of
       catching a market trend and escaping its reversal, customers can be
       misled by undue emphasis on such historical successes. In the
       circumstances of this case, we find that JCC and EDCO’s focus on
       such successes helped deceive their customers about the fundamental
       nature of the futures markets.

Id.

       In Bishop, the customer was induced into opening an account as a result of

an AP’s statements that based upon the history of the heating oil market, profits

were “probable.” [1996-1998 Transfer Binder] Comm. Fut. L. Rep. (CCH) at

44,841. The AP said that “based on the history of the heating oil market for the

past 12 years, I could make a lot of money in heating oil. . . . [P]eople had made a


                                          37
lot of money buying before prices rose and selling after they had risen.” Id. The

commission found that “[t]hese types of representations made by [an AP] provide

the deceptive message that the predictable nature of the seasonal demand and price

trends essentially assured the likelihood of dramatic profits and far outweighed the

risk of loss generally associated with trading commodity options.” Id. What made

the AP’s statements so deceptive as to be “misleading half-truths” was the fact that

the AP “failed to disclose that a seasonal increase in the demand for heating oil

would not necessarily result in the increased value of a heating oil option, because

the market had already factored seasonal demand into the price of an option.” Id.

      Lastly, in In re Staryk, an AP represented to his clients that “given the

historical seasonal pricing trends in gasoline and heating oil, speculation in

gasoline and heating oil options is significantly less risky and more likely to result

in profits than speculation in those options tied to non-seasonal markets.” [1994-

1996 Transfer Binder] Comm. Fut. L. Rep. (CCH) at 43,928. In fact, the AP

claimed to customers that “the likelihood of the gasoline market going down in the

summer is similar to the likelihood that someone would cancel the Fourth of July,

cancel Memorial Day, or cancel summer vacations in schools in North America

and in Europe.” Id. at 43,929. The administrative law judge determined that those

representations were “blatantly false”:


                                          38
      seasonal shifts in demand (and the corresponding price changes) that
      generally characterize the physical markets for gasoline and heating
      oil, do not reduce the risks involved in trading energy options. No
      advantage is gained from knowledge of these seasonal patterns. . . .
      . . . It is only when unexpected events occur, including higher or lower
      than expected demand for gasoline, that an option may become
      profitable.

Id. at 43,930–31.

      After reviewing these four cases, it is clear that RJFCO does not overstate

the likelihood of profit or make claims that expected seasonal trends, compared to

non-seasonal trends, will practically guarantee profits. The RJFCO commercial

specifically focuses on El Niño, the effects of which one can hardly say were

highly expected and predictable. RJFCO states that “[d]roughts, floods and other

adverse conditions could dramatically alter the supply and demand dynamics of the

corn market.” Not only did El Niño have an unanticipated effect on the corn

market compared to other seasonal trends in other commodities markets, but this

weather phenomenon also had no history that RJFCO APs could utilize to boast of

previous profits. This is contrary to the bold statements made by the APs in

Trinity, who bragged that they had consistently made money on the heating oil

market, or the APs in In re JCC, Inc., who claimed that every fall heating oil goes

up.




                                         39
      Nor does RJFCO’s promotional seminar focus on anticipated, historical

seasonal trends. In fact, the seminar script focuses on unanticipated trends such as

abnormal weather phenomena (such as Hurricane Andrew, a drought, and floods),

political conditions (specifically August of 1990 and the impending Gulf War), and

new technical, hypothetical models (in which “[t]echnical analysts use trading

volume and price study along with charts or computer programs to identify and

project trends in the market”). Even when the script discusses the potential for

profit in the heating oil market, RJFCO does not claim that the fluctuations in the

demand for heating oil in the summer and winter will increase or decrease the price

of an option or futures. Instead, the seminar focuses on unexpected events that

may affect supply, such as storage facilities being depleted, pipelines being

destroyed in Colombia and Northern Iran, and political events, such as the

President of the United States dispatching the USS Nimitz to the Middle East.

      The majority also contends that “the [s]eminar also impermissibly suggests

that profits on options (the specific type of investment they were promoting) are

proportionally related to the cash market.” However, stating that profits on options

is proportionally related to the cash market is not necessarily fraud. In fact, it is

only when the AP asserts a one-for-one or greater correlation between profits and

movements in the cash price of the commodity that fraud exists. See CFTC v.


                                           40
Commonwealth Fin. Group, Inc., 874 F. Supp. 1345, 1352 (S.D. Fla. 1994), rev’d

in part and vacated in part, 79 F.3d 1159 (11th Cir. 1996) (unpublished table

decision). RJFCO followed the Chicago Board of Trade’s example. The Chicago

Board of Trade’s options manual explains that “a one-cent change in the futures

price would result in only a half-cent change in the option premium.” Therefore,

when RJFCO explains in its script that by using an option, a twenty-two cent move

in heating oil “could be 50-75% of the profit that the future would have earned,”

RJFCO is assuming that a one-cent change in the futures price would result in only

a half-cent change in the futures price. As the equation concludes, the script

provides: “Now remember that profit is on a futures contract, and if you had a less

aggressive option, because you want limited risk so you would receive 50% of that

profit – 46200 divided by 2 equals $23,100.” RJFCO never asserts that profits on

options directly move in relation to the cash market for the commodity.

II. RJFCO did not downplay or minimize the degree of risk involved in investing

                               in commodity options.

      Clayton Brokerage Co. of St. Louis v. CFTC, 794 F.2d 573, 580 (11th Cir.

1986) (per curiam), tells us that “[t]he extent of disclosure necessary to provide full

information about risk will vary depending on the facts and circumstances of

trading as well as on the nature of the relationship between the broker and the


                                          41
customer.” This standard leaves a lot to be desired and provides courts with a

significant amount of discretion as to what constitutes sufficient disclosure of risk.

However, several cases, including Sidoti, In re JCC, Inc., and In re Staryk, provide

us with some guidance as to how this standard is to be applied.

      The majority extends the principles of law articulated in these cases into a

set of facts where these principles should not apply. It reaches overly broad

conclusions, such as “the Commercial overemphasizes profit potential and

downplays risk of loss,” and “[the seminar] presents a distinctly unbalanced picture

between the potential for profit and the potential for loss in options, inflating one

while downplaying the other,” without grappling with the particular set of facts

involved in the instant case. These conclusions are not supported by this record,

nor is the legal standard underlying them supported by our precedent.

      In Clayton Brokerage Co. of St. Louis, APs made affirmative

misrepresentations as to risk; customers were told to “ignore the risk disclosure

statement,” “that certain trading strategies can limit losses,” and “that the broker’s

scheme can overcome inherent markets risks, or that certain commodities are less

volatile.” Id. at 580–81.




                                          42
      In Sidoti, the APs downplayed the degree of risk by telling customers that

the risks of trading “commodity options were non-existent or minimal.” 178 F.3d

at 1135–36.

      In JCC, Inc., former APs testified that they were taught “to minimize risk, . .

. to characterize the $2500 management fee as insignificant compared to potential

profits, and to use the Regulation 1.55 risk disclosure statement as a sales tool by

explaining away various paragraphs of the document as inapplicable to the FLT

program.” 63 F.3d at 1568. Customers were told that “they could lose no more

than $500 in the sugar market,” “that foreign currencies were much safer than grain

trading because of the guarantees of the movements in the currencies,” and that

“we actually had very little risk at all.” In re JCC, Inc., [1992-1994 Transfer

Binder] Comm. Fut. L. Rep. (CCH) at 41,576.

      In In re Staryk, although the AP would disclose risk, he would always

downplay it by emphasizing the predictability of the price fluctuations in gasoline

and heating oil. [1994-1996 Transfer Binder] Comm. Fut. L. Rep.(CCH) at 43,929.

The administrative law judge determined that although the AP “remind[ed]

customers that past performance may not guarantee success in the future, this

generic warning of risk is almost always juxtaposed with information and

statements which convey that this risk is in fact small.” Id.


                                          43
       The disclosures of risk that were employed in Clayton Brokerage Co. of St.

Louis, Sidoti, In re JCC, Inc., and In re Staryk are distinguishable from the risk

disclosures provided by RJFCO in the instant case.1 In its television commercial,

RJFCO attempted to explain the risk to potential customers in four separate ways.

The first, most obvious risk disclosure statement made by RJFCO was the

statement found on the bottom one-fourth of the screen, which was kept on the

screen for forty-five of the sixty seconds of the commercial’s running time. This

statement, displayed in bold capital letters directly above RJFCO’s phone number,

provided: “OPTIONS INVESTING INVOLVES A RISK OF LOSS. MINIMUM

ACCOUNT $5,000.” Any viewer who jotted the phone number down would have

seen the prominent risk disclosure statement displayed above the number.

       The second disclosure statement flashed on the screen three seconds after the

commercial began. It provided in bright yellow letters: “The preceding were

hypothetical mathematical samples of leverage in the Commodity Options


       1
          It is worth noting that the seven customers who testified against RJFCO acknowledged
that they understood the level of risk involved in trading commodities. Several of these
customers either maintained/traded stock and mutual fund investments or studied commodity
futures. Most of RJFCO’s customer base consisted of people who had themselves first inquired
into commodity trading; they were not sought out.
        It was also determined at trial that all seven of these customers received and had an
opportunity to review the risk disclosure booklet before opening an account. The risk disclosure
booklet explained the amount of risk involved in options trading. The customers were also
advised that only risk capital should be invested in this kind of market. And each customer
approved every trade before any trade was placed by an RJFCO AP.

                                               44
Market.” This disclosure clarifies the point that RJFCO’s prediction was based

upon a hypothetical that is not guaranteed to come true.

       Third, and perhaps most important, the commercial is filled with conditional

language – nothing is guaranteed. RJFCO is equivocal in its advertising – none of

the language in the commercial suggests that El Niño will definitely affect the corn

market as predicted and that customers will receive huge profit. Rather, the

following conditional statements were made: “[El Niño’s] effect on world crops

could mean huge profits in the grain markets.” “[C]onditions may exist for profits

as high as 200 to 300 percent.” “[I]f patterns continue, the effects could be

devastating,” and “adverse conditions could dramatically alter the supply and

demand dynamics.”2

       And finally, in the middle of the commercial, the announcer changes his tone

(the voice drops) and we hear, “[o]ption investing involves a high risk of loss and

only risk capital should be used.” The concurring opinion suggests that this

disclosure is inadequate to state the risk. How much more warning is required than



       2
         RJFCO’s chief market analyst studied the various commodities markets and developed a
reasoned trading strategy. RJFCO’s trading strategy was based on, as the district court found,
“deliberate research and logical assumptions and the strategy was developed primarily to yield
profit for RJFCO clients, not simply to generate commissions.” CFTC v. R. J. Fitzgerald & Co.,
173 F. Supp. 2d 1295, 1307 (M.D. Fla. 2001). Numerous reports from a variety of prominent
and respected financial and meterological sources were examined to develop the strategy
predictions.

                                              45
a disclosure that the investment is a “high risk”? This flagrant risk disclosure

statement, which is hardly brief within the format of the commercial, combined

with the “RISK OF LOSS” statement conspicuously prominent on the screen

throughout almost the entire commercial, the other statement explaining RJFCO’s

mathematical formula, and the conditional language placed throughout the

commercial, effectively and sufficiently discloses the magnitude of risk involved.

       As for the promotional seminar, once again I find that there is an adequate

amount of risk disclosure. One need only compare the seminar with the National

Futures Association’s (NFA’s) manual3 to see that RJFCO thoroughly disclosed risk

according to the NFA’s suggestions.

       For example, RJFCO’s promotional seminar provides: “In contrast to futures,

options on futures allow investors and risk managers to define risk and limit it to the

loss of a premium paid for the right to buy or sell a futures contract, while still

providing the buyer with unlimited profit potential.” The NFA manual provides:

       For the individual who has a price opinion (that a particular futures
       price will change by at least some given amount in a certain direction
       within a specific period of time), buying options offers the
       opportunity to realize substantial profits with a predefined and limited
       risk. The maximum an option buyer can lose – should events prove

       3
        The NFA’s manual, which was admitted into evidence at trial and is part of the record
on appeal, provides an introduction to options on futures contracts, how they work, and the
opportunities and risks associated with their purchase. The NFA is a self-regulatory
organization in the futures industry.

                                              46
       him wrong about the direction, extent or timing of the price change –
       is the premium paid for the option plus commissions and other
       transaction costs.4

       The majority takes exception to the following assertions regarding unlimited

profit potential and limited risk in options found in RJFCO’s seminar: “If you are

highly aggressive and looking for unlimited profit potential as well as unlimited risk

than [sic] it would be the futures. But most would like something less aggressive,

something offering unlimited profit potential but limited risk-option trade.” The

NFA manual confirms this for it provides: “[U]nlike an option which has limited

risk, a futures position has potentially unlimited risk.”

       Now, if the “limited risk with unlimited profit potential” had been “recited

repeatedly as a sales inducement,” then these true statements could have become

fraudulent in that the representation begins to “inflate the likelihood of profit while

minimizing the risk of loss.” In re Staryk, [1996-1998 Transfer Binder] Comm.

Fut. L. Rep. (CCH) at 45,809. That, however, is simply not the case here – the

seminar does not overemphasize profit and downplay risk of loss. Rather, the

introduction to the seminar provides, “These markets are risky – we want you to go



       4
          This explains that RJFCO’s calculations in its profit illustration that the majority claims
are false – “Now remember that profit is on a futures contract, and if you had a less aggressive
option, because you want limited risk so you would receive approximately 50% of that profit-
46200 divided by 2 equals $23,100” – are actually possible according the NFA’s manual. A less
aggressive option on a futures contract does create limited risk.

                                                 47
away with ideas on how to limit your risk but still be positioned to take advantage

of the volatility that not only make them exciting but potentially very profitable.”

RJFCO actually mentions loss first, noting how options on futures contracts can

limit this risk, and then mentions potential profit (not guaranteed or probable

profit). Practically every affirmative representation on profit is counterbalanced

with a risk warning. (“Past price action can provide you with clues to future action.

The market is anticipatory, and you can see price movement first in the chart for the

day.” The next paragraph then warns: “Chart signals, just like fundamental news

can be misleading. You should have structure in you[r] approach to the markets.”)

      Since I find no misleading or deceptive statements made by RJFCO in its

commercial or seminar, there is no need to examine scienter and materiality.

However, it bears mentioning that the majority found RJFCO to have “acted

recklessly with regard to the statements aired on television.” The majority based

this recklessness

      on the fact that this Court and the CFTC have previously condemned
      attempts to attract customers by: (1) linking profit expectations on
      commodities options to known and expected weather events, seasonal
      trends, and historical highs; (2) suggesting that the commodities
      market can be correctly timed to generate large profits; and (3)
      substantially inflating option profit expectations while downplaying
      risk of loss.




                                         48
I find no prior precedent supporting these contentions. At the most, these

statements are oversimplifications of prior cases. Linking profit expectations on

commodities options to known seasonal trends is only fraud if the AP “almost

guarantees profits,” as in Sidoti, or “distorts the likelihood of profit,” as in In re

JCC, Inc. Suggesting that the commodities market can be correctly timed to

generate profits is not necessarily fraud when, as stated in In re Staryk, “[i]t is only

when unexpected events occur, including higher or lower than expected demand for

gasoline, that an option may become profitable.” [1994-1996 Transfer Binder]

Comm. Fut. L. Rep. (CCH) at 43,931. And the majority’s buzz phrase,

“substantially inflating option profit expectations while downplaying risk of loss,”

is much too vague and abstract a standard to be of any use to commodities

brokerage firms who wish to advertise their services in the future.

       The difficulty with the current standard for commodity options fraud is that

Rule 33.10 is too vague. According to the majority opinion, in order to establish a

fraud claim in an enforcement action under the CEA, the CFTC must prove: “(1)

the making of a misrepresentation, misleading statement, or a deceptive omission;

(2) scienter; and (3) materiality.”5 Therefore, much of the case law from this


       5
         While customer reliance on the misrepresentation need not be proven in a CFTC
enforcement action alleging fraud, it is essential to restitution relief sought to compensate the
injured party. CFTC v. Rosenberg, 85 F. Supp. 2d 424, 447 (D.N.J. 2000).

                                                 49
standard has been both arbitrary and conflicting. Additional guidelines must be

introduced to further clarify the elements of fraud under Rule 33.10.

      Courts have had the most difficulty in determining what constitutes a material

misrepresentation or a material omission. According to the majority opinion,

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

the ‘common understanding of the information conveyed.’” As for materiality, a

statement is considered material if “there is a substantial likelihood that a

reasonable investor would consider it important in making an investment decision.”

Saxe v. E.F. Hutton & Co., 789 F.2d 105, 111 (2d Cir. 1986). Unfortunately, Rule

33.10 and case law do not provide adequate guidance to either the CFTC or

commodity futures brokerage firms.

      While every claim of commodities fraud must be reviewed on a case-by-case

basis under the existing standard, a more specific interpretation of the elements

under Rule 33.10 would create a standard whereby “material misrepresentations or

material omissions” would be more readily discernible.

      What constitutes a “material misrepresentation”?

      (1) The most obvious material misrepresentations are outright falsehoods told

by brokerage firm APs and sales staff to prospective or current customers.

Examples of blatant material misrepresentations include promising to open a trading


                                           50
account and not doing so, reporting erroneous account balances, or making

unlawful trades in a customer’s account without his or her authorization. See CFTC

v. Muller, 570 F.2d 1296, 1300–01 (5th Cir. 1978) (finding evidence sufficient to

support an injunction because AP lied concerning opening of bank account and

supplied fictitious options trade statements). A material misrepresentation also

occurs if an AP lies about the amount of profits earned, or losses accrued, in a

customer’s trading account. See CFTC v. Rosenberg, 85 F. Supp. 2d 424, 447

(D.N.J. 2000) (finding fraud because the AP reported trading profits when no

profits had been earned and failed to report losses on trades he was not authorized

to make).

      (2) A material misrepresentation that is not patently obvious, but just as

damaging, exists when a brokerage firm deliberately overstates profit potential and

conceals the possibility of loss. Any prediction or recommendation must have a

reasonable basis in fact and should be explicitly labeled just that – a prediction and

not a guarantee. A statement regarding potential profits that could be earned should

not be considered a material misrepresentation or misleading statement if it is

possible that these projected earnings could realistically occur.

      For example, RJFCO informed customers of the potential for profits up to

300% if the El Niño atmospheric disturbances occurred as projected. If this profit


                                          51
potential was attainable, and RJFCO compiled significant research which suggested

climactic conditions created by the El Niño phenomenon could create drought and

thereby increase the price of grain due to its scarcity, then RJFCO’s marketing

strategy did not represent a material misrepresentation.

      Existing case law reflects situations, unlike RJFCO, where other firms made

unwarranted profit predictions which were considered to be inherently fraudulent

due to an absence of technical research or proof to back up these claims. See CFTC

v. J.S. Love & Assocs. Options, Ltd., 422 F. Supp. 652, 660 (S.D.N.Y. 1976); In re

British Am. Commodity Options Corp., Nos. 76-15 and 77-3 (C.F.T.C. Dec. 2,

1977), noted in [1977-1980 Transfer Binder] Comm. Fut. L. Rep. ¶ 20,526

(C.F.T.C. Dec. 2, 1977), avail. on Westlaw FSEC-Admin. DATABASE, 1977 WL

13558, at *11–12.

      (3) Also, any claim about a brokerage firm’s past trading record or an AP’s

puffing of past successes should be based upon actual trades executed in the market

place and should fairly represent results achieved for those periods.

CFTC Interpretative Letter No. 77-16 [1977-1980 Transfer Binder] Comm. Fut. L.

Rep. (CCH) ¶ 20,498, 22,065 (Oct. 18, 1977); see Clayton Brokerage Co. of St.

Louis, 794 F.2d at 575 (finding fraud when AP boasted of his successes and none of

his failures); Commonwealth Fin. Group, Inc., 874 F. Supp. at 1353 (where


                                          52
salespeople misrepresented the past success of themselves and their firm by telling

prospective customers that current clients have “recently doubled their money” and

that the firm “has the best track record in the industry and has made millions of

dollars in profits for their customers with little risk”).

       What constitutes a “material omission”? Omissions of material fact are

rarely transparent and perhaps more subject to questionable interpretation than even

material misrepresentations.

       For example, a brokerage firm must disclose to potential and current

customers the amount of risk inherent in commodity futures and options trading.

However, an undefined, grey area exists between no disclosure and full disclosure.

If there is no mention of risk on the part of the brokerage firm, then a material

misrepresentation exists – options trading is a risky business, and customers need to

be told about the possibility of losing their entire investment. The mandatory risk

disclosure statement required by the CFTC puts the customer on notice of the risks

of trading; however, in some instances this disclosure statement is contradicted by

oral representations made by APs who tell customers to disregard this statement.

See Clayton Brokerage Co. of St. Louis, 794 F.2d at 580; In re JCC, Inc., 63 F.3d at

1568 (where the risk disclosure statement was explained away as “inapplicable”);

but see Puckett v. Rufenacht, Bromagen & Hertz, Inc., 903 F.2d 1014, 1019 (5th


                                            53
Cir. 1990) (finding that the written risk disclosure statement was sufficient enough

to inform the Pucketts of the risks involved because Dr. Puckett, an educated and

successful businessman who had traded securities for more than thirty years, was

capable of understanding the risk disclosure statement, and admitted that he

affirmatively sought risk in order to make profits).

      Therefore, in order to avoid any misunderstanding or charges of

misrepresentation, it would be preferable for brokerage firms to err on the side of

caution and provide both written and oral disclosure statements to potential

investors. If not, these firms may leave themselves open to charges that they

fraudulently omitted material statements regarding risk of loss. See CFTC v. Crown

Colony Commodity Options, Ltd., 434 F. Supp. 911, 916 (S.D.N.Y. 1977) (holding

that the commodity options sales presentations at issue were fraudulent because

they “conveyed the distinct impression that extraordinary short-term profits were all

but certain to be realized by investors” and because the mechanics of commodity

options trading were misrepresented).

      These guidelines are merely suggestions, on my part, on how to both interpret

the existing standard and provide the commodities industry with additional

safeguards to ensure the legality of their sales presentations, promotional seminars,

and conduct while maintaining their customers’ trading accounts.


                                          54
         III. RJFCO had no affirmative duty to disclose its trading record.

      The majority implies in its opinion that RJFCO had a duty to disclose its

previous track record to prospective customers. However, the majority fails to

point to any prior authority that suggest that there is a specific affirmative duty on

the part of a commodities brokerage firm to disclose its prior track record. The

cases in the majority opinion suggest that a duty to disclose arises only if the firm’s

statements would be misleading or deceptive if it did not disclose its track record.

Ziemba v. Cascade Int’l, Inc., 256 F.3d 1194, 1206 (11th Cir. 2001) (We recognize

a duty to disclose when “a defendant’s failure to speak would render the

defendant’s own prior speech misleading or deceptive”); Rudolph v. Arthur

Andersen & Co., 800 F.2d 1040, 1043 (11th Cir. 1986) (“[A] defendant’s omission

to state a material fact is proscribed only when the defendant has a duty to

disclose”) (emphasis added). Simply put, there is no mandatory duty to disclose.

      The majority argues that a reasonable investor would “surely” want to know

how many RJFCO investors had lost money, and, therefore, it was RJFCO’s duty to

tell them. If it is the case that investors “surely” wanted to know this information

before they invested, then why didn’t they ask? This is not a case where the APs

misrepresented the firm’s track record or lied about successes in the past. See

Modlin v. Cane, [1999-2000 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 28,059


                                           55
at 49,549-50 (CFTC Mar. 15, 2000) (The AP told customers “his method of trading

was successful” and was “the key to making money,” and “that he would jump into

the East River if he was unable to generate a profit.”). RJFCO never made any bold

misrepresentations regarding its prior track record and, therefore, was under no duty

to disclose its record.

                                   CONCLUSION

      Commodities brokerage firms need to disclose both the profit potential and

risks involved in options trading. RJFCO does just that – disclosing the appropriate

amount of profit potential as well as the adequate amount of risk.

      Trading options on futures contracts is inherently risky. The fact of the

matter is, in options, you are either going to lose big or win big – that is why

brokerage firms like RJFCO can advertise potential profits of up to 200 to 300%

and must also warn that this type of investment involves a high risk of loss (only

risk capital should be used).

      Admittedly, under Sidoti, In re JCC, Inc., Bishop, and In re Staryk, the

standard for fraud is vague. However, these cases at least provide a sensible set of

guidelines for brokerage firms to follow in designing their solicitations and

advertising programs. Essentially, these cases suggest that brokerage firms must

not misrepresent or guarantee profits, nor minimize the degree of loss. However, in


                                          56
this case, the majority has extended the standard to apply to a situation where a firm

did not misrepresent or guarantee profits and in fact disclosed the amount of risk

involved.6 And the majority opinion simply fails to offer any useful guidance to

actors in this area of the law.

      Commodities brokerage firms should be on the alert – this decision may

make it difficult to advertise and solicit business in the future. It is uncertain what

subsequent advertising language may “overemphasize profit and downplay risk of

loss.” I dissent.




      6
       No customer suffered a loss beyond his or her initial investment.

                                              57
