Appendix — Sundheimer v. Commodity Futures Trading Commission

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A.1

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

. =

Cal. No. 581—August Term, 1981

(Argued December 10, 1981

Decided September 3, 1982)

Docket No. 81-4186

call

STEPHEN M. SUNDHEIMER,

Petitioner,

_V—

COMMODITY FUTURES TRADING COMMISSION,

Respondent.

Before:

Moore, TIMBERS and VAN GRAAFEILAND,

Circuit Judges.

-i-

Petition for review of an order of the Commodity

Futures Trading Commission, which revoked petitioner’s

registration as a floor broker pursuant to §§ 8a(2)(B) &

8(a)(3) of the Commodity Exchange Act, as amended, 7

4677

A.2

U.S.C. §§ 12a(2)(B) & 12(a)(3), held that petitioner had

violated § 4c(a)(A), 7 U.S.C. §§ 6c(A), imposed a

$100,000 penalty, ordered him to cease and desist from

further violations of § 4c(a)(A), and prohibited him from

trading on or subject to the rules of any contract market

for a period of 24 months.

Petition for review denied and order affirmed.

noe

JOHN M. Burns III, New York, N.Y. (Burns &

Fox, New York, N.Y., on the Brief), for

Petitioner.

GLYNN L. Mays, Assistant General Counsel,

Commodity Futures Trading Commis-

sion, Washington, D.C., (Dennis A. Dut-

terer, General Counsel, Pat G. Nicolette,

Deputy General Counsel, Gregory C.

Glynn, Associate General Counsel, and

Vivian C. Kresslein, Clerk, Washington,

D.C., on the Brief), for Respondent.

VAN GRAAFEILAND, Circuit Judge:

Stephen M. Sundheimer (petitioner) asks this Court to

review a final order of the Commodity Futures Trading

Commission which revoked petitioner’s registration as a

floor broker and imposed other sanctions as provided in

§§ 6(b) and (c) of the Commodity Exchange Act, as

amended, 7 U.S.C. §§ 9 & 13b. We affirm.

4678

A.3

In 1974, petitioner, a vice-president of Pressner Trading

Corporation, agreed that Pressner would take the other

side of certain prearranged contracts in crude oil futures

so that an oil company could obtain illegal tax benefits by

claiming fraudulent losses. Some time later, the Justice

Department commenced an investigation into the use of

the crude oil futures market for tax evasion purposes.

Petitioner was implicated and thereafter cooperated with

the federal authorities.

On October 27, 1978, in the United States District

Court for the Southern District of New York, petitioner

pled guilty to a charge that he violated 26 U.S.C.

§ 7206(2) by knowingly aiding, assisting, and advising in

the preparation of false and fraudulent income tax re-

turns. On January 9, 1979, petitioner was sentenced to a

year in prison and fined $5,000. The sentence of impris-

onment was suspended on condition that petitioner

devote the year to an approved community activity, which

he did.

On January 16, 1979, the Commission’s Division of

Enforcement filed a complaint alleging that petitioner’s

felony conviction made him unfit for registration with the

Commission. See Commodity Exchange Act §§ 8a(2)(B)

& (3), 7 U.S.C. §§ 12a(2)(B) & (3). The complaint also

alleged that petitioner had violated or aided and abetted

violations of section 9(b) of the Commodity Exchange

Act, 7 U.S.C. § 13(b), which forbids market price manip-

ulations, and section 4c(a)(A), 7 U.S.C. § 6c(a)(A), which

forbids conduct “of the character of” accommodation

trades.

The Division of Enforcement moved for summary

disposition, contending correctly that, because of peti-

tioner’s felony plea, he was collaterally estopped from

denying his participation in the prearranged trades. The

4679

A.4

Administrative Law Judge, to whom the matter was

referred, held that, because petitioner’s manipulation of

prices did not end prior to April 21, 1975, when the

Commission assumed jurisdiction over crude oil future

contracts, the provisions of the Act were applicable to

him. The Administrative Law Judge also held that a

prima facie case of unfitness under section 8a(2)(B) had

been made out and that both sections 9(b) and 4c(a)(A)

had been violated. He granted in part the motion for

summary disposition but ordered a hearing so that peti-

tioner could introduce evidence of mitigating circum-

stances and rehabilitation.

Following the hearing, the Administrative Law Judge

held that the evidence of mitigation was insubstantial and

the claim of rehabilitation was premature. He suspended

petitioner’s registration as a floor broker for six months,

enjoined him from further violations of the Act, sus-

pended his trading privileges for twenty-four months, and

fined him $200,000. On appeal, the Commission reversed

the Administrative Law Judge’s holding of a section 9(b)

violation because petitioner’s guilty plea did not encom-

pass all the elements of market manipulation under the

Commodity Exchange Act. The Commission held, how-

ever, that the transactions covered by the plea were

“tantamount to” accommodation trades and violated

section 4c(a)(A). The Commission concluded that peti-

tioner’s registration should be revoked rather than sus-

pended, reduced the monetary penalty to $100,000, and

approved the remaining sanctions.

Petitioner’s principal contentions in this Court are that

the Commission erred in finding a violation of section

4c(a)(A) and that the sanctions, as imposed, were im-

proper.

4680

A.5

The Section 4c(a)(A) Violation

The Commission’s summary disposition of the charges

against petitioner were based upon his guilty plea. The

information to which petitioner pled guilty alleged that

he, “together with other persons, fixed, rigged and

fraudulently prearranged trades and manipulated the

movement of prices on the Crude Oil Market of the New

York Cotton Exchange for the purpose of creating prede-

termined losses for an oil company for the fiscal year

ending Octover 31, 1974 and for the fiscal year ending

October 31, 1975, and predetermined gains for the oil

company in the following fiscal years.” We find no merit

in petitioner’s claim that he did not thus admit to engag-

ing in any transactions after April 21, 1975, when, pur-

suant to the Commodity Futures Trading Commission

Act of 1974, Pub. L. No. 93-463, 88 Stat. 1389, the

newly-created Commission obtained jurisdiction over the

crude oil futures market. The transactions charged and

admitted went well beyond April, 1975, and summary

disposition on the issue of liability therefore was proper.

The Commission’s holding that the transactions in

question violated section 4c(a)(A) because they were “tan-

tamount to” accommodation trades invoived an impre-

cise, and therefore objectionable, choice of language.

Section 4c(a)(A) forbids transactions which are “of the

character of” accommodation trades, and it is quite

apparent that the Commission equated the terms “tanta-

mount to” and “of the character of”. However, the

Commission would be well advised to adhere to the

language of the statutes they are enforcing.

Petitioner contends, in any event, that the transactions

were not of the character of accommodation trades,

because, he says, an accommodation trade must be a

fictitious transaction, not a real one. The Commission

4681

defines “accommodation trading” as “[w]ash trading en-

tered into by a trader, usually to assist another with illegal

trades” and defines “wash trading” in turn as “[e]ntering

into, Or purporting to enter into, transactions to give the

appearance that purchases or sales. . . have been made,

usually not resulting in a change in the traders’ market

position.” Committee on Agriculture, Nutrition and

Forestry, 95th Cong. 2d Sess., Futures Trading Act of

1978, Glossary of Terms Used in Commodity Futures

Trading (Comm. Print 1979). “The essential and identify-

ing characteristic of a ‘wash sale’ seems to be the intent

not to make genuine, bona fide trading transactions in

stocks or commodities.” Commodity Futures Trading

Commission v. Savage, 611 F.2d 270, 284 (9th Cir. 1979)

(quoting /n re Jean Goldwurm, 7 Agric. Dec. 265, 274

(1948), with emphasis added). It is this intent, the absence

of good-faith, arms-length trading, and the undisclosed

prearrangement for losses and gains, that demonstrates

the “accommodation” nature of the transactions in the

instant case.

There is no unconstitutional ambiguity in identifying

an accommodation trade in these terms. As a practical

matter, see Cargill, Inc. v. Hardin, 452 F.2d 1154, 1163

(8th Cir. 1971), cert. denied, 406 U.S. 932 (1972), Press-

ner’s prearranged transactions in the oil company’s stock

were accommodations for the oil company, criminally

unlawful ones at that. That real sales rather than ficti-

tious Ones were contemplated does not change the artifi-

cial character of the arrangement. Prior administrative

use of the term “accommodation trade” was consistent

with this practical, everyday meaning. See, e.g., In re

Julian M. Marks, 22 Agric. Dec. 761 (1963); In re Irwin

M. Eisen, 22 Agric. Dec. 758, 759 (1963); In re Julian M.

Marks, 20 Agric. Dec. 457, 458, 459 (1961).

4682

A.7

The Sanctions

Although the sanctions imposed by the Commission

were severe, apparently more severe than had been im-

posed in other cases, they were within statutory limits and

constituted a proper exercise of the agency’s discretion.

Haltmier v. Commodity Futures Trading Commission,

554 F.2d 556, 563-64 (2d Cir. 1977); see Butz v. Glover

Livestock Commission Co., 411 U.S. 182, 187 (1973).

The only aspect of the Commission’s holding that causes

us concern is the arguably short shrift which the Commis-

sion gave petitioner’s proof of rehabilitation.

It is established practice for the Commission to receive

evidence of mitigating circumstances and rehabilitation.

See, e.g., In re Tipton [1977-1980 Transfer Binder]

Comm. Fut. L. Rep. (CCH) 4 20,673, at 22,750 (1978).

During a three-day hearing, sixteen witnesses testified on

petitioner’s behalf. In rejecting petitioner’s claim of reha-

bilitation, the Commission said “that rehabilitation in a

case like this requires a much greater passage of time

before any such evidence can persuade us that rehabilita-

tion has in fact occurred.” Petitioner contends that the

Commission thus made the passage of time the deter-

minative factor in the rejection, without giving due con-

sideration to the evidence of rehabilitation.

If petitioner were correct in his construction of the

Commission’s language, we would be concerned that the

Commission had abused its discretion. Time is, however,

a relevant factor. The Commission may well be right if it

believes that rehabilitation ordinarily does not occur over-

night. On the other hand, if the Commission arbitrarily

requires that a fixed period of time elapse before evidence

of rehabilitation even will be considered, it actually is

imposing a sentence in the guise of determining fitness for

registration.

4683

A.8

Although, once again, the Commission’s choice of

language leaves something to be desired, we are not

persuaded that the Commission has any unpublished rule

regarding the minimum passage of time. The Commission

Stated that it gave serious consideration to the evidence of

rehabilitation, and we have no reason to disbelieve it.

Petitioner may reapply, of course, for registration. Silver-

man v. Commodity Futures Trading Commission, 562

F.2d 432, 439 (7th Cir. 1977). Should the Executive

Director reject petitioner’s application without giving him

a further hearing on the question of rehabilitation, see 17

C.F.R. § 3.20(e)(f), or should the Commission fail to give

petitioner a fair hearing accompanied by proper consider-

ation of all the evidence, petitioner’s claim of prejudice

may then be viewed in a different light. On the present

record, we cannot say that the sanctions imposed consti-

tuted an abuse of discretion.

Finding petitioner’s remaining claims of error to be

without merit, we deny the petition for review and affirm

the Commission’s order.

4684

700—9-9-82 © USCA—6287

RECORD PRESS, INC., 187 Chambers St., N.¥. 10007 (212) 243-5775

UNITED STATES COURT OF APPEALS A.9

SECOND CIRCUIT .

;

At a stated term of the United States Court of Appeals, in

and for the Second Circuit, held at the United States Courthouse, in

the City of New York, on the 2lst day of October

, one

thousand nine hundred and eighty-two.

STEPHEN M. SUNDHEIMER,

Petitioner,

-Vv- No. 81-4186

COMMODITY FUTURES TRADING COMMISSION,

Respondent.

A petition for reheering containing a suggestion that the

action be reheard in banc having been filed herein by counsel for

the petitioner, Stephen Sundheiner,

Upon consideration by the panel that heard the appeal, it is

ORDERED that said petition for rehearing is DENIED.

It is further noted that the suggestion for rehearing in tans

has been transmitted to the judges of the court in regular active

service and t> any other judge on the panel that heard the appeal

and that no such judge hes requested that a vote be taken thereon.

A. Daniel Fusarco, Clerk

by:

rar my 4,

‘ - L, . x

Wraiete X. Cinoaee

Chief Deputy Clerk

To be argued by

Jouw M. Bvans, ITI

uted ‘uit Court af Kiweals’

1Pe.8 ’ ‘Fou tks Becexs Oncur Ca) da

Sreruzxy M. Suxpusiuen,

Petitioner,

—against—

Commopity Furunes Trapivo Commission,

Respondent.

ON PETITION FOR REVIEW FROM THE

COMMODITY FUTURES TRADING COMMISSION

MEMORANDUM ON BEHALF OF PETITIONER

Buans & Fox

i Attorneys for Petitioner

360 Lexington Avenue

New York, New York 10017

(212) 687-6290

A.1l

TABLE OF CONTENTS

TABLE OF AUTHORITIES. ccciscwcecevccesececdeccebecccceoscouge (iii)

PRELIMINARY BTATEMENT s occedecbodcesacccrdccndccrcedesdscsoecscvese

ISSUES PRESENTED FOR REVIEW sb ei0.0 die wuieteisee de seacciccesedcaveene

STATEMENT, ccidedceed ebevwecdebersvdoedsesbeccdecscceeeccivecebers

A. The Underlying FACES vias decvoadeecccccevos Ceevheekews

B. The Proceedings DOLOW se cbc chabedecddcecseetio disennhains

ARGUMENT .ccoccicodccebvbesedeccepeseocvececeon,bacetdrecesénosasceenun

I. THE CFTC DENIED MR. SUNDHEIMER DUE PROCESS

OF LAW AND FAILED TO OBSERVE PROCEDURES REQUIRED

BY STATUTE IN IMPOSING THE §4c(a) SANCTIONS.........

A. The CFTC Improperly Denied Mr.Sundheimer

Oonice o

B. The CFTC Misinterpreted and Misconstrued

the Slight Evidence..... Oo Ce eecccesececeecere

(i) The Mere Fact of Mr. Sundheimer's

@a Does Nt Establish the Commission

of Any Act Prohibited by the Act or

That ay Act Occurre fter April 21,

ED IDs 060 Cases Ghible ceesmatweabineovososcenée

(ii) nee Sundheimer's Plea Statement Does

Stablish Any Act Pro ed By

The Act or That Any Act Occurred After

April 21, LD [Dac hE bb nme edese CMe chee eve

C. The CFTC Improperly Sustained Summary

isposition and Thereby Wrongfull rived

His Seatate ache to

Mr. Sundheimer of

earin eeeeeeeeeeeeeeeeeeeeee .

II. THE CFTC EXCEEDED ITS STATUTORY JURISDICTION

AND AUTHORITY RY IMPOSING SANCTIONS GROUNDED

IN THE TANTAMOUNT HOLDING. ....cccccececs cecscees 6

A. Mr. Sundheimer's Acts Do Not Constitute

Accommo at on Tra ng e*reeeeweeeveeeeeeeeaeveeeee ee

B. The CFTC May Not Impose Sanctions for

Behavior Which is Not Prohibited by the Act....

III, AS APPLIED TO MR, SUNDHEIMER, THE PROHISI7TION

OF “ACCOMMODATION TRADES" IS UNCONSTITUTIONALLY

WAGE is .s < 6:b wee Wikis tO obo ote cethese ereeeeeee e

aww NOU

hese Nt

A.12

IV. THE CFTC WRONGFULLY DENIED MR. SUNDHEIMER

A MEANINGFUL HEARING ON MITIGATION AND

PRPITREAE AIUD DON 6060.06 Uewltebeectoedcecoeaatwecet aus 36

V. THE CFTC WAS ARBITRARY AND CAPRICIOUS IN

THE MANNER IN WHICH IT IMPOSED SANCTIONS........++ 44

CONCLUSION cccscccccccccccccceceebeebdececreccsccccceseeceses 48

A.13

TABLE OF AUTHORITIES

CASES

Amalgamated Local Union 355 v. NLRB,

481 F.2d 996 (2d Cir. LOTS Whe dc asides pebcesedescsasee

Appalachian Power Co. v. EPA, 545

F.2a 1351 (4th Cir. BEPO) 6 odbc deine cedahvocaeeseaeerc aca

Armstrong Vv. Manzo, 380 U.S. 545 (9965). dedecvacdcenees

Arthur Lipper Corp. v. SEC, 547 F.2d

171 (2d Cir. 1976), cert. denied, 434

U.S. 1009 CLOTE) s. cc os 6b es cleeaic Cece ecco ne deuceeecsunes

Ashland Oil & Refining Co. v. FPC,

421 F.2d 17 (6th Cir. BOZO) cee sic ceawasebeocscedeersevead

Asaton v. Kentucky, 384 U.S. 195 (1966)....eeeeeseeves

A. Smith Bowman & Sons, Inc. Vv.

Schenley Distillers, Inc., 190

F.Supp. 586 (D.Del. ROGLI os b cidade 6 dle cowsie b.ecWe awe per

Baggett Vv. Bullitt, 377 U.S. 360 (1964) seer eee eeeeeeeae

Barnum v. National Transport, Safety Bd.,

595 F.2d 869 (D.C. Cir. BOTS) s WP sewesddicccacéoseeeee

Beck v. SEC, 430 F.2d 673 (6th Cir. 1970). ..seeeseeees

Bendix Corp. v. FTC, 450 F.2d 534 (6th Cir. 1971).....

Boutilier v. Immigration & Naturalization Serv.,

363 F.2d 488 (2d Cir. 1966), aff'd, 387 U.S. 118

REDO TI 6s 6 6.6.0 6.4. ne bise's 0.0 0 bic ebb bie de Rma eds sc -« 668 eeeueeib

British Am. Commodity Options Corp. v. Bagley,

552 F.2d 482 (2d Cir. 1977), cert. denied, 434

U.S. 933 COT a Pikid'o'c a Rikib bold clbae sca netlne a6 cle b eee Seow se

In re Carr, (1977 80 Transfer Binder) Comn,

Fut. L. Rap. (CCH) %20,454 CVOF Ta seidcccecoccewacvccve

C & C Market, Inc. v. United States, 473

F.Supp. 519 (E.D. Mo. L979) ceccvescens eee e eae ee eee of

Celecbrazze v. Kilborn, 322 F.2d 166

(5th Cir. DOGO ks chin c alene k ciate el a Sonik 2 hacia eee “eee

~¥

es by

41, 42.

43, 44

A.14 ze

CFTC v. Goldex Ini.'1 Ltd., [1977-80

Transfer Binder) Comm. Fut. L. Rep.

(CCH) 420,839 (N.D. Tll. LO TONS ae Care wre e Weeks ees 7

CFTC v. Morgan, Herris & Scott, Ltd.,

484 F.Supp. 669 {S.D.N.Y. BOITO) coc covdurdesideiacineeect 7, 27

CFTC v. Savage, 62) F.2d 270 (9th Cir. 1979)...... ree

In re Chin Thloo* Har Wong, 224 F.Supp.

155 (S.D.N.Y. OO TPA hin b&w cwblee wea we was bce oe eee ae 31

Citizens to Prese=ve Overton Park v.

Volpe, 401 U.S. 402 CUD FAD ie nd atin wis. bree Dee cha wle ule Bale 47

In re Clancy, 2 Comm. Fut. L. Rep.

(CCH) 421,126 SA WOO)2 cde ald Vic Ok Sblewit eeldielas ecslan cuewee 46

Coca-Cola, Inc. v. Atchinson, T. &

S.F. Ry. Co., 608 F.2d 213 (5th Cir. 1979)........... 32

Corning Glass Works v. Brennan, 417

U.S. 188 CRED ak eto ob ew Mile eee ele bh peeiedlsetewrecos 7

Cramp v. Board of Public Instruction,

368 U.S. 278 CROW) tb ate as ata w Ore wee wine Wb ce 6 be ale bate 34, 35

De Cavalcante v. Commissioner of

Internal Revenue ,:620 F.2d 23

(3d Cir. PUR ds din'd ood op br Oks wale ek cceeaebe “eee eeeee 18

Division of Enforcement v. Rodin

{1975-1977 Transfer Binder) Com.

Fut. L. Rep. (CCH) ¥20,114 OR A ike Wibieie AOS 6 0 bhie eb othe b 36

Doehler Metal Furniture Co., Inc.

v. United States, 149 F.2d 130

(24 Cir. 5 DGB uidebia bees 6 0.66 CMA obo wale mimes cc'e's we eaeie 22

Doe v. United States Civil Service

Comm'n, 483 F.Supp. 539 (S.D.N.¥. 1980).....seeeeseue 21, 23

Dolgow v. Anderson, 438 F.2d 825

(2d Cir. WE kd AG hs Ae Mae ne ila on ie kaa ewicabosee ocak 22, 23

Irwin M. Eisen, 22 Agric. Dec. 758 (1963).....e+6.++45 28

Emich Motors Corp. v. General Motors

Corp., 340 U.S. 558 CTR a wide le saad <elaleierace o's Robles ewiwia 15, 16

Zmpire Clectroni«s Co., Inc. v.

United States, 3)i F.2d 175 (2d

Cir. 1962). cabeidpinecvcecveerrescsvavesesecsseuce “ee 21, 23

}

ee uy

, ,

Miser ary” ne

MeVe dhe ae ae

ACG tie hah sakes

A.15 : 4

a Page

‘Ernst & Ernst v. Hochfelder,

425 U.S. 185, 96 S.Ct. 1375,

1382, 476 Ed.2d 668 (LOTE A cr ccedenccccerccccnccseonse 47

_ FCC v. National Citizens Comn'n for

y, Broadcasting, 436 U.S. 775 (LOVE) vec cdccrcorsdcbcccvcce 4l, 42

Federal Maritime Comm'n v. Seatrain

Lines, Inc., 411 U.S. 726 (VHPZ) ce cecccccsesccvscsrsecces 31

Flipside, Hoffman Fstates, Inc. v.

Village of Hoffman Estates, 639

F.2d 373 (7th Cir. L9G1) cc cviadvicetrdeeeenecesccosdcvesese 34

Florida v. Mathews, 526 F.2d 319

(Sth Cir. LOVES choc che wecwedessetieerscvedecseorece des 42

Fuentes Vv. Shevin, 407 U.S. 6? (ROTA) 4 cacti adnawbidewae ll

Fuller Brush Co. v. United States,

262 F.Supp. 989 (D. Conn. PISS divccoccococvscavesceevccetss 21

Giaccio v. Pennsylvania, 382 U.S. 399 (1966).....+++. 34

Goldberg Vv. Kelly, 397 U.S. 254 CLOTO)eicisie dcp daswweéc 19, 4l, 42

Golden Grain Macaroni Co. v. FTC,

472 F.2d 882 (9th Cir. 1972), cert.

Genied, 412 U.S. 918 (2OTS) cweddicoss se daewanvocvsseses 12, 13, 14

Grayned v. City of Rockford,

408 U.S. 104 (L9TA) cceccccctcccedecasscacesesscecsvess 34, 35

Greene v. McElroy, 360 U.S. 474 (1959) sseseesceeeeees 10

Lambert Joseph Hagan, [1975-1977 Transfer

Binder] Comm. Fut. L. Rep. (CCH) 420,171 (1976)...... 36

In re Haltmier, (1975-77 Transfer Binder]

Comm. Put. L. Rep. (CCH) 420,160 (1976) .dadeiwocoesndod 46

Haltmier v. CFTC, 554 F.2d 556 (2d Cir. 1977)..«.+++- 15, 47, 48

Henderson Trumbull Supply Corp. v.

NLRB Region 2, 501 F.2d 1224 (2d Cir. 1974)..e0-e0065 26, 21

Hess & Clark, Div. of Rhodia, Inc. v.

FDA, 495 F.2d 975 (D.C. Cir. BOTS) 06 caw b BE Re eee Uédeae 12, 13

Heyman v. Commerce and Indus. Ins. Co.,

> 524 F.2d 1317 (2a Cir. LOPEP veh oidieale waste eeeeeeneaee 20, 22

te Hiller v. SEC, 429 F.2d 356 (20 Cir 1970) ....seere, 44

A.16

Pace

In re Hunt, (1977-80 Transfer Binder)

Comm, Fut. L. Rep. (CCH) 420,803 BOTT) viceotéeveucnes 46

IDCW v. NLRB, 487 F.2d 1143 (D.C. Cir.

$i. anc, 1973), cert. denied, 418 U.S,

LPO rrr er url ery) a CPLR Co 32

Independent Bankers Ass'n of Ga, v.

Board of Governors of the Fed. Reserve

Sys., 516 F.2d 1206 (D.C. Cir. LDS) cree vevvvevevesve 19, 20

International Bhd. of Teamsters v,.

Daniel, 439 U.S. §51 CAGTUP ebemeedocesoebeseecceccséce 31, 32

, International Union v. NLRB, 459

F.2d 1329 (b.c, Cir. RUPE Cbs ss nebddeesdseescbhvcebdeuse 42

rhe Vs neh 420 firm 1270

r. som enie

400 U.S. 846 (19 Ke alll SSNS TT Sil ar eh Ce 18

Kelly v. Illinois Bell Tel, Co.,

328 7.26 146 (Feh Che. 1963) .ccccccccvscccccccccsseses 28

Kent v. Hardin, 425 F.2d 1346 (Sth Cir, L970) .ccceceee 44

Hugh P. King, (1975-77 Transfer Binder)

Comn,. Fut. L. Rep. (CCH) 420,211 CROTO? 69 coo cebveeee see 46

Kovac v. Immigration and Naturalization

Ger., 407 Po8G 102 (Sth Cle. LHD) ccccccccecscccvccccces Ba

In re LaMantia, 2 Comm. Fut. L. Rep.

(CCH) 421,048 Sh paa ae Wed bee tbe bObbre Ode es Ceceeesees 36

Litchfield Sec. Corp. v. United States,

325 F.2d 667 (2d Cir. LPO 21.000 CU Pe Oule Obie bey 2 oe 0300:0 00 27

Local 777 v, NLRB, 603 F.2d 862

(D.C, Cir, og) RO oe oS OU YT PPE eee er 41, 42

MeNollis v. First Fed Gav. and Loan,

364 F.2d 251 (24 Cir, 1966) cort.

denied, 385 U.S, 970 (2966) .\00 80 seer seep eee eeeeee, eee 18

Julian M. Marks, 22 Agric. Dec. 761 (1963) wecsseereee 28

Mathews v. Eldridge, 424 U.G. B19 (LO7Tb) ceccceceecceee Dd

Moyor Vv. Nebraska, 262 U.G., 390 (LOD) ceeererevenes oe 10

at'l Ass'n of Gov't Enployees v.

Campbell, $93 F.2d 1023 (D.C, Cir. SOTO cee cbdoves eee 20 22, 24

A.17

National Realty & Construction Co.,

Inc. Vv. OSHRC, 489 F.2d 1257 (D.C,

Cis. LS» | WAR MT Ae CUYD RR UEREEEEEEEE ET

Nebbia Vv. New York, 291 U.S. 502 (1994) wccvccccccccces

NLRB v. Johnson, 322 F.2d 216 (6th Cir.

1963), Gert, denied, 376 U.S. OSL (LOG4) wecerevevenees

L964) wccnsnver

NLRB v. Tannsco, 139 F.2d 396

(6th Cir,

In re Nordlicht, 2 Comm, Fut. L. Rep.

(CCH) 421,027 T2DOG) cobedeveovedoedesereccccececocessecee

Northern O11 Co. v. Socony Mobil O11 Co.,

368 r,2d 384 (2d Cir. BOSS cc dedevconcoevsendceeecceven

Paccar, Ine. Vv. National Highway Traffic

Safety Administration, 573 F.2d 632 (9th

Cir.), ger ‘ denied, 439 U.S. 862 CR UPO) 0 o'es cocvcevase

Patagonia Corp. v. Board of Governors of

the Fed, Reserve Sys., 517 F.2d 803 (9th

Cir. | rer) eee? ira TREE ee

Phoenix Sav. and Loan, Ine. v.

(4th Cir. SPOT ovevvceckecbeccocece

Aetna

Casualty and Surety Co., 361 F.2d 245

Piper v. United States, 392 F.2d 46,

(Sth Cir. BEE) 006 bc caslbcecest cas Ovece

Poller v. Columbia Broadcasting Sys.,

368 U.S. 464 ELDER) 000.000 0k bed Oba) 60d 0b oud ovecencets

Precious Metals Assoc., Inc. v. CFTC,

620 F.2d 900 (lat cir. Beaeiadsevebbedebweccececenuue

Quinn v. Syracuse tiodel Neighborhood

Corp.» 613 F.2d 438 (24 Cir. BEGG) o awwhesccaecceeens¢vme

In re Rafferty, CITC Docket No. 79-15

(July 15, 1981)... ne oe ee

Ramsouer v Midland Valley R Co.,

135 F.2d 10h (8th Cir, 1943),

Randolph v. Collectramatic, Ine.,

$90 F.2d 844 (LOth Che, 1979).

In re Richardson Sweurities, Ine,,

{1977-80 Transfer Sincer) Comm. Put,

L. Rep., (CCl) 420,81 (1979) .,

20,

1S,

20,

A.18

Robertson v. Seidman & Seidman,

609 r,.2d 583 (24 Cie. LO7D) veocvcceccccerencccececceses

Rodale Press, Inc. v. FTC, 407

F.2d 1252 (D.C, Cir. LOGO ccacevdorwocdodeeccosecesececce

In re Romoff, 31 Agric Dec, 158 (LOTZ) cece eesvececcns

Sartain v. SEC, 601 F.2d 1366 (9th Cir, 1979) ...cc0ees

Sartor v. Arkansas Natural Gas Corp.

321 U.S. 620 C2948) wocccdeedentocvestnavebeeoupeesseees

Eugene E. Schaefer, Jr., [1975+1977

Transfer Binder) Comm, Fut. L. Rep.

(CCH) 420,191 CLOTS) Fever cdo ees nde vevewEbeeewebe veka

‘SEC v. Chenery Corp., 318 U.S. 80 (1LOAS).cceeenccevves

src Vv. Sloan, 436 U.S. 103 (2OTE) civeoverereanvontebeaces

Semaan v. Mumford, 335 F.2d 704

(D.C, Cir, SDEE) povvcnvccrcdovesodeasccavesessesosdsee nae

In re Siegel T.ading Co., Ine.,

{1977-80 Transfer Binder) Comm,

Fut, L. Rep. (CCH) 420,452 (2977) wccncesccesccevsceoses

Steadman v. SEC, 603 F.2d 1126

(Sth Cir. 1979), aff'd, U.S.

—..' 67 L.Ed.2d 6

Traylor v. Black, Sivalls & Bryson, Inc.,

189 F.2d 213 (8th Cir. LOA) vat daaes secdbeee est ceceees

Trotz v. Commissioner, 361 F.2d

BLY o cailncddbe Avie cocina deewins ves

927 (LOth Cir. BOGE) oc 00.0 vc odem etled derewleeesc bw Oe opieee es

United States v. American Packing Corp.,

113 F.Supp 223 (D.N.J. 208 SD vce ds deewhcoee eee vacpene

United States v. Cardiff, 344 U.S. 174 (L952)... cece

United States v. Cheramie DoeTruc #5, Inc.,

$38 F.2d 696 (Sth Cir. 1976)...006.

United States v. Diebold, Inc.,

‘eeeeweereeeeeeeeeae

369 U.S. 654 C1068) 0a onc bewe Dean feed enmedobecetebubode

United States v, Fabric Garment Co.,

966 F.2d $30 (2d Cir. 1966). .ccccces

Unitod States v. Guszone, 273 F.2d

121 (2d Cir. BODPR cae: 0b Wa burbesie ses

eeeeeteeneae

Pave

20, 23

44,

31,

45,

10,

15,

19,

20,

15,

15.

A.19

United States v. J.B. Williams Co.,

Inc., 498 F.2d 414 (2d Cir, BB741):.60 2 oe his bh eC onCe Cte

United States v. La Mantia, [1977-80

Transfer Binder] .Comm. Fut. L. Rep.

(CCH) 420,667 (N.D. baee 1978) occdecedoccccserccocccees

United States v. Levinson, 369 F.Supp.

575 (E.D. Mich. LOTD) cecdoccecsoesvecceoseredesevesecees

United States v. Pent-R. Books, Inc.,

538 F.2d 519 (2d Cir. 1976), cert.

denied, 430 0.83 906 C19 cctbovevevctidecvdseresscceves

United States v. Robel, 389 U.S. 258 (LOB7)..ceueeneee

Wessinger v. Southern Ry. Co., Inc.,

438 F.Supp. 1256 (0.8.66 LOTT) codeacecdeVeocvrsdebrevsecoes

West Coast Hotel v. Parrish, 300 U.S. 379 (1937)......

Wheatley v. Adler, 407 F.2d 307 (D.C. Cir. 1968)......

Wiscope, S.A. Vv. CFTC, 604 F.2d 764 (24 Cis. 1979) oes

Page

21, 22, 24

15, 16

20, 24

21, 22,

23, 24

14. 25

A.20

TABLE OF AUTHORITIES

UNITED STATES CONSTITUTION:

FIFTH AMENDMENT. cccccesereceeereesereeeerereresene

ADMINISTRATIVE PROCEDURE ACT

[5 U.S.C.A. §§ 551-559, 701-706)

SOC. SSliccccccccvcvsseesvevssssseseesereesseenss

SOC. TOZ..cccceeeccvsesesvsvesesessessssseesseres

SEC. Tb cccccccsvvescssccssevesesssveevssesseess

Sec. 706(2) (Cheese cevccveveveveesssevvsssseseeees

COMMODITY EXCHANGE ACT

Cc. 545, §5, Laws of 1936

{7 U.S.C.A. §6c (1964) J) eve vevcccsevvvvvesssesvese

Sec. 3 (7 U.S.C.A. CS) ccc cece ccescseeeeseeerene

Sec. 4b (A) 17 U.S.C.A. SED(A) ) peeve vvcceeveveces

Sec. 4c(a) {7 U.S.C.A. G60 (a) ) orc cccccvcvecerese

Sec. 6 (b) {7 U.S.C.A. SO) wc ccccevcvvsecesescsevee

Sec. 8a {7 U.S.C.A. G12d) wc creer reverveveveseee

Sec. 9 (b) {7 U.S.C.A. GLIA (dD) )aweeweeceevevvveveee

OTHUCR AUTHORITIES

"GLOSSARY OF TERPS USCD IN COMMODITIES

FUTUPES TRADING" S. ROP. NO. 93-113,

93D CONG., 2D SESS. APPEiDIX IX, RE-

PRINTOD I: (1974) U.S. CODE CONG. &

RD. hens BR tee i ek oo oe wae eed 0 6.065.600 eevee enee

19, 25,

6, 36

A.21

"GLOSSARY OF TERMS USED IN COMMODITIES

FUTURES TRADING" 95TH CONG. 2D SESS.,

COMMITTEE PRINT, FUTURES TRADING ACT

OF 1978, JANUARY 1979, p-L4l, ET SEQ. seeeeeeeveneevees

1B MOORE'S FEDERAL PRACTICE, 40.418

AT 2707=$B. wc ccc vesreeeeeeresesseesesesseeeesseresesereee

REMARKS OF SENATOR POPE, 80 CONG. REC.

6162 AND 8088 (1936) cv cceveseseeenseeeneseseeseseeres

SEC: SPECIAL STUDY OF SECURITY MARKETS,

REPORTED IN 3 SECURITIES REGULATION

(PRENTICE HALL, 1979) YUBALEZ. ceccvvsesecevvvesvevevese

A.22

MEMORANDUM ON BEHALF OF PETITIONER

PRELIMINARY STATEMENT

This is a petition for review of a decision and

order (the “Order,” JA.8 et seg.,* reported at 2 Comm, Fut. L.

Rep. (CCH) 21,245 (1981)) issued by the full Commodity Futures

Trading Commission (the "CFTC") on September 16, 1981, as

amplified by the CFTC's further order (the "Further Order," JA.22

et seq.) dated October 16, 1981. This Court has jurisdiction for

this review because petitioner Stephen M. Sundheimer ("HMr.

Sundheimer") was @Going business in this Circuit. Section 6(b)

("§6(b)") of the Commodity Exchange Act, as amended (the “Act"),

{7 U.S.C.A. §9).

ISSUES PRESENTED FOR REVIEW

The following substantial issues are presented for

review:

(1) Whether a Federal Agency, on review of a

decision by an Administrative Judge, may change the theory of

the case and summarily impose harsh sanctions without giving the

sanctioned party any prior notice that he is charged with the

offense for which sanctions are imposed?

(2) Under a statute mandating a federal agency to

hold an adjudicatory hearing prior to imposing sanctions:

(A) Whether a generul plea of guilty to a

Single-count criminal information, containing many

cloments, any one of which would be sufficient to convict,

* Relorances to the Joint Appendix shall be in the form “JA.

herein.

A.23

establishes all elements charged in the information for

collateral estoppel purposes sufficient to suppert summary |

judgment? |

(B) Whether a party's pleading statement

which is subject to a reasonable interpretation not admitting

a statutory violation, establishes the commission of such viola-

tion sufficient to support summary judgment?

establish an alleged violation of a statute prohibiting acts

“commonly known to the trade as" an “accommodation trade"?

(3) Whether a Federal Agency may impose harsh

sanctions for an act not in violation of its statute or rule on

the grounds that the act was "tantamount to" such a violation?

(4) Whether the term “accommodation trade", as

prohibited by §4c(a) of the Act includes non-fictitious

transactions?

(5) Whether the term “accommodation trade", as

prohibited by §4c(a) of the Act and as applied to Petitioner,

is void for vagueness under the United States Constitution?

(6) Whether a Federal Agency required to consider

substantial evidence of mitigation and rehabilitation from a

conviction for aiding or counselling an income tax violation

behaves aibitrarily and capriciously in rejecting the evidence

under a harsh new rule, announced with no pricr notice and after

the hearing, that rehabilitation cannot possibly occur in seven

years?

(7) Whether a Federal Agency may impose harsh

sanctions without supporting them by adeauate findings as to the

need for such sanctions?

(8) Whether a Federal Agency may impose harsh

sanctions which do not bear a reasonable relation to the purposes

of its enabling statute?

(9) Whether a Federal Agency may impose harsh

sanctions in a discriminatory manner?

STATEMENT

A. The Underlying Facts.

Mr. Sundheimer, a commodities trader and floor

broker for twenty years (JA.537), was, and now is, vice president

of Pressner Trading Corporation ("Pressner") (JA.530). Having

earned an enviable reputation for integrity and efficiency in

his industry, he marshalled impressive support at the CFTC pro-

ceedings below from leaders of the commodities industry who have

serious vested interests in maintaining the integrity of the

commodities market (See Point IV, infra).

In the fall of 1974 Mr. Sundheimer was in an office

at Pressner when another Pressner officer, Jules Nordlicht

("Mx. Nordlicht"), discussed with Messrs. Turkish and Pearlmutter,

who wore not otherwise related to Pressner or Mr. Sundheimer,

a proposed transaction in crude oil futures. Crude oil futures

were not then sulject to federal reaulation.* Mr Surdheimer

was not a member of the exchange upor which crude «il futures

* Crude oil Futures became subject to rewvlation under the Act

after April 21, 16975 when the Commodity Futures Trading Con-

Mission Acr of 1974 expanded the definition of ‘commodity" in

the Act tu include all commodities (see JA.57. m 14; JA.15-16).

A. 25

were traded (JA.530).

Mr. Nordlicht and the two others agreed that

Pressner, as a customer, would accept one side of a certain

prearranged crude oil futures trade to provide a tax benefit

to one of Mr. Turkish's customers. The trade was to be

executed by others, in the form of tax straddles, prior to the

end of October, 1974, the tax year-end for one of the partici-

pants. A third party, Joseph R. Hamilton, whom Mr. Sundheimer

detested and always scrupulously avoided (JA.531-2), was a major

participant in the inactive crude oil futures market and had

agreed with Mr. Turkish to prearrange these trades in this

unregulated commodity (JA.532-3).

It was implicit that the loss side of the

straddles would be liquidated prior to Mr. Turkish's customer's

1974 tax year-end and the profit side liquidated as early in

1975 as possible to avoid market fluctuation and a consequent

imbalance between the 1974 loss and the 1975 gain (JA.15, n.7).

Because he was in the room at the time, Mr. Sundheimer's assent

was requested and he gave it (JA.533). Mr. Hamilton obviously

did not control crude oil prices because Fressner profited on

the transaction and returned the profit (JA.475).

When the Department of Justice commenced its

investigation of Mr. Hamilton's and others' use of the crude

Oil futures market for tax evasion purposes, Mr. Sundheimer came

forward before charges against him were imminent or pending |

(JA.227-8). He spent long hours, including evenings and week-

ends, helping the government make its cases (JA.230-1L).

A.26

Mr. Sundheiner himself waived indictment (JA.67) |

and was charged in a one count information (the "“Information")

(JA.65)

{a) that he either “did aid, assist, procure,

counsel and [or] advise * * *"

(b) the filing of either false tax “returns,

affidavits, claims and [or] other documents * * *"

and that in furtherance of the offense he and others “fixed,

rigged, and [or] fraudulently prearranged trades" in crude oil

futures at unspecified times during 1974 and 1976. Any one item

from paragraph "(a)" above coupled with any one fraudulently

prearranged trade at any time prior to April 21, 1975, if an

"(a)" = "(b)" combination existed, was sufficient to convict.

Mr. Sundheimer pleaded guilty (JA.78).

Mr. Sundheimer's plea statement (JA.77) estab-

lishes why he pleaded guilty. He was contrite that he had been

present and acquiesced when an agreement was made that Pressner

accept the otiier side of a prearranged trade which afforded Mr.

Turkish's customer a wrongful tax benefit. Implicit was a simil-

ar liguidating transaction in early 1975 (JA.77, 533-4, 15 n.7).

Mr. Sundheimer forthrightly acknowledged being

present in the fal’ of °.97%4 when the arrangement was reached,

agreeing to it and that “implicit in the initial understanding"

was a liquic¢.cang transaction Judge Broderick accepted this

acknowledgment in cesponse to nis inquiry about “consent to a

Similar [either a iiqgvidating or a new) arrengeme.* for the

following your” (u.\ 533-4. 77).

A.27

Judge Broderick sentenced Mr. Sundheimer to one

year of community service and fined him $5,000 (JA.64) and Mr.

Nordlicht, the active Pressner participant, to two years of such

service and fined him $10,000 (JA.532).

Mr. Sundheimer performed his full time community

service for the New York State Attorney General conscientiously

and well (JA.258-9, 349-51). Mr. Sundheimer also accepted a

one-year suspension from the Petroleum Associates of the New

York Cotton Exchange, and paid it a $7,500 fine, and accepted a

nine-month suspension from the New York Mercantile Exchange

(JA.532).

B. The Proceedings Below.

Five years after the event, the CFTC's Division of

Enforcement ("DE") commenced proceedings against Mr. Sundheimer

(a) Under Section 8a(3) [7 U.S.C.A. §12a(3)] of

the Act ("§8a(3)") to revoke his floor broker registration

on the ground of unfitness because of his conviction; and

(b) Under §6(b) for sanctions for aiding and

abetting

(i) alleged price manipulation of crude oil

futures, Section 9(b) [7 U.S.C.A. 13(b)] of the Act

("§9(v)"); and

(ii) a disjunctive panoply of seven possihle

alleged violaiions of Section 4dc(a) [7 U.S.C.A §6c(a)]j

of the Act ("§4c(a)"), including “accommodation trades"

(JA.29).

The complaint did not allege, as the CFTC later decided, however.

A.28

that the subject transactions were “tantamount to" a violation

(contrast the Complaint, JA.29, with the Order, JA.16, n.9).

DE moved for summary disposition solely upon Mr.

Sundheimer's plea of guilty and his plea statement (JA.41-62),

offering no expert testimony as to whether the act allegedly

aided by Mr.Sundheimer was known to the trade as an "accommodation

trade."* The Administrative Law Judge ("ALJ") awarded partial

summary disposition in respect of the §6(b) claims. Sustaining

the result, but not the ALJ's reasoning, the CFTC held that Mr.

Sundheimer's guilty plea and plea statement established that Mr.

Sundheimer had entered into prearranged trades in crude oil

futures after April 21, 1975 when such futures first became sub-

ject to regulation (JA.14-15).

The CFTC accurately observed that a "prearranged trade",

however, does not per se constitute a violation of the Act (JA.8,

n.1),** and properly held that there was no proof that Mr. Sund-

heimer's acts constituted market manipulation under §9(b) (JA.

16-17) and that the transactions in question were not "fictitious

sales" (JA.16, n.9) and, apparently, not “accommodations trades".

* The statutory structure would appear to require such expert

testimony. §4c(a). Corning Glass Works v. Brennan, 417 U.S.

188, 201 (1974); Randolph v. Collectramatic, Inc., 590 F.2d

844 (10th Cir. 1975). ‘The crTC frequently proffers expert

testimony in analogous circumstances. See, e.g., CFTC v.

Morcan, Harris & Scott, Ltd., 484 F. Supp. 669, 673 (S D.N.Y.

9); CE"°C vo Goldex Int™l Ltd , (1977-1980 Transfer S3inder)

Comm. Fut L. Rep. (CcH) 920,039 (N.D. 211. 3979).

** Prearrangemunt iv not e per se evil in the cause of auction

Markets. For oxample, "Most transactions and ‘block’ programs

in listed comron stocks cake the form of a series of .elative:

ly small transactions on the exchange auction market, or in-

volve presarcunced ‘crosses’ on the floor of an excnance.

Tisphasy avTedl SEC: Special Stucy of Serurity Markets,

reported in 3 Socuritie¢s Regulation (Front, ce Hall, i)

£34,162.

A. 29

Nevertheless, the CFTC held that the subject trans-

actions were “tantamount to ‘accommodation trades'" ("the

Tantamount Holding", JA.16, n.9) and on that ground alone pro-

hibited Sundheimer from trading on contract markets for two

years, fined him $100,000 and ordered him to cease and desist.

from further violation of §4c(a) (the "§4c(a) Sanctions").*

The Tantamount Holding was strikingly inconsistent

with the proceedings below.** The complaint did not charge

that Mr. Sundheimer's acts were “tantamount to" a violation

(JA.28,29). The DE's motion for summary disposition did not

Claim that Mr. Sundheimer's acts were accomodation trades, let

alone “tantamount to” such trades (JA.41-62). Mr. Sundheimer's

response to the motion, prepared by Kaye, Scholer, Fierman, Hays

& Handler, evidences no awareness that any claim was made that

the subject transactions were either accomodation trades or

“tantamount to" such trades (JA.80-137). Faced with the ALJ's

erroneous conclusions that the transaction was a manipulation

and fictitious, the CFTC took over one year (JA.5 44 57 and 58)

from the time the appeal was submitted to conceive the Tantamount

* "Mr. Nordlicht, the active participant on behalf of Pressner,

was prohibited from trading for three months, fined $75,000

and ordered to cease and desist (JA.532). In re Nordlicht,

2 Comm. Fut. L. Rep. (CCH) %21,027 (1980).

** The venality of DE's present practice of pleading all viola-

tions stated in the Act, disjunctively and merely as possibi

lities, is made eminentiy clear by this case, since no one

apparently took the reference to “accommodation trading"

seriously until the CFTC, needing a peg to hang its hat,

seized on this camouflaged claim to justify sanctions, even

though the Division had never claimed that the acts alleged

were “tantamoynt to” a viclation.

A.30

Holding and thereby impose sanctions without affording Mr,

Sundheimer a hearing.

After a hearing limited to Mr. Sundheimer's miti-

gation and rehabilitation in respect of the §8a(3) charge for

broker registration revocation and sanctions, at which sixteen

prominent individuals testified for Mr. Sundheimer and none

against (JA.160 et seq., see Point IV, infra), the CFTC held

it would not consider this evidence, since rehabilitation

requires “a much greater passage of time before any such evidence

can persuade us that rehabilitation has in fact occurred * * * "

(the "Seven Year Rule", (JA.19, n.13).* The Seven Year Rule is

the CFTC's only stated ground for rejecting the impressive evi-

dence of Mr. Sundheimer's rehabilitation and mitigation. More-

over, the CFTC acted under its harsh new rule that revocation

was required where it has “any deubt," not just “reasonable

doubt," as to the propriety of continued registration (JA.19,

n.13). Under §§8a(3) and 6(b) the CrTC permanently revoked Mr.

Sundheimer's floor broker registration, **

* Tho Further Order clarifies that by this observation the crTtc

referred to the time in the fall of 1974 of Mr, Sundheimer's

“participation in the prearranged trading scheme" to the time

“within the past few weeks (October 16, 1981) that the Comnis-

sicn has actually considered whether Mr. Sundheimer was re-

habilitased * * * " (JA,24), That period is seven years

** Mm. Noeddieht's floor breher registration was revoked for

oniy two yeers through February, 1982 with the understanding

thor he could reapply then and tne subject events could not be

Lhe fae GiGunes to dony vegistration. In re Nordlicht, ? Comm,

A.31

ARGUMENT

THE CFTC DENICD JiR. SUNDHEIMER DUE

PROCESS OF LAW AID FAILED TO ODSERVE

PROCEDURES REQUINMED BY STATUTE IN

IMPOSING THE §4e(a) SANCTIONS

The §4c(a) Sanctions are available only in the event

of a violation of the Act, §6(b), and may not be imposed simply

because of a criminal conviction. Indeed, a federal agency may

not “poach on the jurisdiction entrusted solely to a federal

district court" and impose sanctions for offenses not entrusted

to it by its enabling Statute, Steadman v, SEC, 603 F.2d 1126

(Sth Cir. 1979), aff'd, U.S. i, «67 L.Ed. 2d 69 (1981),

Each sanction curtails a valuable right protected by

the Fifth Amendment to the Constitution ($100,000 of propersy,

Mr. Sundheimer's right to pursue his profession of twenty years

and his liberty to enter into contracts), United States v. Robe},

389 U.S. 258, 264 (1967); Greene v. McElroy, 360 U.S. 474, 492

(1959); West Coast Hotel v. Parrish, 300 U.S, 379, 391 (1937);

Nebbia v. New York, 291 U.S, 502, 527 (1934); Meyer v. Nebraska,

262 U.S. 390, 399 (1923); Quinn v. Syracuse Model Neighborhood

Corp., 613 F.2d 438, 446 (2d Cir. 1980),

Mr. Sundheimer was deprived of due procens because

he was given no notice that the CFTC intended to ground its

impositior of sanctions in the Tantamount Holding and he wes

@enied his atatutory right to a hearing by a summary disposition

based on inconclusive evidence.

Notice of charges is an essential element of due

process. Mathews v. Eldridge, 424 U.S. 319, 348 (1976);

Fuentes v. Shevin, 407 U.S, 67, 80 (1972).

The complaint charged Mr. Sundheimer with market

manipulation and, in the disjunctive and merely in the words

of the statute, with possibly aiding and abetting one or another

of seven* additional separate acts prohibited by the Act (JA.29).

On motion for summary disposition, DE claimed only that Mr,

Sundheimer had prearranged trades and manipulated markets (JA. 42),

The ALJ held that MR. Sundheimer had engaged in manipulation and

fictitious sales (JA,159).

On appeal, the CFTC rejected these claims and conclu-

sions and, without giving Mr. Sundheimer any notice that a new

question was at issue, held that his acts were "cantamount to

‘accommodation trades'" (JA.16, n.9). The first clue that Hr,

Sundheimer would be sanctioned summarily either uncer the

Tantamount Holding or for accommodation trading was given in

the Order which imposed the sanctions.

The meaning of “accommodation trade" is vague (see

Point II A, infra); the meaning of “tantamount to ‘accommodation

trades'" is even vague The statutory scheme suggests, and

elementary due precess requires under the circumstances, that

Mr. Sundhesxmer shoute bave been given sufficient notice of nis

risks to permit hin to present expert evidence and arguments to

TVS Ca oA eo Veh go.e8 eroas teoden, aeceeimutation trades

Oe tieticavun taluv,' §4(e} (ad (A), and reporting, registering

Or 1eserding prices whien 49 "Ot bone fide, §4e(a) (Cc).

A. 33

show that the subject transaction was not “of the character of

or * * * commonly known to the trade as * * * accommodation

trade", §4c(a), and its “tantamount”. (See Point II(A), infra,

for the argument why the transaction was not an accommodation

trade or its tantamount.)

An agency may not impose sanctions without first

giving the party to be sanctioned notice affording him the op-

portunity to oppose. Hess & Clark, Div. of Rhodia, Inc. v. FDA,

495 F.2d 975 (D.C, Cir. 1974); Golden Grain Macaroni Co. v. FTC,

472 F.2d 882 (9th Cir. 1972), cert. denied, 412 U.S. 918 (1973);

Rodale Press, Inc. v. FTC, 407 F.2d 1252 (D.C. Cir. 1968); NLRB

v. Tennsco, 339 F.2d 396 (6th Cir. 1964); NLRB v. Johnson, 322

F.2d 216 (6th Cir. 1963), cert. denied, 376 U.S. 951 (1964).

In Rodale Press, supra, the Court stated the rule

which requires that the Order be vacated, as follows:

"By substituting an issue * * * for the one

framed by the pleadings * * *, the Commission

has deprived petitioners of both notice and

hearing on the substituted issue. The evil

at which the statute [the Administrative

Procedure Act) strikes is not remedied by

observing that the outcome would perhaps

or even likely have been the same. It is

the opportunity to present argument under

the new theory of violation, which must

be supplied.” 407 F.2d at 1257.

Accord, National Realty & Constr. Co. Inc. v. OSHRC, 489 F.2d

1957 (D.C, Cir. 1973); Bandix Corp. v. FTC, 450 F.2d 534

(6th Cir. 1971); C&C Market, Tic. v. United States 473 F upp.

519 (E.D. Mo. 1979). Im the present proceeding tho claim «>

lating to accommodacion trades was camouflaged in-the mult.

A.34

clement second count of the complaint and, even then, the CrTc

substituted a new issue and held without a hearing that Mr.

Sundheimer was guilty of an act not even pleaded.

In Johnson, supra, the Court denied enforcement to

an NLRB order because the complaint had charged the respondent

with refusing to reinstate former striking employees, but the

trial examiner had rejected this charge and found the employer

guilty of a discriminatory discharge which was not alleged in the

complaint. The Court justified its holding on the ground that

“one cannot be found guilty [by an agency]

of an offense not encompassed by the com-

plaint or of which he had no fair notice",

339 F.2d at 399,

because,

"(t]he right of a defendant to know the

issues in an adjudicatory proceeding

* * * js a right and not a matter of

grace." 339 F.2d at 400.

Accord, Golden Grain Macaroni, supra. The right to prior notice

applies even to actions taken by an agency against an individual

without an evidentiary hearing, Hess, supra, 495 F.2d at 983.

In Tennsco, supra, the court refused to enforce an

order of the NLRB because the NLRB had buried two actual claims

of discrimination in 66 claims of which it did not intend to prove

64. The court concluded that this camouflage deprived the de-

fendant of notice of the actual claims against him

Here, no accurate statement. of t. @ actual claim (the

“tantarount’ claim) was made in the complaint; the distant rela-

tive of the actual claim was included in one count camouflaced

by seven othe: a 'a.jous claims. OF did not attempt to

preve seven of.trads siaime (incluéirg tne claim relating to

t A. 35

accommodation trades) and it failed to prove the one it tried

to prove (manipulation). The ALJ tried to find two claims

(manipulation and fictitious sales) proved (again not including

accommodation trading), but he erred in this endeavor.

Mr. Sundheimer did not litigate the issue relating to

accommodation trades because it was not raised on the summary

disposition motion or in the ALJ's decision. He did not liti-

gate the Tantamount Holding because there was no suggeston what-

soever that he was charged with committing an act "tantamount

to" a violation of the Act. Cf. Golden Grain Macaroni, supra.

Accordingly, it is clear that Mr. Sundheimer received

no advance notice that he was charged with an act "tantamount

to" an accommodation trade.

B. The CFTC Misinterpreted and Misconstrued the

The sole evidence upon which the CFTC based its deter-

Slight Evidence.

mination that Mr. Sundheimer violated the Act after it became

applicable to crude oil futures on April 21, 1975 is the CFTC's

debatable inferences from Mr. Sundheimer's plea of guilty to the

Information and the transcript of his statement at the time his

plea was accepted. These documents do not separately or together

Support that determination. The evidence being documentary only,

this Court may evaluate and weigh it as if recuiving it in the

first instance.*

* Tho “weight of evidence” question specified by §6(b) as the

standard for review is whether there is “sufficient comsesent

evidence” to support the CFTC's factual conclusion, Wiscore,

Sit. v. CETC, 604 F.2d 764, 767 (2d Cir. 1979). In making

the determination, the standard of review is whether the ‘'ore-

ponderence’ or ‘grater werxyht of the evidence'" after "' so7eth

(continued)

A. 36

(i) The Mere Fact of Mr. Sundheimer's Plea Does Not Establish

the Commission of Any Act Prohibited By the Act or at

ny Act Occurred After April 21, 1975.

Where, as here, the commission of any of several acts

referred to in the accusatory instrument would sustain the con-

viction, a general plea of guilty* or conviction, without more,

may not be used in another proceeding to establish under theo-

ries of collateral estoppel that any particular one of the acts

charged actually occurred. Emich Motors Corp. v. General Motors

Corp., 340 U.S. 558 (1951); Piper v. United States, 392 F.2d

462 (Sth Cir. 1968); United States v. Fabric Garment Co., 366

F.2d 530 (2a Cir. 1966); United States v. Guzzone, 273 F.2d

121 (2d Cir. 1959); United States v. Levinson, 369 F.Supp. 575

(E.D. Mich. 1973); United States v. American Packing Corp., 113

F.Supp. 223 (D.N.J. 1953).

In Emich, supra, the Suprene Court stated the rule

which governs the present appeal as fvilows:

“* * * a prior criminal conviction may work

an estoppel in favor of the Government in a

subsequent criminal proceeding [citations

omitted). Such estoppel extends only to

questions ‘distinctly put in issue and di-

rectly determined’ in the criminal prosecu-

tion [citations omitted).

Footnote cont'd:

other than * * * mechanically reweighing the evidence'” for

the "“'purpose of determining whether the finder of the fact

was justified, i.e. acted reasonably, in concluding that the

evidence * * * the reasonabio inferences drawn therefrom

* Indeed, thore is a persuasive argument that a plea of guilty

should be entitled to substun"ially less weight in establish-

ing an estoppel thun should a conviction. 1B Moore's Federal

Praction, [G “18 au 2707-8

A. 37

“* * * RK general verdict * * * does

not indicate which of the means charged in

the indictment were found to have been used

in effectuating the conspiracy. And since

all of the acts charged need not be proved

for conviction [citation omitted], such a

verdict does not establish that defendants

used all of the means or any particular one."

340 U.S. at 568-9.

Here a number of possible acts were charged as occurring both be-

fore and after the effective date of the Act purporting to pro-

hibit only some of them, but all acts and dates need not have

been proved for conviction. Accordingly, the plea itself did

not establish that any particular act was committed or that it

was committed after April 21, 1975, the effective date of the

Act.

Following Emich many courts have held in multi-overt

act situations similar to the present one that a collaterzl es~

toppel is not established by a conviction. In Guzzone, suora,

this Court held that conviction under a conspiracy charge did

not establish any of the overt acts charged except the one as

to which testimony was introduced at trial. In American Packinc,

Supra, the court held that a plea of guilty to a conspiracy

charge did not establish any overt act alleged since the

"* * * overt act may be one charged in the

indictment, or it may merely be any overt act

which has as its purpose the effe.tuation of

the objects of the conspiracy." 113 F.Supp.

at 225.

In Levinson, supra, the court held that a yeneral verdict of

guilty to a conspiracy charge did not estabiish the commission

of any of the many ovect acts charged.

The rule against an estoppel in the present proceeding

is not limited to conspiracy cases. In Fabric Garment, supra,

this Court held that conviction on a charge of converting approx-

imately 19,000 yards of serge, while creating an estoppel as to

the fact of conversion, did not estop as to the quantity since

the quantity was not an essential element of the charge. In

Piper, supra, the court held that a conviction for filing false

excise tax returns in a pleaded amount did not create an estoppel

as to the amount of tax due since the “correctness of the Govern-

ment's assessment was not necessary to convict * * *," 392 F.2d

at 464.

Thus, since many acts and many possible times for these

acts were alleged in the Information, Mr. Sundheimer's plea of

guilty to the multi-elenent, single count, Information did not

itself establish thet any particular one of the acts charged in

the Information actually occurred at any particular time.

(ii) Mr. Sundheimer's Plea Statment Does Not Establish Any

Ret Prohibited By the Act or that Any Act Occurre ter

April 21, 1975.

Mr. Sundheimer's statement that "implicit in” his as-

sent to the pre-October 31, 1974 transaction was assent to the

post-October 31, 1974 liquidating transaction does not establish

either a violation of the Act or any act occurring after April

21, 1975. The CITC recognizes that a tax straddle requires a li-

Guidating transac’io. promptly in the subsequent year (JA.15,

n. 7), bum the CITC surmariiy rejected the Logica: conclusion

thet “Yr. Seathor ie. coferrad co an early 1975 licuidating trans-

action withou. scuciny wny besie for doing so.

A.39

Assuming arguendo that Mr. Sundheimer's plea statement

were susceptible of interpretation as referring to a post April

21, 1975 transaction, that is only one possible interpretation

and establishes only that the statement is ambiguous. An am-

biguous statement may not be used to create an estoppel. Kaufman

v. Moss, 420 F.2d 1270 (3rd Cir.), cert. denied, 400 U.S. 846

(1970); Kelly v. Illinois Bell Tel. Co., 325 F.2d 148 (7th Cir.

1963); cf. Northern Oil Co. Inc. v. Socony Mobil Oil Co., Inc.,

368 F.2d 384 (2d Cir. 1966); McNellis v. First Fed Sav. & Loan

Ass'n, 364 F.2d 251 (2d Cir.), cert. denied, 385 U.S. 970 (1966)

In Kaufman, supra, the court stated the rule which

governs the present appeal as follows:

"Reasonable doubt as to what was decided by a

prior [criminal] judgment should be resolved

against using it. as an estoppel.” 420 F.2d

at 1274,

In Kelly, supra, the court held that a jury verdict in a crimi-

nal case could not be used to create an estoppel where it was

"equally susceptible of diametrically opposed

inferences with respect to the basic issue

here ***," 325 F.2d at 152.

In Northern Oil and McNellis, supra, this Court applied the sare

rule to civil judgments, holding that an ambiguity as to what

was determined prevented the use of the judgment for collateral

estoppel purposes. Evin in tie case of an vnambiguous plea,

extraneous circumstarces such 4% the prosecutor's post-convic-

tion admission that he could not have proved all of the elements

of an indictment precludes collateral estoppel to establish the

eluments the prosecutor could not have proved. De Cavalcante v.

Commissioner, 620 F 2d 23 (3d Cir. 1980).

A.40

Mr. Sundheimer's mere plea to a multi-element criminal |

income tax Information, any of which elements would support a

conviction, and reference to Mr. Sundheimer's plea statement fail |

to establish by collateral estoppel either an act which would

constitute a violation of the Act or that any act complained of

was committed after the effective date of the Act. Accordingly, |

there was insufficient competent evidence to support the CFTC's

determination that Mr. Sundheimer violated the Act.

C. The CFTC Improperly Sustained Summary Disposition

ant Thereby Wrongfelly Deprived Mr- Sundheiner of His

Statutory Right to any Adjudicatory Hearing.

CFTC hearings are required by §§€(b) and 8a before the

CFTC may impose §4c(a) sanctions. The right to a meaning-

ful evidentiary hearing is also an essential requirement of due

process. Goldberg v. Kelly, 397 U.S. 254 (1970). Here, partial

summary Gicposition was granted denying Mr. Sundheimer an adju-

dicatory hearing on every issue arising under §4c(a).

Summary disposition on the §4c(a) claim was granted

despite the absence of any dispositive, unequivocal evidence

that any act prohibited by the Act was committed, that any sub-

ject transaction occurred after April 21, 1975, that any act

co.mitted constituted an accommodation trade or that any such

act was “tartamount to" an accommodation trade.

Absent dispouilive, unequivocal evidence that the Act

was viosated, vhe CPrc tacked authority te grant summary dasposi::

tion and deprive Mr Sundheimer of his statutory adjudicatory

heoring United Stutcs v. Cheramie Bo-Truc #5, Inc., 538 F.2d

Gv) (Sth Cir, 197). independent Barxers Ass'n. v Board

A.41

of Governors of the Fed. Reserve Sys., 516 F.2d 1206 (D.c. Cir.

1975); Patagonia Corp. v. Board of Governors of the Fed. Reserve

Sys., 517 F.2d 803 (9th Cir. 1975).

Since formalities of pleadings and rules of evidence

are more relaxed in agency proceedings, an agency “carries a

heavy burden of justification", Independent Bankers, supra, 516

F.2d at 1220, in denying a party his statutorily prescribed ad-

judicatory hearing ard such denial "is justified only in excep-

tional circumstances." Id., n.57. “(T]he agency must show that

the parties could gain nothing", Id., by an adjudicatory hearing

and

"[a) petitioner need not make detailed factual

allegations in order to meet the requirement

that he raise ‘issues of material fact.' He

need only show that an ‘inguiry in depth' is

appropriate." Id., n.57.