Petition — Bell v. International Trading, Ltd.

IN THE

SUPREME COURT OF THE UNITED STATES

OCTOBER TERM, i977

No. ¢¢-1098

Harvey L. Bewu

Securities CommissionER

For tHe State oF Fee Petitioner

vs.

INTERNATIONAL Trapine, Ltp.,

A Division oF GNB, Inc.,

J. R. Rose anp Artuur Paumer..... Respondents

PETITION FOR. A WRIT OF CERTIORARI

TO THE SUPREME COURT OF THE

STATE OF ARKANSAS

Harvey L. Bew

Securities Commissioner

By: Rocer W. Gites

1428 Donacuey Buitpinc

Seventn & Main Streets

Lrrtie Rock, ARKANSAS 72201

Attorney for Petitioner

Reg. No. 77-11226 ; 55 Copies

-~ Sunreme Court, U. a”)

| FILED

|

Table of Contents

Page

Be EE sie be 6c cceeenscdancisesconiacaceconccceceseeseess ii

| PS TT Peete TT TT TTTTTT LTT EILELE ETE 2

DE ca sends aPedotbeadstadwdntevedsépcdodsvevescadusissetes 2

LL SESE E rere Tere eee Tee eT TT ETT T TELL TTEe 2

| Pee eee ee 2

I Gy a 6 6 ee aT 8 ER et A he BIS Ge e's 5

ED CUE Foe GEA ics decsewssscnenceseseccncwcepenes 7

DR ted eed CeGd WERSERNESUS ESCO 60460 KKK eCRKO RCE STEs 16

APPENDICES

A. Opinion of Arkansas Supreme Court..................--.555: 17

B. Order Entered by Chancellor,

Pulaski County, Arkansas, Chancery Court...................... 31

C. Order of Arkansas Supreme Court Denying Rehearing ......... 34

ii

List of Authorities *

STATUTES

FOU OS occnnnnnccccccusekdesetbadvedccacessctccccvsnomene 2

Ark. Stat. Ann. § 67-1247(1) (Repl. 1966) .... 2.2... 0.66 scene eee nee 3

Ark. Stat. Ann. § 67-1247(L) (Repl. 1966) .... 06.0.6... cece eee 5

Ark. Stat. Ann. § 57-1235 (Repl. 1966) .............. 6c cece eee eee 3

Ark. Stat. Ann. § 67-1254 (Repl. 1966) ..... 0.0.6... cece eee eee nee 4

Ark. Stat. Ann. § 67-1255 (Supp. 1977) ...........- 25 cece eee eee ees 14

Ark. Stat. Ann. § 41-2203 (Crim. Code 1976) ................00005. 14

JUDICIAL DECISIONS

Berman v. Orimex Trading, Inc.,

291 F. Supp. 701 (S.D.N.Y. 1968) ........... 6.6 c cece eens 8

Clayton Brokerage Co. vy. Mouer,

520 S.W. 2d 802 (Tex. Civ. App. 1975),

rev'd on other grounds, 531 S.W. 2d

OOS (Tem. Gap. Ch. 1978)... cc ccc ccc cece ccc c ccc cececcccesess 11

Commercial Iron & Metal Company v.

Bache & Company, et al.,

GO BH. BE FO GE Ge. GOED oda ccc sccccccsccnccccccccess 9

Gould v. Barnes Brokerage Company, Inc.,

345 F. Supp. 294 (N.D. Tex. 1972) ..........cccccceceeceecess 8

Hamilton v. Kentucky Distilleres and

Warehouse Company, 251 U.S. 145 (1919). ........... severance 12

Hirk v. Agni-Research Council, Inc., et al.,

CCH Sec. L. Rep. par. 94, 738 (N.D. Ill. 1974) .............4.. 9

International Trading, Lid., et al. v. Bell,

262 Ark. 244, 556 S.W. 2d 420 (1977) ... 2... 666 eee eee 8

~ J. C. Booth v. Peavey Compary Commodities

» Services, 430 F. 2d 132 (8th Cir. 1970)... 2... 666 eee eee 8

iii

Johnson v. Espey, et al., ‘

ee es I SE LW awed aceevenencedsvses ne 8

Mahue v. Reynolds & Company,

oa ra sccwesceveededsenectenes 8

Marshall v. Lamson Brothers &@ Company, et al.,

on otc dewnbascecesn canis ccwnes 8

McCurrin v. Kohlweger & Company, et al,

340 F. Supp. 1338 (E.D. La. 1972),

ee We Se I Wok cc Secscscrcgcncccwncvsess ~

Milnarik v. M. S. Commodities, Inc.,

320 F. Supp. 1149 (N.D. Ill. 1970),

aff'd 457 F. 2d 274 (7th Cir. 1972),

CS MT OO og ccc ccwcccccvcccedsesebecess 9

Northern States Power Company v. Minnesota,

BE 13

Schwartz v. Bache @ Company, Inc.,

re SE icivescecesetesevecesencerees 9

Securities and Exchange Commission v.

Continental Commodities Corp.,

i ch esas bade sdanesennbeeen' 8

Sinva, Inc. v. Merrill Lynch, Pierce,

Fenner & Smith, Inc.,

Dano cgnnadectdverccodsscesces 8

Wasnowie v. Chicago Board of Trade,

352 F. Supp. 1066 (M.D. Pa. 1972),

aff'd without opimon, 491 F. 2d 752

i .c6o. ict Ci ihs piehebcdveseneenesedetecessenen 9

LEGAL WRITINGS

Johnson, The Commodity Futures Trading

Commission Act: Preemption as Public Policy,

TIT TT Tee 12

Long. The Naked Commodity Option Contract

As A Security, 15 Wm. & Mary L. Rev. (1974) ............0.0.. 10

IN THE

SUPREME COURT OF THE UNITED STATES

OCTOBER TERM, 1977

No.

Harvey L. Be.

Securities ComMIssIONER

For tHe STATE OF ARKANSAS ................ Petitioner

vs.

INTERNATIONAL TRADING, LTD.,

A Division oF GNB, Inc., :

J. R. Rose anv Artuur Paimer........... Respondents

PETITION FOR A WRIT OF CERTIORARI

TO THE SUPREME COURT OF THE

STATE OF ARKANSAS

The Petitioner, Harvey L. Beli, Arkansas Securities Com-

missioner, respectfully prays that a Writ of Certiorari be issued

to review the judgment and opinion of the Supreme Court of the

State of Arkansas entered in this proceeding on October 3,

1977.

OPINION BELOW

The opinion of the Supreme Court of the State of Arkansas

is found in Volume 262 of the Arkansas Reports at page 244 and

is also found in Volume 556 Southwestern Reporter, 2d edition

at page 420. A copy of that opinion, along with a copy of that

court’s decree, appears in Appendix A hereto. No opinion was

rendered by the Chancery Court of Pulaski County, Arkansas,

the Court of original jurisdiction but the Order entered by that

Court is attached as Appendix B hereto.

JURISDICTION

The Judgment of the Supreme Court of the State of Arkansas

was entered on October 3, 1977. A timely petition for rehearing

in banc was denied on November 7, 1977, Appendix C hereto,

and this Petition for Certiorari was filed within 90 days of that

date. This Court’s jurisdiction is invoked under 28 U.S.C. §

1257 (3).

QUESTION PRESENTED

Whether the Commodity Futures Trading Commission

Act of 1974 (CFTCA) preempted the State of Arkansas from en-

forcing the anti-fraud portion of its Securities Act against the

seller of a London commodity option.

STATUTORY PROVISIONS INVOLVED

United States Code Title 7:

§ 2 Regulation of Trading and Exchange Activities.

*“ . . provided, that the Commission shall have exclusive

jurisdiction with respect to accounts, agreements

(iucluding any transaction which is of the character of or is

commonly known in the trade as, an “option’”’, “privilege”,

“indemnity”, “bid”, “offer”, “put”, “call”, “advance

guaranty”, or “decline guaranty”, and transactions in-

volving contracts of sale of a commodity for future delivery,

traded or executed on a contract market designated pur-

suant to Section 5 of this Act or any other board of trade,

exchange or market, in transactions subject to regulation

by the Commission pursuant to Section 217 of thé Com-

modity Futures Trading Commission Act of 1974: And

provided further, that, except as hereinabove provided,

nothing contained in this section shall (i) supersede or

limit the jurisdiction at any time conferred on the

Securities and Exchange Commission or other regulatory

authorities under the laws of the United States or of any

state, or (ii) restrict the Securities and Exchange Com-

mission and such other authorities from carrying out their

duties and responsibilities in accordance with such laws.

Nothing in this section shall supersede or limit the jurisdic-

tion conferred on courts of the United States or any state . .

”

Ark. Stat. Ann. § 67-1247(1) (Repl. 1966). Definitions of terms us-

ed.

“Security” means any note; . . . evidence of indebtedness;

certificate of interest or participation in any profit sharing

agreement; . . . investment contract; ... .

Ark. Stat. Ann. § 67-1235 (Repl. 1966). Unlawful acts in connection

with offer, sale or purchase of securities.

It is unlawful for any person, in connection with the offer,

sale or purchase of any security, directly or indirectly

(1) to employ any device, scheme or artifice to defraud

(2) to make any untrue statement of a material fact or to

omit to state a material fact necessary in order to make the

statements made, in light of the circumstances under

which they are made, no misleading, or

(3) to engage in any act, practice or course of business

which operates or would operate as a fraud or deceit upon

any person.

Ark. Stat. Ann. § 67-1254 (Repl. 1966). Enforcement of Act by In-

junction or Mandamus.

Whenever it appears to the Commissioner, upon sufficient

grounds or evidence satisfactory to the Commissioner, that

any person has engaged or is about to engage in any act or

practice constituting a violation of any provision of this Act

[The Arkansas Securities Act of 1959, as amended, Ark.

Stat. Ann. § 67-1235 et seq. (Repl. 1966)] or any rule or

order hereunder, he may summarily order the person to

cease and desist from such act or practice, which order

shall be effective for not more than 20 days during which

time the Commissioner may apply to the Chancery Court

of Pulaski County to enjoin the act or practice and to en-

force compliance with this Act or any rule or order

hereunder; however, the Commissioner may, without issu-

ing a cease and desist order, apply directly to the Chancery

Court of Pulaski County for the aforesaid relief. Upon a

proper showing a permanent or temporary injunction,

_ restraining order, or writ of mandamus shall be granted

and a receiver or conservator may be appointed for the

defendant or the defendant’s assets. The Court may not

require the Commissioner to post bond.

STATEMENT OF THE CASE

The original action in this case was filed on November 10,

1976 by the Petitioner, the Arkansas Securities Commissioner,

seeking preliminary and permanent injunctions to restrain the

Respondents from, among other things, violating Section 1 of

the Arkansas Securities Act of 1959, as amended, the anti-fraud

provision of the Arkansas Securities Act.

The Petition for Injunction filed by the Commissioner

alleged that commencing in the spring of 1975, the Respondents

sold London commodity options (options, traded on the Lon-

don Commodity Options Exchange, to buy or seli commodity

futures contracts) by various fraudulent means. The London

commodity options were alleged to be investment contracts,

evidences of indebtedness or participations in profit sharing

agreements and hence securities as defined by Section 13(1) of

the Arkansas Securities Act [Ark. Stat. Ann. § 67-1247 (Repl.

1966)]. An ex parte order was entered on November 16, 1976

setting a hearing for December 14, 1976 to consider the

Petitioner’s request for a preliminary injunction.

On December 6, 1976, the Respondents filed a Demurrer

to the Petition for Injunction, based on two grounds. The first

was that it appeared on the face of the Petition that the

Chancery Court of Pulaski County, Arkansas had no jurisdic-

tion of the subject matter of the action. This assertion was

predicated on the Commodity Futures Trading Commission

Act of 1974 which established a new Federal regulatory agency,

the Commodity Futures Trading Commission and conferred ex-

clusive jurisdiction on the CFTC vis-a-vis the states and the

Securities and Exchange Commission with respect to regulation

of commodity options and commodity trading advisors. The se-

cond ground of the Demurrer was that the Petitioner lacked the

legal capacity to bring the action.

Petitioner filed a Motion to Overrule the Demurrer on

December 9, 1976. A hearing was held on December 14, 1976 at

which the Petitioner presented testimony of three witnesses who

had purchased commodity options from the Respondents. The

Respondents maintained that their Demurrer should be

sustained on the pleadings and presented no testimony in their

behalf.

The first witness called by the Petitioner indicated that he

had purchased a cocoa option from the Respondents for $3,-

000.00. The witness testified that it had been requested of him

to sign a Power of Attorney so that the Respondents could trade

his account in his name, but the witness refused. The witness

testified that at some later date he contacted the Respondents

seeking information concerning the cocoa market and how well

his cocoa option was doing. He was informed that his cocoa op-

tion had been sold by the Respondents and that a sugar option

had been purchased with the profit. The witness stated that he

accepted a check in the amount of $574.00 represercing the

difference in the sale price of his cocoa option and the purchase

price of the new sugar option but that he refused to invest

further with the Respondents. Some months later th: sugar op-

tior was abandoned by the Respondents and the wit ess lost all

but $574.00 of his investment.

ee a . — - »

The second witness called by the Petitioner testified sub-

stantially as the first witness except that after initially refusing

to sign the Power of Attorney this witness relented. He too lost

all but $574.00 of his investment.

The third witness called by the Petitioner testified that he

purchased an option from the Respondents based upon their

“guarantee” that he would double his money. The option so

purchased was later abandoned by the Respondents with this

witness losing his entire investment.

At the conclusion of the evidence presented to the

Chancellor, the Chancellor overruled the Demurrer and enjoin-

ed the Respondents from selling London commodity options by

fraudulent or misleading means. The Chancellor did not,

however, make a specific finding from the bench that the

Respondents had engaged in fraudulent conduct.

The Respondents appealed to the Arkansas Supreme

Court which reversed and dismissed the Petitioner’s Complaint

holding that the Petitioner had no standing to file suit and that

the Chancery Court cf Pulaski County, Arkansas, had no

jurisdiction to entertain such suit because of the preemption of

the entire commodities field by the enactment of the Commodi-

ty Futures Trading Commission Act of 1974,

REASON FOR GRANTING WRIT

THE ENACTMENT OF THE COMMODITY

FUTURES TRADING COMMISSION ACT OF 1974 HAS

CREATED CONTROVERSY CONCERNING THE

“EXTENT TO WHICH STATES CAN ACT IN LIGHT OF

THE ‘“‘EXCLUSIVE jURISDICTION”’’ OVER

COMMODITIES TRANSACTIONS GRANTED TO THE

COMMODITY FUTURES TRADING COMMISSION.

Prior to the effective date of the CFTCA, state securities

regulators, the Securities and Exchange Commission and

private litigants all sought to effect a measure of protection

and/or recovery for investors defrauded through the offer, sale

or purchase of commodities, commodity futures contracts or

commodity options by asking courts to fashion remedies based

on applicable securities acts. Such requests met with varying

success.

The federal courts which entertained such suits based their

decisions on an analysis of Securities and Exchange Commission v.

W. J. Howey & Company, et al., 328 U.S. 293 (1946). While the

offer and sale of a commodities contract for future delivery stan-

ding alone was generally held not to involve the offer and sale of

a “‘security”, Sinva, Inc. v. Merrill Lynch, Pierce, Fenner & Smith,

Inc., 253 F. Supp. 359 (S.D.N.Y. 1966), when that offer and sale

was coupled with or made part of a managed or discretionary

account, a claim cognizable under the securities acts was

recognized by courts sitting in the Second Circuit, Johnson v.

Espey, et al., 341 F. Supp. 764 (S.D.N.Y. 1972), Berman v. Orimex

Trading, Inc., 291 F. Supp. 701 (S.D.N.Y. 1968), Mahue v.

Reynolds & Company, 282 F. Supp. 423 (S.D.N.Y. 1967); courts

sitting in the Fifth Circuit, Securities and Exchange Commission v.

Continental Commodities Corp., 497 F. 2d 516 (Sth Cir. 1974),

McCurrin v. Kohlweger @ Company, et al., 340 F. Supp. 1338 (E.D.

La. 1972) aff. 477 F. 2d 113 (5th Cir. 1973), Gould v. Barnes

Brokerage Company, Inc., 345 F. Supp. 294 (N.D. Tex. 1972);

courts sitting in the Eighth Circuit, 7. C. Booth v. Peavey Company

Commodities Services, 430 F. 2d 132 (8th Cir. 1970), Marshall v.

Lamson Brothers @ Co., et al., 368 F. Supp. 486 (S.D. Ia. 1974),

a ee ee oe 7

Schwartz v. Bache &@ Company, Inc., 340 F. Supp. 995 (S.D. la.

1972); and the Tenth Circuit Court of Appeals, Commercial Iron

& Metal Company v. Bache & Company et al., 478 F. 2d 39 (10th

Cir. 1973). Such claims were however rejected by courts sitting

in the Seventh Circuit, Milnarik v. M.S. Commodities, Inc., 320 F.

Supp. 1149 (N.D. Ill. 1970), aff'd, 457 F. 2d 274 (7th Cir. 1972)

and Hirk v. Agri-Research Council, Inc., et al., CCH, Sec. L Rep.

par. 94, 738 (N.D. Ill. 1974) and further rejected by the District

Court for the middle district of Pennsylvania, Wasnowic v.

Chicago Board of Trade, 352 F. Supp. 1066 (M.D. Pa. 1972), aff'd

without opinion, 491 F. 2d 752 (3rd Cir. 1973). The difference in

opinion turned on the respective courts’ interpretation of the

common enterprise requirement necessary for a finding of an in-

vestment contract as defined in Howey, supra. The Seventh Cir-

cuit stated that there had to be a “‘pooling”’ of investor funds

while the remaining Courts considering the problem stated that

there need be only a common enterprise between the investor

and promoter and not among investors similarly situated.

The Petitioner in the suit below alleged fraudulent dis-

cretionary transactions in respondents’ customers’ commodity

options accounts and in addition alleged certain material mis-

representations and omissions in connection with the initial

offer and sale of the commodity options themselves. A com-

modity option is a contract right, purchased from the option

seller for a fee called the “premium,” to buy from, or sell to, the

option seller, the underlying commodity futures contract at a

fixed price called the “striking price,” at any time during the life

of the option. The striking price is usually the market price of

the underlying commodity futures contract on the day that the

option contract is sold. The option period is usually fixed, rang-

ing from one month to a year or 18 months. An option to sell the

underlying commodity futures contract is known as a “‘put.” An

10

option to buy the underlying commodity futures contract is

known as a “‘call.’’ It is also possible for the option purchaser to

buy both a put and a call on the same commodity at the same

time. Such a purchase is known as a “‘straddle,’’ or, more com-

monly, as a “double option.” Long, The Naked Commodity Option

Contract As A Security, 15 Wm. & Mary L. Rev. 211, 212-14

(1974).

The purchaser of a call theoretically makes his profit when

the :narket for the underlying commodity futures rises. If this

occurs, he exercises his option, purchasing the underlying com-

modity futures contract from the option seller at the striking

price and reselling it in the open market. His profit is the

difference between the striking price and his selling price, less

the premium he paid for the option. The purchaser of a put will

profit similarly if the market falls sufficiently from the striking

price for his profit on the futures contract to exceed the

premium. /d. at 213. The purchaser of a double option will

profit whether the market rises or falls, provided that the

difference between the rise or fall and the stfiking price exceeds

the premium he paid to the option seller.

Commodity option contracts in various forms have been

present for a number of years. Before 1934, contracts on

domestic commodities, such as wheat and cotton, were traded

extensively on the major American exchanges. In that year,

however, the Commodity Exchange Authority (CEA) banned

trading in options on domestic commodities because of the

abuses which had developed in the commodity option market.

Trading in international, or “world” commodities, including

silver, silver coins, platinum, cocoa, plywood, copper, coffee,

and world sugar, was not affected, since such items were not

subject to CEA jurisdiction. Long, op. cit. supra, pp. 213-14.

~ er ee ee

A distinction must be noted between ‘‘naked’’ commodity

options which have no underlying futures contract and the Lon-

don commodity options which were sold by respondents. The

naked commodity option is an option issued by the seller for

which there is no underlying futures contract. By the great

weight of judicial authority, such options are securities. See:

Long, op. cit. supra, p. 217.

In contrast to the naked option, the “London option” is an

option on an underlying futures contract traded on the London

commodity exchanges. The options are issued, or ‘‘written,”’ by

the same exchanges. “World” commodities such as sugar,

cocoa, coffee, rubber, silver and copper are traded on the Lon-

don exchanges. Such options too have been held to be securities.

Clayton Brokerage Co. v. Mouer, 520 S.W. 2d 802, 804 (Tex. Civ.

App. 1975), rev'd on other grounds, 531 S.W. 2d 805 (Tex. Sup. Ct.

1975).

While the issue of whether such London commodity op-

tions were securities within the meaning of the Arkansas

Securities Act was pivotal in determining Petitioner’s initial

standing to bring suit, that question was left undecided by the

Arkansas Supreme Court, /nternational Trading, Lid. et al. v. Bell,

556 S.W. 2d 420, 422 (1977) (Appendix ‘‘A”’ at page 22), and is

therefore not pertinent here. For purposes of this Petition,

Petitioner, like the Arkansas Supreme Court, assumes that such

options are investment contracts. The question then presented

concerns the Arkansas Court’s analysis of 7 U.S.C.A. § 2 (Supp.

1977) which according to that Court . . . “seems . . . to express a

clear intention to vest exclusive jurisdiction of the regulation of

commodity options in the Commodity Futures Trading Com-

mission and to supersede the jurisdiction of all state and federal

agencies.” International Trading, Lid. v. Bell, supra, at 556 S.W. 2d

page 423 (Appendix “A” at page 26).

12

Petitioner does not here challenge the ability of Congress to

preempt the field of commodities regulation under the

Commerce clause of the United States Constitution. See, e.g.,

Hamilton v. Kentucky Distilleries and Warehouse Company, 251 U.S.

145 (1919). Petitioner does however question the construction

placed on that preemption by the Supreme Court of Arkansas

and the CFTC.

The Court’s attention is directed to the Report of the

Senate Agriculture and Forestry Committee on H.J.R. Res. 335:

The Committee wishes to make clear that the preemption

of the regulation of commodity futures trading by the

Commodity Futures Commission Act of 1974 does not pre-

vent the States from enforcing their criminal anti-fraud

statutes. The Committee realizes that many fraudulent

schemes are devised to prey on the unsuspecting and un-

sophisticated investor. In many cases, these schemes pur-

port to deal in commodities trading. The States are en-

couraged to continue to utilize their criminal anti-fraud

statutes to discourage such schemes. (S. Rep. No. 74-73,

94th Cong., ist Sess. [1975]).

The above section of the Senate report has been interpreted

to permit State Courts to continue to adjudicate state criminal

fraud cases. Johnson, The Commodity Futures Trading Commission

Act: Preemption as Public Policy, 29 Van. L. Rev. 1, 33 (Jan. 1976).

Such interpretation is consistent with the position of the CFTC

expressed on page 19 of their brief, amicus curiae, filed with the

Arkansas Supreme Court in the instant case and is further con-

sistent with the position of the Arkansas Court as expressed on

556 S.W. 2d page 425 (Appendix “A” at page 29). Petitioner

has been unable to find justification for the distinction drawn by

13

the CFTC which would allow enforcement of some state anti-

fraud statutes yet preempt others. If in fact ‘‘all state and federal

agencies” have been preempted, logic would seem to indicate

that no state statute nor any federal statute, save the CFTCA,

could be enforced against persons effecting fraudulent transac-

tions in commodities. A ludicrous extension of that position

would be to preempt any local law enforcement agency from

taking action against thieves who were stealing raw com-

modities.

It is apparent from reading law review articles and CFTC

memorandums that it is state securities regulators and the SEC

that the commodities industry and the CFTC wish preempted.

All other federal, state and local agencies are allowed by the

CFTC to enforce their statutes.

It is the position of the Petitioner that if general anti-fraud

statutes can be enforced against fraudulent commodities

brokers then specific anti-fraud statutes prohibiting fraud in

connection with the offer and sale of investment contracts

should also be enforced.

Congress in enacting the CFTCA did not enact legislation

preempting selected agencies. If Congress declares that a par-

ticular agency has exclusive jurisdiction, then there is no room

for other agencies to regulate in that field. As stated by the

Eighth Circuit Court of Appeals in Northern States Power Company

v. Minnesota, 447 F. 2d 1143 (8th Cir. 1971):

‘“‘Where Congress has unequivocally aid expressly

declared that the authority conferred by it is exclusive,

then there is no doubt but that states cannot exert con-

comitant or supplementary regulatory authority over the

identical activity.’’ Northern States, supra, at 1146.

14

The question then presented is whether the Arkansas

Securities Commissioner by filing suit to enjoin fraudulent sales

of investment contracts in the form of London Commodity Op-

tions is “regulating” the offer and sale of those options within

the meaning of Northern States Power Company, supra., or whether

he is simply enforcing an anti-fraud statute compatible with the

Senate report cited above.

The Arkansas Securities Commissioner is not seeking to

license persons or otherwise regulate London Commodity Op-

tions but rather he, as the representative of the State of Arkan-

sas, is seeking to prohibit through injunction certain fraudulent

conduct.

Petitioner submits it was not the intent of Congress to

preempt the State of Arkansas from enforcing Arkansas’

securities fraud laws by passage of the CFTCA. The State of

Arkansas seeks to enforce a securities fraud law — not to

regulate commodities. Congress never intended to deny the

State of Arkansas and its courts the right to protect Arkansas

citizens from perpetrators of fraud and deceit. Such malefactors

should and must be enjoined from engaging in fraudulent '

businesses entirely.

The Court’s attention is directed to Section 21 of the

Arkansas Securities Act [Ark. Stat. Ann. § 671255 (Supp.

1977)| which provides criminal sanctions for persons who

willfully violate that Act.

It is inconsistent to hold that the State of Arkansas, pur-

suant to Ark. Stat. Ann. § 41-2203 (Crim. Code 1976), a general

“theft by deception” statute, can prosecute persons engaging in

fraudulent commoditics operations, /nternational Trading, Lid. v.

15

Bell, supra at 556 S.W. 2d page 425 (Appendix “A” at page 29),

but cannot so prosecute under Ark. Stat. Ann. § 67-1235 (Repl.

1966), the Securities Act “anti-fraud” section, due to the “‘clear

intention [of Congress] to vest exclusive jurisdiction of com-

modity options in the Commodity Futures Trading Commis-

sion and to supersede the jurisdiction of all state and federal

agencies.’’ /nternational Trading, Lid. v. Bell, supra, at 556 S.W.

2d page 423 (Appendix “A” at page 26). Either the State of

Arkansas has been preempted or it has not.

Petitioner believes the more reasoned approach to this in-

consistency is to recognize the grant of exclusive jurisdiction to

“regulate” commodities in the CFTC but to allow the enforce-

ment of anti-fraud statutes by the states whether those statutes

are grounded in the general common law or contained in other

specialized statutes such as the Securities Acts. Certainly, if

state anti-fraud enforcement and federal regulation become in-

consistent, federal preemption would apply. The Petitioner is

not seeking to interfere with the federal regulatory scheme over

the commodities industry but only is seeking to protect the

Arkansas investors from fraud. Surely Congress could not have

meant to deny him that ability.

16

CONCLUSION

For the reasons hereinabove stated, Petitioner respectfully

submits that his Petition for a Writ of Certiorari should be

granted.

Respectfully submitted,

Harvey L. Bev

Securities Commissioner

By: Rocer W. Gites

1428 Donacuey BuipiInc

Seventn & Main Streets

Littte Rock, ARKANSAS 72201

Attorney for Petitioner

17

APPENDIX “A”

REVERSALS CHANCERY DISTRICTS

STATE OF ARKANSAS,

SCT.

In the Supreme Court

BE IT REMEMBERED, That a term of the Supreme Court

of the State of Arkansas, begun and held at the Court House, in

the City of Little Rock, on the 3rd day, being the first Monday

of October, A.D. 1977, amongst others, were the following

proceedings, to-wit: On the 3rd day of October, A.D. 1977, a

day of said term:

International Trading Ltd.,

a division of GNB, Inc. et al

Appellant

No. 77-96 vs.

Harvey L. Bell, Securities Commissioner

| Appellee

Appeal from Pulaski Chancery Court

Second District

THIS CAUSE came on to be heard upon the transcript of

the record of the Chancery Court of Pulaski County, Second

District, and was argued by solicitors; on consideration whereof

it is the opinion of the Court that there is error in the

proceedings and decree of said Chancery Court in this cause as

set out in the opinion herein delivered October 3, 1977.

18

IT IS THEREFORE ORDERED AND DECREED by

the Court that the decree of said Chancery Court in this cause

rendered be, and the same is hereby reversed, annulled and set

aside with costs; and that this cause be dismissed.

IT IS FURTHER ORDERED AND DECREED, That

said appellants recover of said appellee all their costs in this

Court in this cause expended, and have execution thereof.

IN TESTIMONY, That the above is a true copy of the

decree of said Supreme Court rendered in th case therein

stated, I, Jimmy H. Hawkins, Clerk of said Supreme Court,

hereunto set my hand and affix the Seal of said Supreme Court,

at my office in the City of Little Rock, this 7th day of November,

A.D. 1977.

JIMMY H. HAWKINS

Clerk

By Dona L. Williams

D.C.

19

SUPREME COURT OF ARKANSAS

INTERNATIONAL TRADING LTD.,

A Division of GNB, Inc.:

GNB, Inc., J. R. ROSE and Arthur PALMER

v. Harvey L. BELL, Securities

Commissioner for the State of

Arkansas

77-9

Opinion delivered October 3, 1977

(In Banc)

Appeal from Pulaski Chancery Court, Second Division,

John T. Jernigan, Chancellor; reversed and dismissed.

Joun A. Focteman, Justice. The chancery court enjoin-

ed appellants from directly or indirectly employing any

device, scheme or artifice to defraud; making any untrue

statement of a material fact or omitting to state a material

fact necessary in order to make the statements made, in light

of the circumstances under which they are made, not mis-

leading, or, engaging in any act, practice, or course of

business which operates or would operate as a fraud or deceit

upon any person. In doing so, the court overruled appellants

demurrer. Appellants elected to stand on that demurrer,

which alleged that it appeared on the face of the complaint

that the court had no jurisdiction of the subject matter and

that appellee did not have the legal capacity to sue in this ac-

20

tion. Since we find that the chancery court erred in overruling

this demurrer, we must reverse the decree.

The complaint was filed by the Securities Commissioner

for the State of Arkansas under the Arkansas Securities Act,

as amended [Ark. Stat. Ann. § 67-1235 et seq]. Init, he alleg-

ed that Internaticnal Trading, Ltd., a division of GNB, Inc.,

CNB, Inc., J. R. Rose and Arthur Palmer were engaging in

acts and practices and a course of conduct which constitute

violations of various sections of the act in offering and selling

a type of commodity option contracts known as ‘London

commodity options.’’ He alleged that these acts and practices

constituted a device, scheme or artifice to defraud and would

operate as a fraud or deceit upon the purchasers of options

and that appellants made misrepresentations of material

facts or omitted to state material facts necessary to make the

statements made not misleading in the light of the cir-

cumstances under which they were made. The acts and con-

duct specified were:

(a) engaging in an organized statewide, high-pressure,

“boiler room” like sales campaign, conducted primarily

by repeated, unsolicited, ‘“‘cold-canvass” long distance

telephone calls to persons who were inexperienced and

unsophisticated as to London commodity options tran-

sactions, in which calls false and deceptive statements

were made about profit expectations and the advisabili-

ty of immediate purchase of such options to take advan-

tage of purported favorable market prices for the op-

tions;

(b) hiring and directing sales persons without ex-

perience or knowledge of the risks and trading

mechanics involved in such options and providing these

salesmen with glowing, but deceptive and misleading

“canned” sales speeches to be read to potential

customers over the telephone, instructing these sa

sons to conceal material facts, avoid unfavorable ex-

21

planations, provide only minimal information, and tell

these prospects anything to make a sale;

(c) representing and making it appear that the op-

tions being offered and sold would be purchased in the

London market in the names of such customers, with

the company acting as the purchaser’s agent, when in

fact the options were purchased in the name of the com-

pany for its own account at prices substantially less than

the customers paid the company;

(d) representing, without any reasonable basis, profits

or returns which would double or triple the purchase

price in a short period of time, but failing to disclose that

many customers had actually lost their investments;

(e) concealing and misrepresenting the true nature of

the purchase price, including all fees and markups,

which customers pay to the company for the purchase of

London commodity options; concealing the fact that the

company marks up the price of each option purchased

in the London markets between 40 and 150 percent;

(f) representing to purchasers and prospective

purchasers that the company’s salespersons are well

trained and have several years’ experience in the com-

modity option field, when, in fact, most of them have

had substantially less than one year’s experience and

the company provides no meaningful training to such

salespersons, who are not specialists in the fieid of com-

modity options;

(g) failing to state that International Trading, Ltd., a

division of GNB, Inc., and GNB, Inc. are foreign cor-

porations not authorized to do business in Arkansas;

(h) failing to disclose the risk of loss to potential in-

vestors;

22

(i) failing to disclose that the investors were purchas-

ing a commodity option rather than a true contract for

future delivery of commodities;

(j) failing to disclose the actual closing date for trans-

actions traded on the London Board of Options Ex-

change;

©

(k) using high pressure telephonic sales techniques

emphasizing the likelihood of profits and not con-

sidering the investment needs of the customer;

(1) excessively marking up the price of the London

commodity options sold to Arkansas investors;

(Il) receiving compensation directly and indirectly for

advising potential investors as to the value of these

securities and employing a device, scheme or artifice to

defraud and engaging in acts, practices or course of

business which operated or would operate as a fraud or

deceit upon purchasers in violation of Ark. Stat. Ann. §

67-1236 (a) (Repl. 1966) by omitting to state the

material facts necessary in order to make the statements

made, in light of the circumstances under which they

were made, not misleading.

The court heard appellee’s evidence on the allegations of

fraud, but appellants, having elected to stand upon their

demurrer, offered no evidence. Even so, the chancellor declin-

ed to make a finding that appellants had been guilty of fraud.

The language of the decree stating the acts enjoined is couch-

ed entirely in words of § 1 of the Arkansas Securities Act

[Ark. Stat. Ann. § 67-1235 (Repl. 1966)] declaring those

acts, in connection with the offer, sale or purchase of

securities to.be unlawful.

For the purposes of this opinion we assume, but do not

decide, that a London commodity option is a security, as

23

alleged in appellee’s complaint and defined by Ark. Stat.

Ann. § 67-1247 (1). If it is, it would be subject to regulation

under the Arkansas Securities Act, except for the preemption

of the field by the United States Congress through the Com-

modity Futures Trading Commission Act, an amendment to

the Commodity Exchange Act. 7 USCA § | et seq.

In order to understand the question presented, it is

necessary that certain terms, not generally familiar, be defin-

ed, as we understand them.

A commodity futures contract is a contract by which a

seller agrees to deliver a definite quantity of a commodity ina

specified future month, and the purchaser agrees to accept

and pay for the commodity when it is delivered. The terms of .

the contract, except for the price, are fixed by the organized

exchange through which the trading is done. Campbell,

Trading in Futures Under the Commodity Exchange Act, 26

(seorge Washington Law Review 215, 216-218. The price is

determined by open bidding by traders on the floor of the

commodity exchange. See Clayton Brokerage Co. of St. Louis v.

Mouer, 520 S.W. 2d 802 (Tex. Civ. App., 1975); § 7 USCA §§

6, Gb, 6c, Supp. 1977.

A commodity option is a contract right, purchased from

the option selier for a fee called the “premium,” to buy from,

or sell to, the option seller, the t aderlying commodity futures

contract at a fixed price called the “striking price,” at any

time during the life of the option. The striking price is usually

the market price of the underlying commodity futures con-

tract on the day that the option contract is sold. The option

period is usually fixed, ranging from one month to a year or

18 months. An option to sell the underlying commodity

futures contract is known as a “put.” An option to buy the

underlying commodity futures contract is known as a “cali.”

It is also possible for the option purchaser to buy both a put

and a call on the same commodity at the same time. Such a

purchase is known as a “straddle,” or, more commonly, as a

24

“double option.” Long, The Naked Commodity Option Con-

tract as a Security, 15 Wm. & Mary L. Rev. 211, 212-14

(1974).

The purchaser of a call theoretically makes his profit

when the market for the underlying commodity futures rises.

If this occurs, he exercises his option, purchasing the underly-

ing commodity futures contract from the option seller at the

striking price and reselling it in the open market. His profit is

the difference between the striking price and his selling price,

less the premium he paid for the option. The purchaser of a

put will profit similarly if the market falls sufficiently from the

striking price for his profit on the futures contract to exceed

the premium. Id. at 213. The purchaser of a double option

will profit whether the market rises or falls, provided that the

difference between the rise or fall and the striking price ex-

ceeds the premium he paid to the option seller. A commodity

option is considered a more conservative investment than a

commodity futures contract because the risk of loss is limited

to the premium paid and is not a concomitant of price fluc-

tuations in the commodity which may lead to additional

margin calls. Note, Federal Legislation for Commodity Op-

tion Trading: A Proposal, 47 So. Cal. L. Rev. 1418, 1424-25

(1974).

Commodity option contracts in various forms have been

present in the financial market place for a number of years.

Before 1934, contracts on domestic commodities, such as

wheat and cotton, were traded extensively on the major

American exchanges. In that year, however, the Commodity

Exchange Authority (CEA) banned trading in options on

domestic commodities because of the abuses which had

developed in the commodity option market. Trading in inter-

national, or “world” commodities, including silver, silver

coins, platinum, cocoa, plywood, copper, , and world

sugar, was not affected, since such items were not subject to

CEA jurisdiction. Long, cit. supra, pp. 213-14.

25

A London option is a right, for a price, to purchase or

sell a commodity futures contract for a specified term at a

specified price. Thus it is simply an extention of a commodity

futures contract and is t - the apace nasng ary poem

: exchanges as the underlying futures ract.

smodiaion traded on the lone exchange include sugar,

cocoa, coffee, rubber, silver and copper. See Clayton Brokerage

Co. of St. Louis, Inc. v. Mouer, supra, appeal dismissed as

mooted by reason of preemption by Commodity Futures

‘Trading Commission Act of 1974, 531 S.W. 2d 805. For other

discussions defining these terms and the commodity trading

business, see British American Commodity Operations .v.

, 552 F. 2d 482 (2 Cir., 1977). For a discussion of the

Lo option market and the sale of London options in the

United States, see Long, Commodity Options — Revisited,

25 Drake L. Rev. 75, 111-128 (1975).

The language which we find to be a clear manifestation

of the intention of Congress to exclude states from this field is

found in provisos added to the Commodity Exchange Act by

the Commodity Future Trading Act as set out in 7 USCA § 2

(Supp. 1977). They are:

*** Provided, That the Commission shall have exclusive

jurisdiction with respect to accounts, agreements

{including any transaction which is of the character of,

or is commonly known to the trade as, an ‘option’,

“privilege”, “indemnity”, “bid”, “offer”, “ : call A

lesiad ted pursuant to section 7 of this title or any other

board of trade, exchange, or market, and transactions

subject to by the Commission to

section 15a of this title: And provided further, except

as hereinabove provided, contained in this sec-

tion shall (i) supersede or limit the tion at any

time conferred on the Securities and Commis-

sion or other regulatory authorities under the laws of the

26

United States or of any State, or (ii) restrict the

Securities and Exchange Commission and such other

authorities from carrying out their duties and respon-

sibilities in accordance with such laws. Nothing in this

section shall supersede or limit the jurisdiction con-

ferred on courts of the United States or any State. ***

The language seems to us to express a clear intention to

vest exclusive jurisdiction of the regulation of commodity op-

tions in the Commodity Futures Trading Commission and to

supersede the jurisdiction of all state and federal agencies.

Our conclusion is fortified by another section of the act, now

appearing as 7 USCA 6c (b) (Supp. 1977), where Congress

said:

No person shall offer to enter into, enter into, or

confirm the execution of, any transaction subject to the

provisions of subsection (a) of this section involving any

commodity regulated under this chapter, but not

specifically set forth in section 2 of this title, prior to the

enactment of the Commodity Futures Trading Commis-

sion Act of 1974, which is of the character of, or is com-

monly known to the trade as, an “option”, “privilege”,

“indemnity”, “bid”, “offer”, “put”, “call”, “advance

guaranty”, or ‘“‘decline guaranty”, contrary to any rule,

regulation, or order of the Commission prohibiting any

such transaction or allowing any such transaction under

such terms and conditions as the Commission shall

prescribe within one year after the effective date of the

Commodity Futures Trading Commission Act of 1974

unless the Commission determines and notifies the

Senate Committee on Agriculture and Forestry and the

House Committee on Agriculture that it is unable to

prescribe such terms and conditions within such period

of time: Provided, That any such order, rule, or regula-

tion may be made only after notice and opportunity for

hearing: And provided further, That the Commission may

set different terms and conditions for different markets.

27

This view is further strengthened by the report of the

Congressional Conference Committee on the House and

Senate versions of the bill for the act in question. That com-

mittee said:

The clarifying amendments make clear that (a) the

Commission’s jurisdiction over futures contract markets

or other exchanges is exclusive and includes the regulation of .

. . commodity options; |and] (b) the Commission's jurisdiction,

where applicable, supersedes State as well as Federal agencies . .

Under the exclusive grant of jurisdiction to the Commis-

sion, the authority fn the Commodity Exchange Act

(and the eg ov pe ays by the eee

reempt the field insofar as futures regula -

carmel’ .. . In view of the broad grant of authority to the Com-

mission to regulate the futures trading industry, the Conferees do

not contemplate that there will be a need for any supplementary

regulation by the States. {Emphasis ours.|

See Senate Miscellaneous Reports on Public Bills, IX, Sen.

Rep. 1178-1239, 93d Coneress, 2d Session, pp. 35-36; see

also, Securities and Exchange Commission v. American Commodity

Exchange, Inc., 546 F. 2d 1361 {10 Cir., 1976) for other

legislative history.

The vesting of exclusive jurisdiction rd a “_ om :arrpuing

that Congress intended no regulation in this held except un-

der the authority of the act. See Rice v. Santa Fe Elevator Co.,

331 U.S. 218, 67 S. Ct. 1146, 91 L. Ed. 1447 (1947); Johnson,

Commodity Futures Trading Act: Preemption as Public

Policy, 29 Vanderbilt L. Rev. 1, 2, 20.

Where the act conferred jurisdiction on the commission,

at least one other court has held that it ed the field of

regulation insofar as the states are |. State v. Monex

International, Limited, 527 S.W. 2d 804 (Tex. Civ. App., 1975),

28

applied to London commodity options in Clayton Brokerage Co.

of St. Louis v. Moeur, 531 S.W. 2d 805 (Tex. Sp Ct., 1975). It

has also been held that the act stripped the Securities Ex-

change Commission of authority previously vested in it.

Securities Exchange Commission v. Univest, Inc., 405 FS 1057 (DC,

Ill., 1975), 410 FS 1029, remanded 556 F. 2d 584 (7 Cir.,

1977). There is at least tacit recognition of the preemption in

some cases in which it has beeh held that pending actions or

actions taken before the newly created commission could act

were not affected. See, e.g., State v. Spannus Coin Wholesaler

Inc., 250 N. W. 2d 587 (1976). ;

___ Appellee makes some very appealing arguments in seek-

ing to sustain his position that there is no preemption. First,

he seizes upon the clause stating that “except as hereinabove

provided, nothing contained in this section shall (i) supersede

or limit the jurisdiction at any time conferred on . . . other

regulatory authorities under the laws . . . of any State or (ii)

restrict . . . such other authorities from carrying out their

duties and responsibilities in accordance with such laws,”

and the statement that “[n]othing in this act shall be deemed

to supersede or limit the jurisdiction conferred on courts of . .

_ any state.” The argument that the exception relates only to

regulation of commodities, not securities, 1s unavailing here

because of the clear language of the act bringing commodity

options within the purview of the act. The exception, then,

eliminates the subject matter of this action from the jurisdic-

tion of the regulatory laws of a state. Perhaps the Commodity

Futures Trading Commission cannot regulate London ex-

changes, but it does have jurisdiction over accounts,

agreements (including options) and transactions on contract

markets or any other board of trade, exchange or market.

Appellee also argues that because the Arkansas

sry yr Act ? _ in conflict with the federal act, he should

not be prevented from enforcing the state regulatory scheme.

Where, however, as here, Congress has made it clear that

authority conferred by it is exclusive in a given area the states

29

cannot exercise concomitant or supplementary regulatory

authority over the identical activity. Northern States Power Co. v.

State, 447 F. 2d 1143 (8 Cir., 1971); Rice v. Santa Fe Elevator

Corp., supra, 331 U.S. 218; Campbell v. Hussey, 368 U.S. 297,

82 S. Ct. 327, 7 L. Ed. 2d 299 (1961).

Appellee, consistent with his argument that

Congressional intent to preempt is not manifest, invokes a

test he finds in Northern States Power Co. v. State, supra, i.e.: (1)

what is the intent of Congress as expressed in the legislative

history of the act (2) how pervasive is the federal regulatory

scheme (3) does the nature of the subject require exclusive

regulation and (4) is state law an obstacle to federal enforce-

ment. An affirmative answer to all these questions is not re-

= as a basis for finding an implied federal ——.

court in that case stated these tests only as factors to be

considered. Although we would be compelled to answer the

fourth question in the negative, if we consider only the terms

of the Arkansas Securities Act as presently written, the poten-

tial for obstacles is just as important as their existence. See

Rice v. Santa Fe Elevator Corp., supra. Commodity Futures

Trading Commission regulations could change this answer.

As to the other questions, our answers are in the affirmative.

We have already mentioned the legislative history and the

broad scope of the Commodity Futures Trading Commission

Act. There was at least a Cungresiionel finding that the

nature of the subject matter demanded exclusive federal

regulations and we cannot say that this finding was un-

founded. See Johnson, The Commodity Futures Trading

Commission Act: Preemption as a Public Policy, 29 Vander-

bilt Law Review 1. Even if we apply appellee's tests, we find a

strong implication that federal preempticn was intended.

We do not agree with appellee that preemption will pre-

vent the state from protecting its citizens from fraud. There is

no reason why the state cannot prosecute an offender under

such provisions as § 41-2203 (Crim. Code, 1976). There is no

bar of actions by persons defrauded to recover money ob-

30

tained from them by fraud. Such actions could not constitute

any realistic threat of interference withthe federal regulatory

scheme and the act certainly does not afford protection of

fraudulent conduct. See Farmer v. United Brotherhood of

Carpenters of America, 430 U.S. 290, 97 S. Ct. 1056, 51 L. Ed.

2d 338 (1977).

Finally, appellee’s invocation of the Tenth Amendment

is unavailing where the Congress had the power to act and, in

acting, manifestly intends to preempt the field. In such a

case, the supremacy clause (Art. V1, § 2) clearly has a bear-

ing. See Rice v. Santa Fe Elevator Corp., supra, 331 U.S. 218;

Northern States Power Co. v. State, supra, 447 F. 2d 1143. We do

not understand appellee to argue that Congress has no power

to regulate trading in London commodity options in the

United States. It seems rather obvious to us that

does have the power under the commerce clause of the United

States Constitution. This case does not involve the exercise of

power which impairs the integrity of the states on their ability

to function effectively, as was the case in National League of

Cities v. Usery, 426 U.S. 833, 96 S. Ct. 2465, 49 L. Ed. 2d 245

(1976) upon which appellant relies. The case involved an

attempt by Congress to prescribe minimum wages to be paid

to state employees by the states, acting in their sovereign

capacity. Clearly, there is no such invasion of the sovereignty

of the states involved here. Here the exercise of congressional

authority was directed to private citizens, not to the states as

states, or to functions essential to their separate and indepen-

dent existence.

We find that the chancery court had no jurisdiction to

act in this proceeding under the provisions of the Arkansas

Securities Act, and that the appellee had no standing to bring

this action so the decree of the chancery court is reversed and

the cause is-dismissed.

Hlickasan, J., dissents.

31

APPENDIX “B”

IN THE CHANCERY COURT OF

PULASKI COUNTY, ARKANSAS

R

HARVEY L. BELL, SECURITIES COMMISSIONE

FOR THE STATE OF ARKANSAS PETITIONER

VS. No. 76-5009

INTERNATIONAL TRADING, LTD.,

A DIVISION OF GNB, INC.:

GNB, INC.: J. R. ROSE AND

ARTHUR PALMER RESPONDENTS

ORDER

On this day comes to be heard the Demurrer filed in behalf

of Respondents and the Petition for Injunction filed by

Petitioner and Respondents appearing through their Attorney,

Joel Bellows, and Petitioner appearing through his Attorneys,

Ted Goodloe and James T. Pitts, and this cause being sub-

mitted to the Court for final adjudication by consent of the par-

ties, and from the facts and matters presented and tried on the

merits, the Court being well and sufficiently advised finds:

(1) That the Demurrer filed in behalf of Respondents

herein should be overruled. That this Court has jurisdiction

over the persons and the subject matter of this action and that

the Petitioner has standing to bring this suit.

(2) That London Commodity Options offered and sold by

Respondents in this State are investment contracts and are

32

hence securities as defined by Section 13(1) of the Arkansas

Securities Act [Ark. Stat. Ann. § 67-1247(1) (Repl. 1966).]

(3) That Respondents, in connection with the offer and

sale in this State of investment contracts styled London Com-

modity Options should be enjoined from directly or indirectly

employing any device, scheme or artifice to defraud; making

any untrue statement of a material fact or omitting to state a

material fact necessary in order to make the statements made,

in light of the circumstances under which they are made, not

misleading; or, engaging in any act, practice, or course of

business which operates or would operate as a fraud or deceit

upon any person.

IT IS THEREFORE ORDERED that Respondents’

Demurrer be and the same is hereby ordered overruled and that

the Respondents in connection with the offer and sale in this

State of investment contracts styled London Commodity Op-

tions be and the same are hereby ordered enjoined from directly

or indirectly employing any device, scheme or artifice to

defraud; making any untrue statement of a material fact or

omitting to state a material fact necessary in order to make the

statements made, in light of the circumstances under which

they are made, not misleading; or, engaging in any act, prac-

tice, or course of business which operates or would operate as a

fraud or deceit upon any person.

/s/ John T. Jernigan

CHANCELLOR

DATE: Dec. 15, 1976

APPROVED AS TO FORM:

33

/s/ Joel Bellows

JOEL BELLOWS

100 N. LaSalle Street, Suite 1100

Chicago, Illinois 60602

Attorney for Respondents

/s/ Ted Goodloe

TED GOODLOE

/s/ James T. Pitts

JAMES T. PITTS

Arkansas Securities Department

1428 Donaghey Building

Little Rock, Arkansas 72201

Attorneys for Petitioner

34

APPENDIX “C”

STATE OF ARKANSAS, r

SCT.

In the Supreme Court J

BE IT REMEMBERED, Thai at a term of the Supreme

Court of the State of Arkansas, begun and held at the Court

Room in the City of Little Rock, on the 3rd day, being the first

Monday of October, A.D. 1977, amongst others were the

following proceedings, to-wit:

On the 7th day of November, A.D. 1977, a day of said term

International Trading Ltd.,

a division of GNB, Inc. et al Appellant

No. 77-96 vs.

Harvey L. Bell, Securities Commissioner Appellee

Appeal from Pulaski Chancery Court

Second Division

Petition for rehearing is denied.

IN TESTIMONY, That the above is a true copy of the Per

Curiam of said Supreme Court, rendered in the case therein

stated, I, JIMMY H. HAWKINS, Clerk of said Supreme Court,

hereunto set my hand and affix the Seal of said Supreme Court,

at my office in the City of Little Rock, this 7th day of November,

A.D. 1977. °

JIMMY H. HAWKINS

Clerk

By Melissa Milhollen

D.C.