Drexel Burnham Lambert Inc. And David Joe Ragan v. Commodity Futures Trading Commission and Sansom Refining Company

STARR, Circuit Judge,

concurring in part and dissenting in part:

I am in accord with much of Judge Edwards’ thorough opinion for the court. My disagreement is limited, but it is fundamental. In my view, this record will not support the Commission’s conclusion that Ra-gan’s conduct satisfied the scienter requirement of section 4b, 7 U.S.C. § 6b (1982). To the contrary, this record fails to yield substantial evidence to support the Commission’s inference of recklessness.

In reaching this conclusion, I am fully mindful of our limited role in analyzing the record and the deference which we rightly are to show to the agency in its factual determinations. But it is odd in the extreme to conclude, on this record, that Ra-gan acted recklessly.

I

In large part, the Commission’s recklessness determination followed from its rejection of the AU’s conclusion that Ragan “with some justification” believed Robinson to be authorized to trade in Sansom’s account with Drexel. The Commission, and now the court, thus finds a glaring inconsistency in the AU’s opinion: that is, the AU concluded that there was no apparent or actual authority for Robinson to trade in the account, yet the AU went on to conclude that Ragan’s (undisputed) good-faith belief in that authority was supported by “some justification.” But the “inconsistency,” upon reflection, is readily resolved. As a matter of law, for apparent authority to exist, there must be some conduct on the part of the principal to give rise to the inference of the agent’s authority. See Restatement (Second) of Agency §§ 8, 8B. On this record, the AU properly found that Sansom did not act in such a manner as to establish apparent authority. But as a factual matter, Ragan could readily and in good faith (although in error) have believed Robinson to have been so authorized. Here is why.

First, although Sansom may not have acted in a fashion that would require a *754 finding of apparent authority, Sansom surely gave some indications of authority. Second, and more fundamentally, that Robinson lacked authority represents a legal conclusion; in contrast, the finding that Ragan’s good-faith belief in Robinson’s authority had some justification is a factual conclusion. The Commission did not reverse the AU’s factual finding that Ragan acted in good faith; indeed, to do so would have been remarkable, inasmuch as the AU’s conclusion was reached after hearing all the testimony and evaluating the credibility of the witnesses. Thus, while I agree with the legal conclusion that Robinson lacked actual or apparent authority, I fundamentally disagree that that conclusion is inconsistent with a finding of good faith on Ragan’s part. The inescapable upshot of the AU’s uncontradicted finding of Ra-gan’s good faith is, it seems to me, that Robinson succeeded in bilking Ragan as well as Sansom.

After noting the “inconsistency” in the AU’s opinion, the Commission did not more than mention in a footnote that Ra-gan’s “unreasonable” conduct amounted to willful misconduct sufficient to satisfy the scienter requirement of section 4b. See Commission Opinion, [1986-87 Transfer Binder] Comm.Fut.L.Rep. (CCH) 1123,796, 34,108 n. 10. The Commission supplied no reasoning to support this conclusion; it did not deign to detail the record evidence supporting its conclusion that Ragan acted willfully. In short, all the Commission did was reject the AU’s conclusion that San-som was estopped from repudiating the trades and set forth its conclusion that Ragan violated section 4b. Unlike the court, which has undertaken the task of supplying reasoning and citing evidence in the record, the Commission acted in an utterly conclusory fashion.

Thus it is that I have no quarrel with my colleagues’ statements of law. If the Commission’s conclusions are supported by the weight of evidence, we are bound to uphold them. It may well be that the Commission’s conclusions are supportable; but it is emphatically not the court’s task to weigh the evidence for the Commission. Here, where the weight of the evidence is far from clear (and the ALJ’s conclusions were rejected by the Commission) the court ought not to supply the Commission’s reasoning for it. As we “review the record with the purpose of determining whether the finder of fact was justified, i.e. acted reasonably, in concluding that the evidence ... supported his findings,” Great Western Food Distribs. v. Brannan, 201 F.2d 476, 479-80 (7th Cir.), cert. denied, 345 U.S. 997 , 73 S.Ct. 1140 , 97 L.Ed. 1404 (1953), we cannot be at all confident that the Commission’s decision warrants affirmance. There is abundant evidence that Sansom and Loughridge acted negligently, even recklessly; and there is, to be sure, evidence showing that Ragan acted negligently (although not recklessly). In this uncomfortable state of affairs, with the evidence conflicting and the Commission failing to supply reasoning to support reversal of its ALJ, a remand to the CFTC for reconsideration is plainly in order.

II

The court ably recounts the evidence supporting the Commission’s decision. The court fails, however, to note the Commission’s error in viewing the ALJ’s position as incoherent; indeed, the court succumbs to the same error. Moreover, the court fails to evaluate the entirety of the record, which brims with evidence casting the most elemental doubts as to whether the Commission’s conclusions are adequately supported. We, of course, have no idea what the course of the Commission’s weighing of the evidence was; we have only its broad statement of a conclusion. Here are the salient facts that, in my judgment, rob the Commission’s ill-conceived reversal of its AU of the requisite evidentiary support needed to pass judicial muster.

To begin at the beginning, the ill-fated relationship between Drexel Burnham and Sansom began, after an initial contact in Philadelphia, in Drexel’s offices in Houston. There, on the Texas coastal plain, two Philadelphians sat down in the office of a financial wizard of sorts, the now-bankrupt Ragan. The sophisticates from the East Coast provided a study in contrasts: San- *755 som’s president, Loughridge, was a successful Philadelphia businessman, anxious to avoid paying the costs of civilization by entering into highly creative tax shelter schemes. His companion, Robinson, was a tax lawyer by profession, but a lawyer who had descended to the depths of unethical (indeed, felonious) conduct resulting in his involuntarily leaving the practice of law. Robinson, it seems, was a gambler. Loughridge, who frequented the same country club and was old friends with the gambling ex-lawyer, hired Robinson when the latter found himself disbarred by the Commonwealth of Pennsylvania, and, sadly, out on the street. Robinson began serving Sansom in mainly clerical ways, but later became (by virtue of his training and expertise) involved in exploring creative ways to shelter Sansom’s recent upsurge in income. It was in the latter capacity that Robinson joined in the meeting deep in the heart of Texas with Ragan, a scholar turned broker, trained in philosophy but who had turned his analytical abilities to more materialistic matters than the life of the mind.

The evidence is undisputed that Robinson called the Sansomian shots at the Houston gathering. Loughridge, who was gracious enough not to inform Drexel of Robinson’s distinctly shady, embarrassingly recent past, annointed Robinson as Sansom’s strategic architect in the mysteries of tax shelters. Loughridge looked on silently while Robinson discussed the ins and outs of tax shelters with the obviously skilled Ragan.

The upshot was a contractual relationship between Drexel, acting through Ra-gan, and Sansom. In short order, transactions designed to effectuate Sansom’s income-sheltering goals were undertaken. In the early stages of this relationship, Ragan tried on several occasions to reach the aloof Loughridge by phone to report on his trading activities. Loughridge would not deign to involve himself in such pedestrian matters, however, and informed Ra-gan that the Houstonian’s contact in Philadelphia was Robinson. Robinson was, in short, Drexel’s principal contact at Sansom. Ragan politely complied with Loughridge’s hands-off wishes, but dutifully dispatched written confirmations and other records of the account to Sansom, addressed to Loughridge’s personal attention. The record shows that Loughridge, for whatever reason, was unaware of the pork belly trades; but the record likewise shows that Ragan had no particular reason to think that Loughridge was not receiving the statements.

And so the relationship ultimately came to grief, for reasons canvassed in the court’s opinion. But the course of conduct engaged in by Sansom, through Lough-ridge, is remarkable for its invitation to disaster. Loughridge would not be bothered after he put the fox in charge of the chickenhouse. He chose, on the contrary, not to check from time to time on the chickens. He was even too busy to open the envelopes that Drexel sent to him. Those went, like Ragan’s telephone calls, to Robinson. Indeed, Loughridge’s trust in Robinson, his gambler pal from the country club, was apparently too deep to alert Drexel or the philosophical Ragan to keep a wary eye on Robinson’s conduct. Under these circumstances, it is hardly surprising that the ALJ upon hearing the testimony concluded that Ragan’s belief in Robinson’s authority was “with some justification.”

The Commission found glaring fault with Ragan’s failure at the June 19, 1980 meeting in Philadelphia to alert Loughridge to the first pork belly trades. This, with all respect, is poppycock. At that juncture, there were no danger signs on the horizon; my colleagues, however, fail to note this in their rendition of the facts. Robinson (surprisingly, in light of his later abysmal performance in the pork belly markets) managed to make money on the early trades. So why would Ragan try to “hide” the fact that Sansom’s in-house gambler had expanded Sansom’s investment strategy to include pork belly speculation when the new effort was profitable? No evidence whatever has been adduced, and no reasonable inference has been drawn, to suggest that Ragan was somehow hiding the happy fact that the pork belly trades had made money for the company. There was nothing to hide, and no reason to re *756 duce the conversation to the level of reporting on a few bucks eked out in the gritty market of pork bellies. Remarkable conclusions are being drawn from Ragan’s failure to toot his own horn; not only could Ragan shelter income, but he could pick up some extra spending money for Sansom on the side by playing the pork belly market. *

The most damning aspect of Ragan’s conduct, it would appear, was his failure to communicate directly with Loughridge when the freewheeling investment approach championed by Robinson began to turn sour. This is indeed misconduct, as Drexel almost brings itself to concede. The critical issue, however, is whether this conduct rose above the level of negligence to the much more demanding level of recklessness. The answer, in a word, is no. The totality of the circumstances is overwhelmingly to the effect that Ragan’s course of conduct amounted only to negligence. As noted above, Loughridge was too busy, or too disinterested, to be bothered with the details of the Drexel account. After expressly being rebuffed by Lough-ridge in trying to arrest his attention on Drexelian matters, Ragan obeyed (negligently) his client’s command; he bowed to Loughridge’s cold directive to involve only Robinson in trading matters.

Ragan’s negligence did not, however, rise to recklessness. After all, Ragan sought to verify the bona fides of Robinson’s representation about a surplus in the Bache account (which checked out); moreover, the calls for funds to Sansom were promptly and fully honored without a peep. It simply will not do for the Commission to upbraid Ragan for failing to place an humble telephone call of notification to Lough-ridge when Ragan would reasonably have assumed that the call would be transferred to Robinson. As far as Drexel was concerned, all roads at Sansom lead to Robinson. Now that the piper has to be paid, the Commission has overturned its own AU and in a remarkable view of the record has said, in effect, that Drexel should have assaulted Sansom with facts that Lough-ridge went to some lengths to avoid knowing. This result, one might well conclude, is fundamentally unfair as well as remarkably undemanding in its standard of what rises to the level of reckless conduct.

For the foregoing reasons, I respectfully dissent from that portion of today’s result that vindicates the Commission’s ill-conceived, ill-reasoned reversal of its Administrative Law Judge. It is the job of the Commission, and not the court, to supply reasoning to support the agency’s conclusions. Although the record contains some items of evidence that might be argued to support the Commission’s conclusion of recklessness, it is a significant stretch to say that the weight of the evidence supports the Commission; and that, as the majority states, is the standard of review governing this case. Ragan’s undisputed good faith means that he was Robinson’s victim just as much as Sansom was.

I am aware that the list of trades supplied by Ragan on June 19 omitted mention of the pork belly trades. But relying on that omission proves too much, for it implies that Ragan acted deliberately or fraudulently. No one — not the court, the Commission, or the AU — has questioned Ragan’s good faith; rather, the most that has been said is that Ragan acted unreasonably or recklessly.