Appendix — ContiCommodity Services, Inc. v. Schor

64-1519 OM TED”

19

=a MAR 25 1985

In the Supreme Court of the Unt

OCTOBER TERM, 1984

COMMODITY FUTURES TRADING COMMISSION,

PETITIONER

Vv.

WILLIAM T. SCHOR, ET AL.

APPENDIX TO THE

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE DISTRICT OF COLUMBIA CIRCUIT

REX E. LEE

Solicitor General

DAvip A. STRAUSS

Assistant to the Solicitor General

Department of Justice

Washington, D.C. 20530

(202) 633-2217

KENNETH M. RAISLER

General Counsel

PAT G. NICOLETTE

Deputy General Counsel

WHITNEY ADAMS

Deputy General Counsel

NANCY E. YANOFSKY

Attorney

Commodity Futures Trading Commission

Washington, D.C. 20581

TABLE OF CONTENTS

Page

Appendix A (court of appeals opinion, Aug. 10, 1984) .. la

Appendix B (CFTC order, June 15, 1983) -.................. 42a

Appendix C (ALJ initial decision, Oct. 19, 1981) _..... 45a

Appendix D (court of appeals judgment, Aug. 10,

DU shadieicaniaeibepiastienccciiiicthetietiepaseninnninsinbinsann 56a

Appendix E (court of appeals order, Oct. 26, 1984) ...... 58a

Appendix F (court of appeals order, Oct. 26, 1984) ...... 60a

Appendix G (constitution, statutory provisions, and

SURES Zed Sa oe ME aE 65a

APPENDIX A

UNITED STATES COURT OF APPEALS

FOR THE DISTRICT OF COLUMBIA CIRCUIT

No. 85-1703

WILLIAM T. SCHOR, PETITIONER

v.

COMMODITY FUTURES TRADING COMMISSION,

and

CONTICOMMODITY SERVICES, INC.

and

RICHARD L. SANDOR, RESPONDENTS

No. 83-1704

MORTGAGE SERVICES OF AMERICA, PETITIONER

Vv.

COMMODITY FUTURES TRADING COMMISSION,

and

CONTICOMMODITY SERVICES, INC.

and

RICHARD L. SANDOR, RESPONDENTS

[Filed Aug. 10, 1984]

Petitions for Review of an Order of the

Commodity Futures Trading Commission

(la)

2a

Before: GINSBURG, Circuit Judge, MACKINNON,

Senior Circuit Judge, and PARKER,*

United States District Judge for the Dis-

trict of Columbia.

Opinion for the Court filed by Circuit Judge GINS-

BURG.

GINSBURG, Circuit Judge: The principal question

raised by this petition for review is whether the Com-

modity Futures Trading Commission (“CFTC” or

“Commission”) has authority to entertain counter-

claims not alleging violations of the Commodity Ex-

change Act.’ (“CEA” or “Act”) or CFTC regula-

tions. Article III concerns impel us to construe the

Act to deny the Commission that authority.

Petitioners William T. Schor and Mortgage Serv-

ices of America (hereinafter collectively referred to

as “Schor’’) filed complaints with the Commission

seeking approximately $1.8 million in damages (rep-

arations) from respondents ContiCommodity Serv-

ices, Inc. and Richard L. Sandor (hereinafter collec-

* Siting by designation pursuant to 28 U.S.C. § 292(a).

17 U.S.C. §§ 1-22 (1976). Congress amended the CEA in

1974 to create the Commission and substantially expand the

scope of federal regulation of the commodity futures indus-

try. See Commodity Futures Trading Commission Act of

1974, Pub. L. No. 93-463, 88 Stat. 1889 (1974). Schor’s suit

is governed by the 1974 Act. Congress again significantly

revised the Act in early 1983. See Futures Trading Act of

1982, Pub. L. No. 97-444, 96 Stat. 2294 (1983). These latter

changes, insofar as they affect CFTC proceedings, became

effective only as of May 1983, see id. § 239; they are not

operative in these proceedings.

The changes effected in 1983 included renumbering the sub-

sections in section 14 of the Act, 7 U.S.C. § 18. In this opinion,

unless otherwise noted, we cite the 1976 United States Code,

i.e., the Act as it existed at the time Schor filed his complaint

and the ALJ issued his decision.

3a

tively referred to as “Conti”). Schor alleged that

Conti had committed sundry violations of the Act and

CFTC regulations in handling Schor’s financial fu-

tures accounts.? Conti counterclaimed to recover over

$90,000 in post-liquidation deficit balances in Schor’s

accounts.

After discovery, briefing, and a three-day trial, the

Administrative Law Judge (“ALJ” or “Law Judge’’)

ruled against Schor on all aspects of his complaints

and in favor of Conti on its counterclaims. The Com-

mission declined to review the ALJ’s decision; Schor

then petitioned for judicial review. On all but one

matter—Schor’s contentions that Sandor “traded

ahead” for his own account—we affirm the dismissal

of Schor’s complaints; on that sole matter, we remand

to the Commission for an initial determination. On

the principal question Schor’s petition poses, we hold

that the CFTC lacks authority (subject matter com-

petence) to adjudicate Conti’s counterclaims; we

therefore reverse the ALJ’s decision on the counter-

claims and instruct their dismissal for lack of juris-

diction.

I. BACKGROUND ©

Petitioner Schor is the president and majority

stockholder of petitioner Mortgage Services of Amer-

ica (“MSA”). MSA is a mortgage banker; it makes

mortgage loans and then sells them to long-term in-

2? Financial futures are contracts to buy or sell interest-

bearing investments on a fixed future date. A contract to buy

is known as a “long” position; since the owner will be obli-

gated to pay the contract price at the fixed date regardless

of the security’s market value, the worth of the position will

diminish if rising interest rates drive down the security’s

value. Conversely, a contract to sell (or a “short” position)

increases in value as interest rates rise. See generally P.

JOHNSON, COMMODITIES REGULATION §§ 1.03, 1.04 (1982).

4a

vestors. To hedge against shifts in interest rates,

Schor entered the financial futures market.

Respondent Conti is a futures commission mer-

chant registered with the CFTC. Respondent Sandor

was the account executive at Conti in charge of

Schor’s accounts. Schor opened his Conti accounts in

September 1976; at that time, Schor and MSA had

a net worth of approximately $235,000 each. Over

the next three years, Schor developed a heavily net

“long” position.’ He occasionally made additional de-

posits to his accounts in response to Conti’s margin

calls.* At the time of the events principally at issue

in this proceeding, Schor’s accounts were seriously

undermargined.

On October 6, 1979, the Federal Reserve Board an-

nounced decisions Schor deemed likely to increase in-

terest rates, thereby rendering unenviable his net long

position.’ On the following Monday—October 8—pe-

titioner Schor attempted to call respondent Sandor

for the alleged purpose of taking up short positions

to hedge against rising interest rates. Sandor was

8 See supra note 2.

4 A futures customer establishing an account with a futures

commission merchant must deposit money—known as a

“margin”—to protect the merchant from losses caused by

market fluctuations adversely affecting a customer’s positions.

Changes in market prices for a particular futures contract

may erode the original deposit, leading a broker to issue a

margin call for additional funds. Margin requirements are

established by the exchange where a transaction takes place.

See generally P. JOHNSON, supra note 2, § 1.10, at 30-32.

5 See Petitioners’ Brief at 11. The Administrative Law

Judge, however, found “[t]here was no consensus among

financial traders as to the impact these [October 6] decisions

would have o[n] the price of financial futures.” Jnitial De-

cision, CFTC Docket No. R 80-566-80-723, at 4-5 (Oct. 19,

1981), reprinted in Appendix (“App.”) 872-73.

5a

out of the office that day; Schor spoke instead with

several other Conti employees.

In testimony before the ALJ, the parties presented

sharply conflicting versions of the Schor-Conti Octo-

ber 8, 1979, conversations. Schor insists that he

wanted to take up short positions, but was blocked

from trading because of instructions Sandor had

given concerning Schor’s accounts. Conti, on the other

hand, presented evidence suggesting that Schor

merely sought market information, but declined to

trade when asked if he wished to do so.

When Schor spoke to Sandor the following day—

October 9—Schor stated that further margin calls on

petitioners’ accounts could not be met. Pursuant to

the parties’ customer agreement, Conti then liquidated

Schor’s accounts. After liquidation, Schor’s accounts

retained substantial deficit balances.

In February 1980, Schor filed reparations com-

plaints with the CFTC to recover from Conti losses

suffered in Schor’s futures trading ventures; he al-

leged numerous violations of the Commodity Ex-

change Act and CFTC regulations. Conti counter-

claimed to recover the deficit balances remaining in

Schor’s accounts.* After trial in March 1981, the

ALJ issued an initial decision denying relief to Schor

and awarding judgment to Conti on its counter-

claims. See Initial Decision, CFTC Docket No. R

80-566-80-723 (Oct. 19, 1981), reprinted in Appen-

dix (“App.”) 869-80." The Commission found no

* Conti first filed suit to recover the deficit balances in the

United States District Court for the Northern District of

Illinois. ContiCommodity Services, Inc. v. Mortgage Services

of America, Inc., No. 80-C-1089 (N.D. Ill. filed Mar. 4, 1980).

Conti later voluntarily dismissed that action, choosing in-

stead to counterclaim in the CFTC proceeding.

*Schor argues that the ALJ, by adopting in large part a

proposed decision drafted by Conti, impermissibly delegated

6a

question of law or policy warranting its considera-

tion of the merits of the ALJ’s determinations; it

therefore allowed the initial decision to become final.

See Order Denying Review, CFTC Docket No. R.

80-566-80-723 (June 15, 1983), reprinted in App.

939-40. Schor then petitioned for this court’s re-

view.°

his decision-writing responsibility. See Petitioners’ Brief at

50-53. The Commission, while disapproving this “adoption”

technique, held that no reversible abuse of discretion had

occurred. Order Denying Review, CFTC Docket No. R 80-

566-80-723, at 1 n.1 (June 15, 1983), reprinted in App. 939

n.l. We agree that a decisionmaker’s wholesale adoption of a

party’s submission may undermine “([c]onfidence in the integ-

rity of the [administrative] process.” Southern Pac. Com-

munications Co. v. AT&T, No. 83-1102, slip op. at 28 (D.C.

Cir. June 26, 1984). In light of the record made at trial, how-

ever, we do not consider the Law Judge’s substantial acceptance

of Conti’s proposed decision independently sufficient grounds

for reversal. Cf. Valentino v. United States Postal Serv., 674

F.2d 56, 60 n.2 (D.C. Cir. 1982) (district court’s substantial

acceptance of appellee’s proposed findings did not warrant

overturning decision) ; Hagans v. Andrus, 651 F.2d 622, 626

(9th Cir.) (same), cert. denied, 454 U.S. 859 (1981) ; Hayes

v. Thompson, 637 F.2d 483, 490 (7th Cir. 1980) (same).

® Schor challenges the Commission’s Order Denying Review

on the ground that “the Commission permit[ted] [the ALJ]

decision to stand based upon reasoning that the Commission

rejects.” Petitioners’ Brief at 54. We read the Commission’s

Order differently; the Commission stated that it “neither

adopted the Presiding Officer’s order as its own nor affirm-

atively passed upon any of the issues decided therein.” Order

Denying Review at 1, reprinted in App. 939 (footnote omit-

ted). We discern in this language nothing more than a

discretionary denial of review, an option Schor concedes to be

within the Commission’s authority. See Petitioners’ Brief at

54; see also 17 C.F.R. §§ 12.95(e), 12.101 (1983) (stating

CFTC policy of providing only discretionary review of ALJ

decisions) .

* The CEA provides that a party seeking judicial review of

a Commission ruling shall

7a

II. PETITIONERS’ CLAIMS

Schor maintains that, in dismissing his reparations

claims, the ALJ erred in several critical respects.

With one exception, we find Schor’s objections utterly

insubstantial.

First, Schor asserts that Conti neglected “to issue

margin calls adequate to meet margin requirements

and to enforce those requirements by liquidation of

the accounts if they remained undermargined for any

period of time.” Petitioners’ Brief at 32. These al-

leged oversights, Schor contends, violated the CEA’s

anti-fraud provision, 7 U.S.C. § 6(b), as well as the

Commission regulation requiring futures brokers to

“diligently supervise the handling of all commodity

interest accounts,” 17 C.F.R. § 166.3 (1983). The

Commission has repeatedly ruled that a futures bro-

ker’s decisions concerning margin requirements, even

if in violation of commodity exchange rules, are sub-

ject to review only under the lenient business judg-

ment rule unless bad faith is shown. See Friedman

v. Dean Witter & Co., [1980-1982 Transfer Binder]

Comm. Fut. L. Rep. (CCH) { 21,307, at 25,536-38

(Nov. 138, 1981) ; Graves v. Shearson Hayden Stone,

file[] with the clerk of the court a bond in double the

amount of the reparation awarded against the appellant

conditioned upon the payment of the judgment entered

by the court, plus interest and costs, including a reason-

able attorney’s fee for the appellee, if the apellee shall

prevail.

7 U.S.C. § 18(g). Schor argues that Congress did not intend

this appeal bond provision to apply to customers seeking re-

view of counterclaim awards; if the provision does apply to

nonregistrant complainants, Schor further contends, it vio-

lates the due process clause and the equal protection com-

ponent of the Fifth Amendment. Petitioners’ Brief at 19-25.

Our disposition of Conti’s counterclaims renders resolution

of these issues unnecessary.

8a

Inc., [1980-1982 Transfer Binder] Comm. Fut. L.

Rep. (CCH) { 21,301, at 25,521-22 (Oct. 14, 1981) ;

Baker v. Edward D. Jones & Co., [1980-1982 Trans-

fer Binder] Comm. Fur. L. Rep. (CCH) { 21,167,

at 24,770-72 (Jan. 27, 1981), appeal dismissed sub

nom. Baker v. CFTC, 661 F.2d 871 (10th Cir. 1981)

(per curiam).

We uphold the Commission’s position as a reason-

able interpretation of the Act. See, e.g., First Com-

modity Corp. v. CFTC, 676 F.2d 1, 4-7 (1st Cir.

1982); British American Commodity Options Corp.

v. Bagley, 552 F.2d 482, 489-92 (2d Cir.), cert. de-

nied, 434 U.S. 988 (1977). See generally Red Lion

Broadcasting Co. v. FCC, 395 U.S. 367, 381 (1969)

(“[T]he construction of a statute by those charged

with its execution should be followed unless there are

compelling indications that it is wrong... .”) (foot-

note omitted). The CFTC’s business judgment ap-

proach reflects the “special status accorded margin

under the Commodity Exchange Act.” Baker v. Ed-

ward D. Jones & Co., [1980-1982 Transfer Binder]

Comm. Fut. L. Rep. (CCH) at 24,770. The CEA

specifically excepts “the setting of levels of margin”

from the Commission’s authority to approve, disap-

prove, or alter contract market rules. Id.; see 7

U.S.C. §§ 7a(12), 12a(7)(C). Futures brokers have

an incentive, wholly apart from CFTC regulation, to

impose and enforce reasonable minimum margin re-

quirements; they assume responsibility to third per-

sons for any trading losses sustained, but not hon-

ored, by their customers. See P. JOHNSON, COMMOD-

ITIES REGULATION § 1.10, at 32 (1982).

Schor has not alleged bad faith on the part of Conti

in handling margin requirements on petitioners’ ac-

counts. Nor would the record support a charge of

bad faith. We therefore reject Schor’s arguments

9a

concerning Conti’s alleged failure to police petition-

ers’ margin deposits. Cf. Merrill Lynch, Pierce, Fen-

ner & Smith, Inc. v. Brooks, 548 F.2d 615, 615 (5th

Cir.) (per curiam) (rejecting proposition that “a

sophisticated commodity futures investor who at all

times possessed knowledge of his deficient margin

account status ... should not be required to pay back

any remaining indebtedness because the extension

of credit violated a rule or regulation of the Chicago

Board of Trade”), cert. denied, 484 U.S. 855 (1977).

Schor next attacks the Law Judge’s determination

that Conti did not “fail[] to accept and act upon

directions given by [Schor]” on October 8.!° See In-

itial Decision at 2, reprinted in App. 870. As earlier

stated, the parties presented conflicting accounts of

the October 8 telephone conversations between Schor

and Conti employees. The testimony on this issue re-

quired the ALJ to resolve a credibility question. See

ud. at 7, reprinted in App. 875. The ALJ’s determina-

tion that Conti’s position was more credible than

Schor’s is plainly stated and adequately explained.

We therefore spy no error in the Law Judge’s finding

that “Schor . . . declined to place any market orders”

on October 8. Id. at 8, reprinted in App. 876; see,

e.g., Myron v. Hauser, 673 F.2d 994, 1005 (8th Cir.

1982) ; Haltmier v. CFTC, 554 F.2d 556, 561-62 (2d

Cir. 1977) ; Silverman v. CFTC, 549 F.2d 28, 32 (7th

Cir. 1977) (all refusing to disturb ALJ credibility

determinations). See generally Universal Camera

Corp. v. NLRB, 340 U.S. 474, 496 (1951).

Schor further urges that Conti violated the Act and

CFTC regulations by allowing Schor to maintain

© Schor alleges that Conti, by preventing him from trading

his accounts on October 8, 1979, violated the Act’s anti-fraud

provision as well as the Commission’s diligent supervision

regulation. Petitioners’ Brief at 37.

10a

‘“ynsuitable” positions.’' We need not decide whether

a suitability requirement is implicit in the Act.” The

Law Judge found that petitioners “were eminently

suited to trade the futures contracts involved in this

proceeding.” Initial Decision at 9, reprinted in App.

877. The record amply supports that finding. See,

e.g., App. 145 (Schor’s testimony as to his consider-

able experience in futures trading).

We turn finally to the sole objection to the ALJ’s

decision on Schor’s claims that warrants a remand.

Schor contends that respondent Sandor, after an-

nouncing his intention to liquidate petitioners’ ac-

counts, first traded for his own account positions

identical to petitioners’ at a better price than he ulti-

mately obtained for theirs. Schor unambiguously

11 One commentator has described the “suitability doctrine”

as follows: “A broker-dealer must have reasonable grounds

for believing that all recommendations made are suitable for

each customer in light of his- financial situation and objec-

tives.” T. Russo, REGULATION OF THE COMMODITIES FUTURES

AND OPTIONS MARKETS § 12.38, at 12-75 (1983) (footnote

omitted).

12 The CFTC once proposed, but failed to adopt, a suitability

rule. See T. Russo, supra note 11, § 12.38, at 12-75—76. On

two occasions, the Commission has expressly reserved the

question whether a suitability requirement is implicit in the

Act. Avis v. Shearson Hayden Stone, Inc., [1980-1982 Trans-

fer Binder] ComM. Fut. L. Rep. (CCH) { 21,379, at 25,829

n.4 (Apr. 18, 1982) ; Jensen v. Shearson Hayden Stone, Inc.,

[1980-1982 Transfer Binder] ComMM. FuT. L. REP. (CCH)

{ 21,824, at 25,582 n.1 (Oct. 9, 1981). At least one federal

court has squarely rejected the claim that a commodity

broker’s failure to find suitable investments violates the Act.

J.E. Hoetger & Co. v. Asencio, 558 F.Supp. 1361, 1864 (E.D.

Mich. 1983) ; cf. Myron v. Hauser, 673 F.2d 994, 1006 (8th

Cir. 1982) (“[broker’s] liability . . . not premised upon vio-

lation of a nonexistent suitability standard’’).

lla

charged before the Law Judge that this alleged con-

duct violated the CEA and CFTC regulations. See

Complainants’ Reply Brief at 19 (July 13, 1981),

reprinted in App. 795. He repeated the charge in

his petition for CFTC review. See Application of

MSA for Commission Review of Initial Decision at

25-27 (Nov. 9, 1981), reprinted in App. 922-24.

Neither the ALJ’s Initial Decision nor the Commis-

sion’s Order Denying Review addressed Schor’s point.

As a court of review, we are disinclined to determine

the merits of Schor’s “trading ahead” claim without

benefit of an explicit administrative ruling on it.

Accordingly, we return this single aspect of Schor’s

claims * to the Commission for further consideration.

III. CFTC JuRIsDICTION OVER COMMON LAW

COUNTERCLAIMS

Schor contests the ALJ’s judgment in favor of

Conti on its breach of contract counterclaims. He

argues that the Commodity Exchange Act limits the

Commission’s jurisdiction over counterclaims to those

alleging violations of the Act or CFTC regulations."

18'We reject as frivolous Schor’s contention that Conti’s

counterclaim award should be reduced to reflect the payments

respondent Sandor made to Conti to partially offset the post-

liquidation deficit balances in Schor’s accounts. See Peti-

tioners’ Brief at 49-50. Conti policy required Sandor to make

those payments. Schor clearly is not an intended beneficiary

of that arrangement. See generally J. CALAMARI & J. PERILLO,

THE LAW OF CONTRACTS § 17-2, at 607 (2d ed. 1977): L.

SIMPSON, HANDBOOK OF THE LAW OF CONTRACTS § 116, at

245-47 (2d ed. 1965).

Our disposition of the jurisdiction issue makes it unnec-

essary to reach Schor’s further claim that Commission ad-

judication of common law counterclaims violates his Seventh

12a

The Administrative Law Judge remarked that Schor

perhaps had “a neat legal point,” although its reso-

lution was beyond the ken of an officer “bound by

agency \regulations and published agency policies.”

Initial Decision at 11, reprinted in App. 879.

The Commission has defined the scope of its coun-

terclaim jurisdiction in Reparation Rule 12.23 (b)

(2):

An answer may set forth as a counterclaim facts

alleging a violation and a request for a repara-

tion award that would be a proper subject for a

complaint under § 12.21 or any claim which at

the time the complaint is served the registrant

has against the complainant if it arises out of the

transaction or occurrence or series of transac-

tions or occurrences set forth in the complaint.

17 C.F.R. § 12.23(b) (2) (1983) (emphasis added).

The rule, as interpreted by the Commission, permits

CFTC adjudication of deficit balance counterclaims.

See Friedman v. Dean Witter & Co., [1980-1982

Transfer Binder] ComM. Fut. L. Rep. (CCH) {[ 21,307

(Nov. 13, 1981). Schor concedes that Conti’s coun-

terclaims fall within the Rule 12.23(b) (2) definition.

Petitioners’ Brief at 27. The question we are called

upon to resolve is whether the Commission’s broad

definition of permissible counterclaims is consistent

with the Commodity Exchange Act.

Neither party, before the Commission or in pre-

senting the case to this court, discussed the rele-

vance of Article III of the Constitution * to the ques-

Amendment right to a jury trial. See Petitioners’ Brief at 29-

31.

15 The portions of Article III in point are quoted infra at

p. 14.

18a

tion whether Congress intended, or is empowered to

authorize, the CFTC to entertain common law coun-

terclaims. Northern Pipeline Construction Co. v.

Marathon Pipe Line Co., 458 U.S. 50 (1982)

(“Northern Pipeline”), demonstrates that adjudica-

tion of state law claims by non-Article III federal

tribunals poses serious constitutional questions. Be-

cause the issue concerns subject matter jurisdiction,

we raised the question on our own motion; * we first

instructed the parties to address the Article III issue

at oral argument,” and then invited supplemental

briefing.”

Well established principles of statutory interpreta-

tion require us, before reaching difficult constitu-

tional issues, to “ascertain whether a construction of

the statute is fairly possible by which the question

may be avoided.” Ashwander v. TVA, 297 U.S. 288,

348 (1936) (Brandeis, J., concurring) (quoting

Crowell v. Benson, 285 U.S. 22, 62 (1932)); accord

NLEB v. Catholic Bishop, 440 U.S. 490, 500 (1979) ;

Lynch v. Overholser, 369 U.S. 705, 710-11 (1962);

International Association of Machinists v. Street, 367

U.S. 740, 749 (1961). In NLRB v. Catholic Bishop,

supra, the Supreme Court indicated the sequence of

questions a court should address and answer in cases

16 See, e.g., Pacemaker Diagnostic Clinic of America, Inc.

v. Instromedix, Inc., 725 F.2d 537, 540 (9th Cir. 1984) (en

banc) ; Wharton-Thomas v. United States, 721 F.2d 922, 925

(3d Cir. 1983) (Article III issue raised by court on own mo-

tion) ; cf. Collins v. Foreman, 729 F.2d 108, 111 (2d Cir.

1984) (court refused to hold party waived Article III objec-

tion by neglecting to raise it prior to trial) .

17 Notice, Nos. 83-1703, 83-1704 (D.C. Cir. Mar. 28, 1984).

8 The court directed supplemental briefing from the bench

at the conclusion of oral argument.

l4a

of this sort. See also EEOC v. Pacific Press Publish-

ing Association, 676 F.2d 1272, 1276 (9th Cir. 1982).

First, we “determine whether the [Commission’s] ex-

ercise of its jurisdiction here would give rise to seri-

ous constitutional questions.” 440 U.S. at 501. We

resolve that inquiry in the affirmative. Therefore, we

next ask whether Congress had a “clearly expressed”’

intention to vest the Commission with the constitu-

tionally questionable jurisdiction. Jd. (quoting Mc-

Culloch v. Sociedad Nacional, 372 U.S. 10, 22 (1968) ).

Discovering no explicit congressional intention to do

so, we conclude that the CEA does not authorize the

Commission to adjudicate Conti’s breach of contract

counterclaims.

A. Article III Inquiry

Article III of the Constitution provides:

The Judicial Power of the United States, shall

be vested in one supreme Court, and in such in-

ferior Courts as the Congress may from time to

time ordain and establish.

U.S. Const. art. III, §1. “Judges, both of the su-

preme and inferior Courts,” enjoy tenure “during

good Behaviour,” and receive salaries not subject to

diminution during their term of office. Jd. It is un-

disputed that the CEA does not extend these Article

III protections to CFTC commissioners. See 7 U.S.C.

§ 4a(a). We therefore explore the question whether

it is compatible with Article III to commit, as the

Commission’s counterclaim rule does, adjudication of

common law, breach of contract counterclaims to offi-

cers not enjoying life tenure and irreducible com-

pensation.

Supreme Court decisions defining the scope of Con-

gress’ discretion to vest federal judicial power in non-

15a

Article III tribunals “do not admit of easy synthesis.”

Northern Pipeline, 458 U.S. at 91 (Rehnquist, J.,

concurring in the judgment).’® To resolve the matter

before us, however, we need not attempt the heraclean

labor of rationalizing a host of “arcane distinctions

and confusing precedents” accumulated over a span

of 150 years. Id. at 90. The Supreme Court’s latest

Article III pronouncement—Northern Pipeline, supra

—conjoined with post-Northern Pipeline court of ap-

peals decisions, generates doubt concerning the con-

stitutionality of Commission Rule 12.23(b) (2) suffi-

cient to impel us to interpret the CEA as withhold-

ing from the Commission jurisdiction (subject matter

competence) over common law counterclaims.

In Northern Pipeline, the Court tested the juris-

dictional provision of the Bankruptcy Act of 1978

(“1978 Act”), 28 U.S.C. § 1471 (1982), for compat-

ibility with Article III. The 1978 Act had established

bankruptcy courts “in each judicial district, as an

adjunct to the district court for such district.” Id.

§ 151(a). These courts were staffed by judges not

enjoying Article III’s tenure and salary guarantees

See id. §§ 153(a), 153(b), 154. Nonetheless, Con-

gress authorized the bankruptcy judges to exercise

jurisdiction over “all civil proceedings arising under

title 11 [the Bankruptcy title] or arising in or related

to cases under title 11.” Jd. §§ 1471(b), (c). The

1978 Act vested bankruptcy courts with all of the

19 See also Krattenmaker, Article III and Judicial Inde-

pendence: Why the New Bankruptcy Courts are Unconstitu-

tional, 70 GEO. L.J. 297, 298-99 (1981) (‘‘the precedents in

this area are so vague or inconsistent as to prove meaningless

at best”) (footnote omitted) ; Redish, Legislative Courts, Ad-

ministrative Agencies, and the Northern Pipeline Decision,

1983 DUKE L.J. 197, 228 (Article III line of cases “largely

confused and unprincipled’’).

16a

“powers of a court of equity, law, and admiralty,”

except that they could not “enjoin another court or

punish a criminal contempt not committed in the

presence of the judge of the court or warranting a

punishment of imprisonment.” Id. § 1481.

Northern Pipeline involved a common law, breach

of contract claim brought by a company undergoing

chapter 11 reorganization against its purported

debtor. Six Justices agreed that Article III prohibits

a non-Article III federal tribunal from adjudicating

such state law claims over the objection of one of the

litigants. But only four members of the Court con-

curred in Justice Brennan’s elaboration of Article III

principles; Justice Rehnquist, joined by Justice

O’Connor, concurred only in the Court’s judgment.

We therefore examine both the plurality and con-

curring opinions in Northern Pipeline for the liguc

they shed on the Article III problem at hand. We also

look to post-Northern Pipeline circuit court decisions

holding the 1979 Magistrates Act compatible with

Article III; these decisions provide instruction on

whether petitioners’ putative consent ameliorates any

otherwise existing Article III flaws in CFTC adjudi-

cation of Conti’s common law counterclaims.

Justice Brennan’s plurality opinion in Northern

Pipeline considered, and rejected, two theories prof-

fered to rescue bankruptcy court jurisdiction from

constitutional assault: the “legislative court” excep-

tion; and the Article III court “adjunct” accommoda-

tion. CFTC jurisdiction over common law counter-

claims does not fit within either theory under Justice

Brennan’s analysis.

The Northern Pipeline plurality initially consid-

ered the claim that bankruptcy courts may be placed

under the Article III exception carved long ago for

17a

“legislative courts.” * Justice Brennan recognized

“three narrow situations” in which Article III allows

Congress to vest the judicial power of the United

States in federal tribunals not cloaked with Article

III protections. See 458 U.S. at 64. The first two

exceptions—territorial courts and courts martial—

were clearly inapplicable in Northern Pipeline, see id.

at 64-66, and are no more relevant here. The third

exception recognized by the plurality involved legis-

lative court adjudication of “public rights” cases. Id.

at 67.% The CFTC argues that Commission repara-

tions proceedings “fall squarely within the ‘public

rights’ predicate for legislative court jurisdiction ad-

vanced by the [Northern Pipeline] plurality.” Com-

mission Supplemental Brief at 28.

Justice Brennan explained the public rights doc-

trine principally in separation of powers terms:

[T]he Framers expected that Congress would be

free to commit [matters arising between the

Government and persons subject to its author-

ity] completely to nonjudicial determination, and

. as a result there can be no constitutional

objection to Congress’ employing the less drastic

expedient of committing their determination to

a legislative court or an administrative agency.

458 U.S. at 67, 68 (citing Crowell v. Benson, 285

U.S. 22, 50 (1932)) (footnote omitted). The plural-

20 Chief Justice Marshall inaugurated the legislative courts

doctrine in American Ins. Co. v. Canter, 26 U.S. (1 Pet.) 511

(1828).

*1 See also Atlas Roofing Co. v. OSHRC, 430 U.S. 442, 450

& n.7 (1977) ; Crowell v. Benson, 285 U.S. 22, 50-51 (1932) ;

Ex parte Bakelite Corp., 279 U.S. 438, 451 (1929) ; Murray’s

Lessee v. Hoboken Land & Improvement Co., 59 U.S. (18

How.) 272, 284 (1856).

18a

ity acknowledged that the public/private rights dis-

tinction “has not been definitively explained in [the

Court’s] precedents.” 458 U.S. at 69 (footnote omit-

ted). However, for a matter to fall within the public

rights doctrine, Justice Brennan stated, it “must at a

minimum arise ‘between the government and oth-

ers.’” Id. (quoting Ex parte Bakelite Corp., 279

U.S. 488, 451 (1929) ); see also 458 U.S. at 69 n.23.

Thus, for example, the Northern Pipeline plurality

acknowledged that the actual discharge in bankruptcy,

in contrast to adjudication of the bankrupt’s common

law claims against third parties, “may well be a

‘public right.’ ” Jd. at 71.

“Private-rights disputes,” on the other hand, in-

volve the liability of one individual to another; they

“lie at the core of the historically recognized judicial

power.” Jd. at 69-70. Such cases, the plurality stated,

may not be adjudicated by congressionally-established

legislative courts. As in Northern Pipeline, respond-

ent Conti’s counterclaims involve “adjudication of

state-created private rights, such as the right to re-

cover contract damages”; claims of this kind “obvi-

ously [are] not [public rights].” See id. at 71.

Appellants in Northern Pipeline also sought to vali-

date the bankruptcy court as an “adjunct” of the

Article III district court. The plurality read prece-

dent in point—Crowell v. Benson, 285 U.S. 22

(1932), and United States v. Raddatz, 447 U.S. 667

(1980)—as establishing two principles relevant to

Congress’ allocation of “traditionally judicial func-

tions” to non-Article III adjuncts. 458 U.S. at 80-81.

First, Justice Brennan stated, “when Congress cre-

ates a substantive federal right, it possesses substan-

tial discretion to prescribe the manner in which that

right may be adjudicated—including the assignment

to an adjunct of some functions historically per-

formed by judges.” Jd. at 80 (footnote omitted).

19a

Second, “the functions of the adjunct must be lim-

ited in such a way that ‘the essential attributes’ of

judicial power are returned in the Art. III court.”

Id. at 81 (quoting Crowell, 285 U.S. at 51).

The plurality found bankruptcy court jurisdiction

over state law claims constitutionally suspect under

both principles. Possible distinctions between the

bankruptcy courts and the CFTC are of insufficient

weight to persuade us that Justice Brennan’s North-

ern Pipeline opinion is of limited relevance to this

case; we have serious doubts whether Commission

jurisdiction over common law counterclaims satisfies

either of the Northern Pipeline plurality’s principles

concerning congressional discretion to assign to non-

Article III adjuncts the nation’s “judicial power.”

While Justice Brennan acknowledged broad con-

gressional authority to create adjuncts “to aid in

the adjudication of congressionally created statutory

rights,” he determined that Article III places greater

restraints on Congress’ ability to “assign[] tradi-

tionally judicial power to adjuncts engaged in the ad-

judication of rights not created by Congress.” 458

U.S. at 81-82 (emphasis in original) ; see also id. at

83-84. The Northern Pipeline plurality opinion, in

short, indicates that Congress has “minimal” discre-

tion to assign adjudication of Conti’s state-created

rights to a non-Article III adjunct. Jd. at 84; see

also Kalaris v. Donovan, 697 F.2d 376, 386 (D.C.

Cir.) (“Northern Pipeline effectively held that cer-

tain private state law claims, when adjudicated

within the federal system, must be decided by Article

III courts.”) (emphasis in original) (footnote

omitted), cert. denied, 103 S. Ct. 3088 (1983).”

22 The Commission urges that we validate its Rule 12.23

(b) (2) on the ground that counterclaims to recover customer

account deficit balances “arise under” federal law within the

20a

CFTC adjudication of Conti’s state law counter-

claims is also vulnerable under the second “adjunct”

principle announced by Justice Brennan. That prin-

ciple—ultimate decisionmaking power should remain

with the Article III tribunal rather than the ad-

junct—encompasses several related notions. The

Northern Pipeline plurality’s discussion of the prin-

ciple focused upon the Court’s earlier decision in

United States v. Raddatz, 447 U.S. 667 (1980).

In Raddatz the Court held that Article IiI permits

the adjudication of constitutional claims, 7.e., non-

congressionally-created rights, by a magistrate not

cloaked with Article III protections.* “Critical to

meaning of Article III. Verlinden B.V. v. Central Bank of

Nigeria, 103 S. Ct. 1962 (1983), is featured as supporting

this argument. Commission Supplemental Brief at 24-27.

The Commission’s contention seems misfocused in this sense:

it addresses Congress’ power to place Conti’s counterclaim in

federal court, rather than what is at issue here—Congress’

power to place Conti’s counterclaims in a non-Article Ill

federal tribunal.

Even if apposite, the Verlinden analogy fails on its merits.

The Commission can identify no express congressional plan

deliberately to channel broker-customer contract claims into

the CFTC. See 103 S. Ct. at 1973. If Congress had such a

plan, the limitation of Commission adjudicatory authority to

state law counterclaims would make no sense. Nor do we

discern what “detailed federal law-standards” an ALJ would

be called upon to apply in adjudicating a broker-customer

claim toe recover deficit balances. See id. at 1971.

For reasons indicated in the text, we cannot regard the

CFTC as an Article III court adjunct and in that capacity

equipped to exercise ancillary jurisdiction (see Commission

Supplemental Brief at 22-23) over contract-based counter-

claims.

28 The 1976 Magistrates Act amendments authorized mag-

istrates to adjudicate nondispositive pretrial motions subject

2la

the [Raddatz] Court’s decision to uphold the Magis-

trates Act,” Justice Brennan explained, “was the

fact that the ultimate decision was made by the dis-

trict court,” 458 U.S. at 83 (citing Raddatz, 447

U.S. at 683); the Magistrates Act provided for dis-

trict court de novo review of the magistrate’s pro-

posed findings and recommendations. See Raddatz,

447 U.S. at 681-82; 28 U.S.C. § 636(b) (1) (1976).

Indeed, the Raddatz Court stated that “[w]e view

the statutory scheme here as rendering a magistrate’s

recommendations more analogous to a master or a

commissioner than to an administrative agency for

Art. III purposes.” 447 U.S. at 682-83 (emphasis

added) (footnote omitted).

The CEA provides that Commission findings of

fact are conclusive “if supported by the weight of

the evidence.” 7 U.S.C. §9. That standard of review

does not permit the reviewing .ourt to “reweigh[]

the evidence to ascertain in which direction it pre-

ponderates”; rather, the court must limit itself to

“review[ing] the record with the purpose of deter-

mining whether the finder of ... fact... acted

reasonably, in concluding that the evidence . . . sup-

ported his findings.” Haltmier v. CFTC, 554 F.2d

556, 560 (2d Cir. 1977) (quoting Great Western

to district court review under a clearly erroneous standard.

The amendments also empowered magistrates to make find-

ings and recommendations on dispositive pretrial motions and

in prisoner cases, subject to de novo district court review upon

a party’s objection. 28 U.S.C. § 636(b) (1) (1976). The con-

stitutional validity of this latter power was at issue in Rad-

datz. The 1979 amendments to the Magistrates Act permitted

magistrates, upon both parties’ consent, to conduct all proceed-

ings in a civil action and to enter final judgment. Jd. § 636 (c)

(1982). See infra pp. 26-27.

22a

Food Distributors, Inc. v. Brannan, 201 F.2d 476,

479-80 (7th Cir.), cert. denied, 345 U.S. 997

(1953) ); accord Precious Metals Associates, Inc. v.

CFTC, 620 F.2d 900, 903 (1st Cir. 1980). Thus, in

contrast to Raddatz, “ultimate decisionmaking au-

thority” under the CEA does not “clearly remain[ ]

with the [federal] court.” Northern Pipeline, 458

U.S. at 79 (citing Raddatz, 447 U.S. at 682); see

also In re Kaiser, 722 F.2d 1574, 1581 (2d Cir.

1983) ; White Motor Corp. v. Citibank, 704 F.2d 254,

263 (6th Cir. 1983) (both relying, in part, on provi-

sion for district court de novo review of certain

bankruptcy court decisions in rejecting Article III

challenge to Interim Bankruptcy Rules).

Justice Brennan noted two other ways in which

Raddatz magistrates “were subject to sufficient con-

trol by an Art. III district court.” 458 U.S. at 79.

Judicial control is significant to the constitutional

inquiry because, as the Court has often stated, Arti-

cle III’s tenure and salary guarantees principally

serve a separation of powers function; their domi-

nant purpose is “to ensure the independence of the

Judiciary from the control of the Executive and Leg-

islative Branches of government.” Jd. at 59 (foot-

note omitted) ; accord United States v. Will, 449 U.S.

200, 217-20 (1980); O’Donoghue v. United States,

289 U.S. 516, 5380-35 (1933). By placing large meas-

ures of control over magistrates in the federal judi-

ciary, rather than in the President or Congress, the

Magistrates Act avoided some of the constitutional

pitfalls the Court found in the Bankruptey Act of

1978. No similar features appear in the Commodity

Exchange Act.

As a first element of judicial control distinguish-

ing the Magistrates Act from the Bankruptey Act of

23a

1978, magistrates “were appointed, and subject to

removal, by the district court.” Northern Pipeline,

458 U.S. at 79 (citing Raddatz, 447 U.S. at 685

(Blackmun, J., concurring)) (footnote omitted).

The Magistrates Act provided that the Judicial Con-

ference of the United States, composed exclusively

of Article III judges, see 28 U.S.C. § 331, would de-

termine the number of magistrate positions for each

district. Id. § 633(b). The Act further provided for

selection of magistrates by the judges of the judicial

district in which the magistrates were to serve. Id.

§ 631(a). Those same judges had authority to re-

move a magistrate from office during the term of ap-

pointment “for incompetency, misconduct, neglect of

duty, or physical or mental disability.” Id. § 631(h).

Additionally, a particular magistrate’s office could be

terminated upon a Judicial Conference determination

“that the services performed by his office are no

longer needed.” Id.

The Commodity Futures Trading Commission, on

the other hand, is “an independent agency of the

United States Government.” 7 U.S.C. § 4a(a). Com-

missioners are appointed, not by the judiciary, but by

the President, with the advice and consent of the

Senate. Id. While no more than three of the five

commissioners may be of the same political party,

the statute is designed to allow the President to ap-

point one new Commissioner each year. Id. Thus,

what was said of the Magistrates Act cannot be said

of the CEA—that “the only conceivable danger of a

‘threat’ to the ‘independence’ of the [adjudicator]

comes from within, rather than without, the judicial

department.” Raddatz, 447 U.S. at 685 (Blackmun,

J., concurring), quoted in Northern Pipeline, 458

U.S. at 79 n.30.

24a

A second judicial control found in the Magistrates

Act, Justice Brennan observed, concerned the district

courts’ referral authority: “[T]he magistrate con-

sidered [suppression] motions only upon reference

from the district court.” 458 U.S. at 79. The Magis-

trates Act did not compel the district court to refer

any matters to the magistrate. See Raddatz, 447

U.S. at 685 (Blackmun, J., concurring). Moreover,

when references were made, the district courts “es-

tablish[ed] rules pursuant to which the magistrates

... discharge[d] their duties.” 28 U.S.C. § 636(b)

(4); see Raddatz, 447 U.S. at 685 (Blackmun, J.,

concurring).

The federal judiciary exercises no similar control

over the CFTC. Whether a matter will be initially

determined by an Article III court or the Commission

depends entirely upon the actions of private litigants.

Once a party selects the CFTC as its forum, the fed-

eral courts’ only potential involvement is as an en-

forcer of reparation awards, 7 U.S.C. § 18(f), or as

a reviewer of judgments, id. §18(g). Thus, we can-

not say here that “the institutional interests of the

judiciary are secured by the district court’s control

over ... the references.” Goldstein v. Kelleher, 728

F.2d 32, 36 (1st Cir. 1984) (upholding constitution-

ality of 1979 Magistrates Act) ; see also In re Kaiser,

722 F.2d 1574, 1581 (2d Cir. 1983); White Motor

Corp. v. Citibank, 704 F.2d 254, 263 (6th Cir. 1983)

(both relying, in part, on the district court’s specific

authority to revoke referral of particular cases to

bankruptcy court in rejecting Article III challenge to

Interim Bankruptcy Rules).

The Commission further seeks to validate its coun-

terclaim rule by analogizing CFTC reparations pro-

ceedings to arbitration; in both settings, the Commis-

25a

sion argues, “the parties voluntarily elect to submit

their claims to a non-Article III forum.” Commission

Supplemental Brief at 14 n.9; see also Conti Supple-

mental Brief at 20-23. Arbitration, however, is not

an apt analogy; it does not implicate the separation

of powers concerns motivating the Northern Pipeline

decision. Private parties may, without offense to the

Constitution, agree to settle their disputes outside the

federal adjudicatory system; district court enforce-

ment of arbitration awards is not alone sufficient to

require the invocation of Article III safeguards.

Constitutional constraints are called into play, how-

ever, when Congress establishes a comprehensive ad-

judicatory alternative to the federal courts—such as

the CFTC—without providing tenure and salary

guarantees.

In sum, Justice Brennan’s plurality opinion in

Northern Pipeline raises grave doubts concerning the

constitutionality of CFTC Rule 12.23(b) (2). Since

24 We recognize that the Commodity Exchange Act, if read

to authorize Commission adjudication of state common law

counterclaims, would not exhibit all of the Article III flaws

the Northern Pipeline plurality discovered in the 1978 Bank-

ruptey Act. In several respects, the CEA retains more of “the

essential attributes of the judicial power” in the Article III

courts than did the Bankruptcy Act.

First, the CFTC more closely resembles the agency in

Crowell v. Benson which dealt only with “a particularized

area of law,” Northern Pipeline, 458 U.S. at 85, than the bank-

ruptey courts which, under the 1978 Act, were to exercise

jurisdiction in “all civil proceedings arising under title 11 or

arising in or related to cases under title 11.” 28 U.S.C.

§ 1471(b), quoted in 458 U.S. at 85 (Justice Brennan’s em-

phasis). Second, CFTC orders, like those of the agency in

Crowell but unlike those of bankruptcy courts under the 1978

Act, are enforceable only by order of the district court. See

26a

only four members of the Court joined that opinion,

however, we look to Justice Rehnquist’s concurrence

(joined by Justice O’Connor) to detect the holding of

the Court. See Gregg v. Georgia, 428 U.S. 153, 169

n.15 (1976) (plurality opinion) (“[T]he holding of

the Court may be viewed as that position taken by

those Members who concurred in the judgment[] on

the narrowest grounds ... .”); accord Marks v.

United States, 480 U.S. 188, 1938 (1977); United

States v. Martino, 664 F.2d 860, 872 (2d Cir. 1981),

cert. denied, 458 U.S. 1110 (1982); McCormick v.

Edwards, 646 F.2d 173, 178 n.11 (5th Cir.), cert.

denied, 454 U.S. 1017 (1981) (all quoting Gregg).

Both Conti and the Commission stress language in

Justice Rehnquist’s concurrence limiting his agree-

ment with the plurality to instances in which parties

are deprived of an Article III forum against their

will. See Conti Supplemental Brief at 4-5; Commis-

sion Supplemental Brief at 3-4, 11 (quoting 458 U.S.

7 U.S.C. § 18(f) ; 458 U.S. at 85-86. Third, CFTC orders are

reviewed under the same “weight of the evidence” standard

sustained in Crowell, rather than the more deferential “clearly

erroneous” standard found objectionable in Northern Pipe-

line. See 7 U.S.C. §9; 458 U.S. at 85. Finally, the CFTC,

unlike bankruptcy judges under the 1978 Act, does not exer-

cise “all ordinary powers of district courts,” including presid-

ing over jury trials and issuing writs of habeas corpus. See

458 U.S. at 85.

These differences between the CFTC and 1978 Act bank-

ruptcy judges do not, however, adequately assuage our doubts

concerning the constitutionality of Commission Rule 12.23

(b) (2). As discussed in the text, the Commission’s composi-

tion and authority, established by the CEA, do not test well

under the “adjunct” principles Justice Brennan stated and

explained in Northern Pipeline.

27a

at 91 (Rehnquist, J., concurring) ).” Schor’s deci-

sion to air his complaints of CEA and CFTC regula-

tions violations before the Commission, respondents

contend, constituted consent to CFTC adjudication of

Conti’s common law counterclaims. Schor could have

secured an Article III tribunal’s adjudication of

Conti’s breach of contract counterclaims, respondents

suggest, by filing his own claims in federal court

rather than with the Commission. See Conti Supple-

mental Brief at 2 & n.1; Commission Supplemental

Brief at 10-11. Some courts had held, at the time

Schor initiated these proceedings, that the CEA es-

tablished an implied federal right of action in dis-

trict court for damages on behalf of defrauded com-

modity investors, see, e.g., Hirk v. Agri-Research

Council, Inc., 561 F.2d 96, 108 n.8 (7th Cir. 1977);

Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Gold-

man, 593 F.2d 129, 1388 n.7 (8th Cir. 1979) (dic-

tum) ; the Supreme Court later reached the same con-

clusion in Merrill Lynch, Pierce, Fenner & Smith,

Inc. v. Curran, 456 U.S. 358 (1982) (5-4 decision).

But see infra note 27,

We return shortly to the character of Schor’s al-

leged consent. See infra pp. 27-29. At this juncture,

we simply note that we do not share Conti’s assur-

ance that “[u]nder Northern Pipeline consent of the

parties is sufficient to uphold the CFTC reparations

25 Justice Rehnquist stated that no earlier High Court de-

cision elaborating upon Article III “has gone so far as to

sanction the' type of adjudication to which Marathon will be

subjected against its will under the provisions of the 1978

Act.” 458 U.S. at 91 (emphasis added). He limited his hold-

ing of unconstitutionality (and therefore the holding of the

Court) to “so much of the Bankruptcy Act of 1978 as enables

a Bankruptcy Court to entertain and decide Northern’s law-

suit over Marathon’s objection.” Id. (emphasis added).

28a

procedure under Article III.” Conti Supplemenal

Brief at 3. Justices Rehnquist and O’Connor limited

their position to the case at hand—one in which a

party was summoned before a non-Article III tribu-

nal over its objection. See 458 U.S. at 91. Sensible

interpretation of judicial opinions avoids converting

a carefully crafted limitation on a holding into its

ratio decidendi. The most we can fairly say of

Northern Pipeline is that it provides no “determina-

tive principle” for evaluating the constitutionality of

non-Article III adjudicatory schemes that operate

only with the litigants’ consent. See Wharton-Thomas

v. United States, 721 F.2d 922, 928 (3d Cir. 1983).

For guidance on the consent concept, we consider

next several post-Northern Pipeline circuit court de-

cisions determining the compatibility with Article

III of the 1979 amendments to the Magistrates Act.

The Federal Magistrates Act of 1979, Pub. L. No.

96-82 § 2, 93 Stat. 643 (codified at 28 U.S.C. § 636

(c) (1982)), allows a magistrate not enjoying Arti-

cle III protections, with the consent of the parties, to

try civil cases and enter final judgments. Six federal

appeals courts have thus far upheld the constitution-

ality of that scheme: Lehman Brothers Kuhn Loeb,

Inc. v. Clark Oil Refining Corp., No. 83-1874 (8th

Cir. July 11, 1984) (en bane); Puryear v. Ede’s

Ltd., 731 F.2d 1153 (5th Cir. 1984) ; Collins v. Fore-

man, 729 F.2d 108 (2d Cir. 1984) ; Goldstein v. Kel-

leher, 728 F.2d 32 (1st Cir. 1984) ; Pacemaker Diag-

nostic Clinic of America, Inc. v. Instromedix, Inc.,

725 F.2d 5387 (9th Cir. 1984) (en bane) (“Pace-

maker’); Wharton-Thomas v. United States, 721

F.2d 922 (3d Cir. 1983). No circuit has precedent

to the contrary. However, the rulings on the consti-

tutionality of the 1979 amendments to the Magis-

29a

trates Act fail to alleviate our doubts concerning the

constitutionality of CFTC jurisdiction over common

law counterclaims for two reasons: those rulings rely

on express consent, not consent by operation of law

or agency rule; and they stress the control exercised

over the magistrate by the district court.

The consent required for non-Article III adjudica-

tion under the Magistrates Act differs significantly

from petitioners’ putative consent to CFTC adjudica-

tion of Conti’s counterclaims. Parties deciding

whether to try their case before a magistrate or an

Article III court exercise a relatively unfettereu

choice. Because litigant consent has been held “‘essen-

tial to the constitutionality of the [1979 Magistrates]

Act,” courts are “careful to guard against any com-

pulsion to induce consent through the imposition of

costs, delays, or other penalties.” Pacemaker, 725

F.2d at 546.

We cannot say that Schor has manifested equally

unburdened assent to CFTC jurisdiction over Conti’s

counterclaims. Far from expressly inviting Commis-

sion adjudication of the counterclaims, Schor force-

fully argued, both before and after the ALJ’s Initial

Decision, that the Commission lacks statutory author-

ity to award Conti breach of contract damages. See

Complainants’ Objections to Proposed Initial Deci-

sion at 2-4, reprinted in App. 859-61; Application of

MSA for Commission Review of Initial Decision at

5-9, reprinted in App. 902-06.

Respondents maintain, in essence, that Schor and

MSA have indirectly or implicitly consented to CFTC

adjudication of Conti’s counterclaims:

The reparations complainant, by foregoing his

right to proceed in federal or state court and

electing to file a complaint with the Commission,

80a

consents by his conduct to Commission adjudica-

tion of his claim and any counterclaim arising

from the same commodities transactions forming

the basis of his complaint.

Commission Supplemental Brief at 11 (citation omit-

ted); see also Conti Supplemental Brief at 2. As-

suming arguendo that a party’s consent is not only

necessary but also sufficient to resolve Article III ob-

jections to a particular adjudicatory scheme—an issue

we do not decide here **—Schor’s submission to the

CFTC’s counterclaim adjudication was effected not by

his affirmative choice but by operation of Commission

rule. We see no indication in the Magistrates Act de-

cisions that consent thus exacted avoids constitutional

shoals. On the contrary, those decisions emphasize the

importance of express, uncoerced consent. See Collins,

729 F.2d at 120; Goldstein, 728 F.2d at 35; Pace-

maker, 725 F.2d at 543, 546; Wharton-Thomas, 721

F.2d at 926 & n.7.

Commission Rule 12.23(b)(2) presents complain-

ants positioned as Schor is with this choice: File a

reparations complaint with the Commission and “con-

sent” to relinquish the right to have an Article III

tribunal adjudicate the broker’s related common law

claims; or forgo the congressionally-established right

to a Commission determination of a reparations com-

26 Compare Note, Article III Limits on Article I Courts:

The Constitutionality of the Bankruptcy Court and the 1979

Magistrate Act, 80 CoLUM. L. REV. 560 (1980) (consent insuf-

ficient), with McCabe, The Federal Magistrate Act of 1979,

16 HARV. J. on LEGIS. 343 (1979), and Silberman, Masters and

Magistrates Part II: The American Analogue, 50 N.Y.U. L.

REV. 1297 (1975) (consent sufficient).

On the inadequacy of the Commission’s and Conti’s sug-

gested analogy to arbitration, see supra pp. 23-24.

gla

plaint in order to preserve Article III adjudication of

any related state law claim the broker may assert.”

This is hardly the carefully guarded, cost-free consent

the Ninth Circuit declared “essential to the constitu-

tionality of the [Magistrates] Act.” Pacemaker, 725

F.2d at 546.

The Magistrates Act decisions afford scant support

for upholding Commission Rule 12.23(b)(2) for a

second reason. The Magistrates ..ct cases do not hold,

as respondent Conti intimates they do, see Conti Sup-

plemental Brief at 3, that litigant consent is not only

necessary, but also independently sufficient, to over-

27 Respondents overstate their case by suggesting that Schor

had a clear choice between court and Commission. At the time

Schor filed his complaints, the CEA contained no express pro-

vision for district court suits; such provision was first made

in the 1982 amendments. See 7 U.S.C. § 25 (1982). While

some lower federal courts had recognized a private right of

action under the CEA prior to the filing of Schor’s complaints,

see supra pp. 25-26, the Supreme Court did not affirm that

position until 1982, and then only by a 5-4 margin. Merrill

Lynch, Pierce, Fenner & Smith, Inc. v. Curran, 456 U.S. 353

(1982).

Moreover, at least two federal district courts had ruled prior

to the filing of Schor’s reparations complaints that no implied

private right of action existed under the CEA to redress al-

leged violations of its anti-fraud provisions. Fischer v. Rosen-

thal & Co., 481 F. Supp. 53 (N.D. Tex. 1979); Bartels v.

International Commodities Corp., 435 F. Supp. 865 (D. Conn.

1977). In brief, Schor confronted an area of law fairly de-

scribed as unclear. See Rivers v. Rosenthal & Co., 634 F.2d

774, 778 n.7 (5th Cir. 1980) (summarizing holdings), vacated

and remanded, 456 U.S. 968 (1982). Respondents’ contention

that Schor implicitly consented to CFTC adjudication of

Conti’s counterclaims by forgoing his federal court forum is

thus further weakened by the absence of a then-existing

clearly established complainant’s right to proceed in federal

court.

32a

come Article III objections to magistrates’ final ad-

judication of civil cases. Rather, the decisions up-

holding the constitutionality of the 1979 Magistrates

Act focus additionally upon the control Article III

district courts exercise over magistrates. See Collins,

729 F.2d at 114-15; Goldstein, 728 F.2d at 35, 36;

Pacemaker, 725 F.2d at 540, 544-46; Wharton-

Thomas, 721 F.2d at 926-27, 920.

The 1979 Magistrates Act retains in the district

court two controls that Northern Pipeline’s plurality

considered central to the Raddatz holding. First, the

1979 amendments do not alter the method of magis-

trate appointment and removal; the judiciary, not the

other branches of government, exercises control. See

supra pp. 21-22. Second, the district courts under the

1979 Act control case references, as they did under

the version of the Magistrates Act at issue in Rad-

datz. To conduct civil trials with the parties’ con-

sent, the magistrate must be “specially designated to

exercise such jurisdiction by the district court or

courts he serves.” 28 U.S.C. §636(c)(1) (1982).

Moreover, even “specially designated” magistrates

can be deprived of their jurisdiction in particular

matters “for good cause shown on [the district

court’s] own motion, or under extraordinary circum-

stances shown by any party.” Jd. § 636(c)(6). The

‘ogislative history of the 1979 Magistrates Act indi-

cates that “good cause” encompasses “any . . . case

containing sensitivities such that determination by an

Article III judge is required to insure the appearance

and reality of independence and impartiality in the

decision.” Pacemaker, 725 F.2d at 545 (citing S. Rep.

No. 74, 96th Cong., Ist Sess. 14 (1979) ).

In sum, the Commodity Exchange Act, in contrast

to the Magistrates Act, does not place the CFTC un-

33a

der the immediate and constant control of Article III

judges. See supra p. 22. Moreover, the affirmative

consent required under the Magistrates Act differs

substantially from the consent exacted by CFTC rule;

even if, under some circumstances, litigant consent

alone may save an otherwise questionable adjudica-

tory scheme from constitutional attack, we do not be-

lieve petitioners’ putative consent provides secure

validation for the instant application of CFTC Rule

12.23 (b) (2).

Serious constitutional problems thus attend CFTC

adjudication of common law counterclaims. We have

been well advised to avoid “needless determination of

constitutional issues ... if [a statute] is fairly sus-

ceptible of such a construction.” Ralpho v. Bell, 569

F.2d 607, 619 (D.C. Cir. 1977) (footnotes omitted) ;

accord Lynch v. Overholser, 369 U.S. 705, 710-11

(1962): International Association of Machinists v.

Street, 367 U.S. 740, 749 (1961). The Commodity

Exchange Act “is fairly susceptible of [an alterna-

tive] construction” free from Article III objections:

Counterclaims can be limited, as claims are, see 7

U.S.C. §18(a), to those arising under the CEA or

substantive CFTC regulations.

B. The CEA and Its Legislative History

Conti and the CFTC tender several arguments for

interpreting the Act to validate Commission Rule

12.23(b) (2). None of their points, taken singly or in

combination, convinces us that Congress had a firm

intention regarding CFTC jurisdiction over common

law counterclaims. In the absence of a clear expres-

sion of legislative will, we adopt the construction of

the Act that avoids significant constitutional ques-

tions.

—

34a

The Commodity Exchange Act, as it existed at the

time of Schor’s trading and the ALJ’s Initial Deci-

sion,” contained only one reference to counterclaims.

Section 14(d) of the CEA directed that complainants

not residing in the United States, “before any formal

action [would be] taken on [their] complaint,”

furnish a bond in double the amount of the claim

conditioned upon the payment of costs, including

a reasonable attorney’s fee for the respondent if

the respondent shall prevail, and any reparation

award that may be issued by the Commission

against the complainant on any counterclaim by

respondent.

7 U.S.C. §18(d) (emphasis added). Conti seems

to suggest that the quoted section 14(d) language

demonstrates congressional recognition of the pros-

pect of counterclaims, and therefore supports its view

of the Commission’s counterclaim jurisdiction. See

Conti Brief at 13. We perceive no clear indication

from this section of anything but congressional con-

cern that nonresidents seeking judicial review of ad-

verse Commission reparations awards provide secu-

rity to protect the respondent. Congress might have

contemplated counterclaims only against nonresident

complainants, counterclaims against all complainants,

counterclaims unlimited in scope, or counterclaims of

a narrow compass. In short, we cannot derive the

meaning Conti presses from the cryptic 14(d) state-

ment.

While counterclaims were explicitly mentioned only

in section 14(d) of the CEA, Conti maintains that

other sections implicitly evidenced a congressional in-

tention to permit CFTC adjudication of common law

28 See supra note 1.

35a

counterclaims. Conti points to section 14(f), which

stated that “any person for whose benefit [a repara-

tion award] was made” may enforce the judgment

in district court, 7 U.S.C. § 18(f) (emphasis added),

and to section 14(g), which stated the conditions en-

titling “any party aggrieved [by a commission or-

der]’’ to obtain court of appeals review, id. § 18(g)

(emphasis added). Conti argues that these statutory

references to “any person” and “any party,” rather

than to “respondent,” “‘reflected congressional intent

that both commodity professionals and customers

could receive reparations awards.” Conti Brief at 13;

see also Commission Brief at 17.

Conti’s argument, although plausible, is not com-

pelling. Schor’s interpretation of the same statutory

language is also sensible; he contends that Congress

authorized Commission jurisdiction only over counter-

claims alleging a violation of the Act or Commission

regulations. Petitioners’ Brief at 28; see 40 Fed. Reg.

55,666, 55,667 (Dec. 1, 1975) (Commission’s proposed

counterclaim rule adopting same view of CFTC juris-

diction). Under Schor’s construction of the Act, the

“any person’ /“any party” language in sections 14(f)

and (g) accommodates the possibility of a dispute

between brokers in which both the main claim and the

counterclaim charge violations of the CEA or CFTC

regulations. Again, we discern no bright signal of

the congressional design in the cited sections.

The Commission asserts that courts owe substan-

tial deference to its counterclaim rule as an agency

interpretation of its governing statute. Commission

Brief at 20 (citing Power Reactor Development Co.

v. International Union of Electrical Workers, 367

U.S. 396, 408 (1961)). We disagree. Courts gen-

erally accord respectful consideration to the interpre-

36a

tation placed upon a statute by an agency charged

with its administration. See, e.g., NLRB v. Bell

Aerospace Co., 416 U.S. 267, 274-75 (1974). When

‘an agency construes its charter erractically or in-

consistently, however, little or no deference will be

owed to its decisions.” AFGE v. FLRA, 712 F.2d

640, 643 n.17 (D.C. Cir. 1983) (citations omitted) ;

see, e.g., North Haven Board of Education v. Bell,

456 U.S. 512, 522 n.12 (1982); Southeastern Com-

munity College v. Davis, 442 U.S. 397, 411 n.11

(1979). The CFTC has not maintained a consistent

position on the scope of its authority to adjudicate

counterclaims. Moreover, the question before us is

not one on which a specialized administrative agency,

in contrast to a court of general jurisdiction, has su-

perior expertise.

The Commission’s view of its counterclaim juris-

diction has shifted. The CFTC’s first proposed repa-

rations rules would have permitted counterclaims only

‘if the facts set forth . . . allege a violation which

would be a proper subject of a reparation complaint.”

40 Fed. Reg. 55,666, 55,667 (Dec. 1, 1975). This

proposed counterclaim rule, the Commission acknow]l-

edged, was “extremely narrow”; however, a “sub-

stantial question” existed, the CFTC noted, concern-

ing its statutory authority to permit reparation

awards “based on matters other than alleged viola-

tions by a registrant.” Jd. In response to industry

comment, the Commission amended its initially pro-

posed rule to permit all counterclaims arising out of

the transactions or occurrences set forth in the com-

plaint. See 41 Fed. Reg. 3994, 3995 (Jan. 27, 1976).

The CFTC’s own recognition that the scope of its

statutory authority to adjudicate counterclaims was

not crystalline, and its shift from one position to an-

, other, “substantially diminish[] the deference [owed

37a

its] present interpretation of the statute.” Sowth-

vastern Community College v. Davis, 442 U.S. 397,

411 n.11 (1979) (citing General Electric Co. v. Gil-

bert, 429 U.S. 125, 143 (1976) ).”

Furthermore, the deference due an agency’s inter-

pretation of its governing statute “is more emphati-

cally summoned when the question is one requiring

[administrative] expertise in the subject area.” Sea-

Land Service, Inc. v. Kreps, 566 F.2d 763, 780 n.15

(D.C. Cir. 1977) (Robinson, J., dissenting) ; accord

Wilderness Society v. Morton, 479 F.2d 842, 866

(D.C. Cir.) (en bane), cert. denied, 411 U.S. 917

(1973). Commission Rule 12.23(b)(2) does not

“concern[] matters within the agency’s expertise.”

Adkins v. Hampton, 586 F.2d 1070, 1073 (5th Cir.

1978) (footnote omitted). On the contrary, the statu-

tory interpretation-jurisdictional question presented

is precisely the kind with which courts customarily

deal. See, e.g., Allied Van Lines, Inc. v. ICC, 708

F.2d 297, 300 (7th Cir. 1983) (‘‘question of jurisdic-

tion is plainly not a matter within the Commission’s

discretion or expertise’) (citation omitted) ; Office of

Communication of United Church of Christ v. FCC,

707 F.2d 1413, 1423 (D.C, Cir. 1983) (‘‘quintessen-

tial function of the reviewing court to interpret leg-

islative delegations of power and to strike down those

agency actions that traverse the limits of statutory

authority”) (footnote omitted); Office of Consumers’

Counsel v. FERC, 655 F.2d 1132, 1141 (D.C. Cir.

1980). Accordingly, the court’s role in determining

29 We note that the Commission remains ambivalent on the

question whether, once a broker files a common law counter-

claim, the customer may add to the reparations complaint re-

lated claims arising under state law. See Commission Supple-

mental Brief at 18 n.14.

38a

the issue at hand “should . . . be viewed hospitably.”

Hardin v. Kentucky Utilities Co., 390 U.S. 1, 14

(1968) (Harlan, J., dissenting).

Conti and the Commission additionally argue that

Congress tacitly approved the Commission’s current

position when it amended the CEA without counter-

manding the CFTC’s counterclaim rule. See Conti

Brief at 16; Commission Brief at 22. This point

merits consideration,” but the notion that Congress ef-

fectively adopts all agency regulations it does not alter

pushes too far. Placing inordinate emphasis on “con-

gressional silence” can be “treacherous.” Girouard v.

United States, 328 U.S. 61, 69 (1946) ; see also NLRB

v. Bell Aerospace Co., 416 U.S. 267, 310 (1974)

(White, J., dissenting in part) (“Congressional silence

does not imply legislative approval of all [agency]

rulings theretofore made.”); Helvering v. Hallock,

309 U.S. 106, 119-20 (1940) (“To explain the cause

of non-action by Congress when Congress itself sheds

no light is to venture into speculative unrealities.”’ )

(footnote omitted). Congress is not obliged to “cor-

rect each mistaken [administrative] construction un-

der penalty of incorporating it into the fabric of the

statute.” F.W. Woolworth Co. v. United States, 91

F.2d 973, 976 (2d Cir. 1937) (L. Hand, J.), cert.

denied, 302 U.S. 768 (1938). When Congress amends

a law without addressing extant administrative rul-

ings, its “failure to take action . . . is subject to more

than one interpretation.” Chisholm v. FCC, 538 F.2d

349, 363 (D.C. Cir.), cert. denied, 429 U.S. 890

80 See, e.g., Grove City College v. Bell, 52 U.S.L.W. 4283,

4287 (U.S. Feb. 28, 1984) ; North Haven Bd. of Educ. v. Bell,

456 U.S. 512, 585 (1982) (citations omitted) ; Merrill Lynch,

Pierce, Fenner & Smith, Inc. v. Curran, 456 U.S. 353, 381-82

& n.66 (1982) (citations omitted).

39a

(1976). Especially in light of the serious constitu-

tional questions attending Commission jurisdiction

over common law counterclaims, we resist reading

congressional silence as signalling the legislature’s ad-

vertence to, and approval of, Commission Rule 12.23

(b) (2).

From fragments of legislative history and the most

recent CEA amendments, respondents discern a

marked congressional intent to entrust to the Com-

mission broad discretion to define its own counter-

claim jurisdiction. First, Conti and the Commission

cite a 1974 House Committee Report which stated

that “[ejounterclaims will be recognized in the pro-

ceedings . . . on such terms and under such circum-

stances as the Commission may prescribe by regula-

tion.” H.R. Rep. No. 975, 98d Cong., 2d Sess. 23

(1974), cited in Conti Brief at 14-15 and Commission

Brief at 18-19. Next, respondents emphasize the

latest amendments to the CEA, effective since May

1983." Newly enacted section 14(b) provides, in

part, that “[t]he Commission may promulgate...

rules, regulations, and orders . . . [which] may pre-

scribe ... the nature and scope of . . . counterclaims.”

7 U.S.C. §18(b) (1982). Even if not directly opera-

tive in the Schor-Conti dispute, respondents maintain,

current section 14(b) confirms the intention of Con-

gress all along to allow the Commission to delineate

the scope of its counterclaim authority. See Conti

Brief at 16; Commission Brief at 2.

Reading only the words respondents stress, one

might conclude that Congress has indeed left the Com-

mission at liberty to write its own counterclaim juris-

dictional ticket. But even in the absence of any con-

stitutional question, it would be extraordinary for a

31 See supra note 1.

40a

legislature to deliver such a blank check to an admin-

istrative tribunal. Both at argument and on brief,

the CFTC stated that it “is not aware of any other

agencies that expressly render decisions and issue

awards on common law claims.” Commission Supple-

mental Brief at 16 n.13. Conti noted that the CFTC’s

asserted common law counterclaim jurisdiction “may

be unique in the federal system.”’ Conti Supplemental

Brief at 20 n.10. Our independent research has also

failed to locate precedent for Commission Rule

12.23 (b) (2).

Nothing we or the parties have uncovered suggests

that Congress meant to confer upon the Commission

unprecedented authority. Cf. 2A C. SANDS, SUTHER-

LAND STATUTORY CONSTRUCTION § 53.01, at 343 (4th

ed. 1972) (presumption in favor of legislative regu-

larity). And there is not even a hint that Congress

was alerted to, or in any way considered, the Article

III problem that pervades our review of the Commis-

sion’s assertion of jurisdiction to adjudicate common

law counterclaims. See Shrader v. Harris, 631 F.2d

297, 301-02 (4th Cir. 1980) (refusing to construe

statute to raise constitutional questions “[i]n the ab-

sence of any manifestation of congressional consider-

ation of th[e] problem [before the court]”’).

In sum, neither Congress nor the CFTC appears to

have considered the serious constitutional questions

provoked by Commission adjudication of common law

counterclaims. The language and legislative history

of the CEA contain no clear expression of congres-

sional intent to commit to the Commission extraordi-

nary adjudicatory authority—subject matter com-

petence not exercised by any other federal agency.

Considerations of legislative regularity, administra-

tive uniformity, and, most prominently, Article III

constraints, impel us to construe the Act to authorize

4la

the CFTC to adjudicate only those counterclaims al-

leging violations of the Act or Commission regula-

tions. See generally NLRB v. Catholic Bishop, 440

U.S. 490 (1979) (construing statute to deny NLRB

authority to exercise jurisdiction over lay teachers

in parochial schools, in part because contrary holding

would raise serious questions under the religion

clauses of the First Amendment) ; International As-

sociation of Machinists v. Street, 367 U.S. 740

(1961) (construing Railway Labor Act to deny

unions, over an employee’s objection, power to use the

objecting employee’s compulsory union dues to sup-

port political causes employee opposes, in part be-

cause contrary holding would raise serious First

Amendment questions) ; Miller ». United States, 620

F.2d 812 (Ct. Cl. 1980) (holding statutory provision

setting 6% interest rate for government takings not

binding on judiciary, in part because contrary hold-

ing would raise serious Fifth Amendment just com-

pensation questions) ; Daylo v. Administrator of Vet-

erans’ Affairs, 501 F.2d 811 (D.C. Cir. 1974) (hold-

ing statutory amendment prohibiting judicial review

of VA benefit termination inapplicable retroactively

to final, unappealed district court judgment ordering

benefit restoration, in part because contrary holding

would raise serious due process questions).

CONCLUSION

We affirm the ALJ’s dismissal of Schor’s com-

plaints except with regard to the “trading ahead”

allegation; on that matter, we vacate the ALJ’s deci-

sion and remand to the Commission for its initial

consideration. We reverse the ALJ’s judgment in

favor of Conti on its counterclaims and remand with

instructions to dismiss the counterclaims for lack of

Commission jurisdiction.

It is so ordered.

42a

APPENDIX B

UNITED STATES OF AMERICA

Before the

COMMODITY FUTURES TRADING

COMMISSION

CFTC Docket No. R 80-566-80-723

MORTGAGE SERVICES OF AMERICA and

WILLIAM T. SCHOR

Vv.

CONTICOMMODITY SERVICES, INC. and

RICHARD L. SANDOR

ORDER DENYING REVIEW

Upon consideration of the application for review

and the record as a whole, the Commission has dis-

cerned no question of law or public policy to warrant

Commission consideration of the merits of the initial

decision filed by the Presiding Officer. Accordingly,

the Commission has determined that the application

for review should be denied. In making this deter-

mination, the Commission has neither adopted the

Presiding Officer’s order as its own nor affirmatively

passed upon any of the issues decided therein.’ Thus,

1The complainants have objected to the fact that the

Presiding Officer directed the respondents to prepare a draft

of his initial decision. The Presiding Officer adopted verbatim

the 24 findings of fact submitted by respondents and made

only a few minor modifications to the other parts of respond-

43a

although the Commission has determined to permit

the initial decision to become final as to the parties,

the order shall not be binding as a Commission deci-

sion in other cases.

Accordingly, IT IS ORDERED that the initial de-

cision of the Presiding Officer shall become final with

respect to the parties upon service of this Order on

the parties by the Hearing Clerk.’

ents’ proposed decision. While we do not believe that the

Presiding Officer abused his discretion in this regard, we sug-

gest that, in the future, this procedure be used, if at all, only

in exceptional cases. Cf. Hayes v. Thompson, 637 F.2d 483,

490 (7th Cir. 1980) (“Although we are to be more critical in

our review when a District Court, as here, essentially adopts

the findings prepared by the prevailing party, such findings

are nonetheless to be measured by the ‘clearly erroneous’

standard.”’).

2 Any appeal from a Commission order must be taken within

fifteen days of service of this order pursuant to Section 14(e)

of the Act, 7 U.S.C.A. §18(c) (Supp. 1983), as it incorpo-

rates by reference Section 6(b) of the Act, 7 U.S.C. § 9.

Pursuant to Section 14(d) of the Act, 7 U.S.C.A. § 18(d)

(Supp. 1983), a party against whom a reparation award has

been made may be sued in United States district court to

enforce the award if such party does not make payment

within the period specified in the order making the award, or

within 15 days of service of this order by the Hearing Clerk

if no period is specified.

Pursuant to Section 14(f) of the Act, 7 U.S.C.A. § 18(f)

(Supp. 1983), unless the party against whom a reparation

order has been made provides to the Commission, within 15

days from the expiration of the period specified in the order

for compliance, or within 30 days of service of this order by

the Hearing Clerk if no period is specified, satisfactory evi-

dence that either (1) an appeal has been taken pursuant to

Section 14(e), or (2) payment of the full amount of the award

(or any agreed settlement thereof) has been made, such party

shall be prohibited automatically from trading on all contract

44a

By the Commission (Acting Chairman PHILLIPS

and Commissioners HINEMAN and WEST).

/s/ Jane K. Stuckey

JANE K. STUCKEY

Secretary of the Commission

Commodity Futures

Trading Commission

Dated: June 15, 1983

markets and, if the party is registered with the Commission,

such registration shall be suspended automatically. Such a

prohibition and suspension shall remain in effect until such

party provides to the Commission satisfactory evidence that

payment of the full amount of the award with interest thereon

to the date of payment has been made.

45a

APPENDIX C

UNITED STATES OF AMERICA

Before the

COMMODITY FUTURES TRADING

COMMISSION

CFTC Docket No. R 80-566-80-723

MORTGAGE SERVICES OF AMERICA and

WILLIAM T. SCHOR, COMPLAINANTS

Vv.

CoNTICOMMODITY SERVICES, INC. and

RICHARD L. SANDOR, RESPONDENTS

INITIAL DECISION

BEFORE: PAINTER, ALJ

Preliminary Statement:

Complainants Mortgage Services of America

(“MSA”) and William T. Schor initiated this pro-

ceeding by filing reparations complaints on Febru-

ary 21, 1980. Complainants allege that respondents

refused to execute orders placed by complainants on

October 8, 1979, and that respondents allowed un-

suitable trading, gave fraudulent advice, and com-

mitted other violations of the Commodity Exchange

Act and the Commission’s regulations, causing total

damages of approximately $1.8 million.

Respondents filed a timely answer and counter-

claim, denying all of the alleged violations and assert-

ing a claim for account deficits totalling $92,349.37.

The trial in this matter took place in Washington,

D.C. on March 16, 17, and 18, 1981. Post hearing,

46a

the parties filed briefs, including proposed findings

of fact and conclusions of law. By Order issued

August 25, 1981, respondents were directed to file a

proposed order consistent with the findings and con-

clusions set forth in their post-hearing briefs but ex-

cluding any award of attorney fees. Complainants

were given an opportunity to file objections to any

proposed order on or before October 15, 1981. Com-

plainants did not file timely objections. However,

complainants did file objections out of time, and for

purposes of this proceeding, the objections are deemed

to have been timely filed.

In objections to the proposed order filed by respond-

ents, complainants contend that it was improper to

permit respondents to file a proposed order. I dis-

agree. The gut issue in this case is whether Conti

personnel failed or refused to accept and execute

orders as directed by William Schor. There is not a

shred of probative evidence in the record to suggest

that Conti deliberately, negligently, or otherwise

failed to accept and act upon directions given by com-

plainants. A secondary issue is whether complain-

ants were suited to trading futures contracts. Again,

there is nothing in the record to show that respond-

ents violated any suitability rule in dealing with eom-

plainants. Under these circumstances, I find the di-

rective that respondents prepare a proposed order

appropriate.

Findings of Fact:

1. Complainant William Schor is a mature, intelli-

gent individual and is the president of complainant

MSA, a mortgage banking company. He has had

eighteen years experience in the mortgage banking

!

47a

business. (Tr. 109, 145). Prior to opening his ac-

count with respondent ContiCommodity Services, Inc.

(“Conti”), Schor had substantial experience in trad-

ing GNMA and other financial futures through Horn-

blower & Weeks and Merrill Lynch. (Tr. 145; Resp.

Ex. 16). After opening accounts with respondent

Conti, and during the time he traded the Conti ac-

counts, Schor also traded financial futures with an-

other futures commission merchant, Stotler and Co.

(Tr. 145; Resp. Ex. 12, 13).

2. Complainant MSA is 90 percent owned by com-

plainant Schor. (Tr. 109). Complainant Schor per-

sonally handled all of the financial futures trading

for accounts of MSA. (Tr. 15, 165).

3. Respondent Conti is a futures commission mer-

chant registered with the Commission.

4. Respondent Richard L. Sandor is vice-president

of Conti and head of a Conti division specializing in

the trading of financial futures.

5. Complainants Schor and MSA opened accounts

at Conti, through Sandor, on September 2, 1976, and

thereafter engaged in a number of trades in the ac-

counts. (Tr. 46).

6. At the time complainants opened their accounts

with Conti, complainant Schor had a personal net

worth of $235,000, not counting his 90 percent own-

ership of complainant MSA. (Tr. 146).

7. By 1978, the net worth of MSA was also $235,-

000 (Tr. 148), and on October 1, 1979, it was ap-

proximately $271,000 (Tr. 118), giving complainants

a combined net worth substantially in excess of $400,-

000 during 1979.

8. Complainant Schor’s annual salary in 1978 and

1979 was $50,000, and in each year he received other

benefits worth $10,000 to $15,000 and a bonus of

48a

approximately $25,00. (Schor Dep. 143-45). Com-

plainant MSA enjoyed gross profits of over $1,000,-

000 in 1978 (Schor Dep. 136), and showed a rela-

tively small pre-tax loss in 1979 due only to the

trading losses it experienced in the futures market

(Schor Dep. 141-42).

9. Respondent Sandor had ample basis for con-

sidering complainant Schor financially secure and

knowledgeable about both the mortgage banking busi-

ness and the GNMA futures market. (Tr. 293-94).

10. As of Monday, October 8, 1979, the accounts

traded by complainant Schor with respondent Conti

had a net position of 25 contracts long in GNMA

futures traded on the Chicago Board of Trade

(“CBT”), and 10 contracts long in GNMA futures

traded on the American Commodity Exchange

(“ACE”). As of the same date, accounts traded by

complainant Schor at Stotler had a net position of

10 contracts long in CGT GNMA futures. (Tr. 153;

Compl. Ex. 8, 9; Resp. Ex. 12, 13).

11. Complainant Schor had entered into the net

long positions at Conti several months prior to Octo-

ber 8, 1979, and prior to October 8, these positions

had incurred substantial declines in equity. (Compl.

Ex. 6, 7, 8, 9).

12. On Saturday, October 6, 1979, the Federal Re-

serve Board announced a number of decisions de-

signed to strengthen the dollar. (Tr. 268). There

was no consensus among financial traders as to the

impact these decisions would have of the price of

financial futures. (Tr. 268-69, 295-96).

13. During the morning of October 8, 1979, com-

plainant Schor placed a series of telephone calis to

personnel of respondent Conti concerning his account

and that of MSA. (Tr. 121-30, 232-35, 259-265;

Resp. Ex. 1, 2).

49a

14. At the time Schor initiated his conversations

with Conti personnel, he was considering a plan to

reduce his risk by short selling, but he did not know

what positions were held in the complainants’ ac-

counts at Conti. (Tr. 152, 156-57). Conti had pro-

vided Schor with regular account statements reflect-

ing this information (Compl. Ex. 1, 2), and these

statements were readily accessible to Schor on Octo-

ber 8. (Tr. 157).

15. In telephoning Conti, Schor initially wanted to

consult with respondent Sandor, who was out of the

office that day. (Tr. 121). In Sandor’s absence, Schor

spoke at different times to three Conti account execu-

tives, John Richards on the CBT (Tr. 259-65), and

James Criswell (Resp. Ex. 1), and James Rutgers

(Resp. Ex. 2) on the ACE. Schor also spoke on two

occasions to Kathy Lynn Minervino, the operations

supervisor for Conti’s financial division. (Tr. 230,

232-35).

16. In his conversations with account executives,

Schor repeatedly asked for market information (Tr.

260, 262; Resp. Ex. 1, 2), and at one point asked

James Criswell to trade for him on a discretionary

basis, which Criswell declined to do. (Resp. Ex. 1,

2). However, Schor did not, in any of his conversa-

tions with Conti personnel on October 8, 1979, give

directions to place a specific order. (Tr. 157, 263).

Schor likewise placed no orders in the complainants’

accounts at Stotler on October 8. (Tr. 158).

17. Throughout the conversations between Schor

and Conti account executives on October 8, Conti

personnel were available for executing selling orders

from Schor, were willing to place such orders for him,

and repeatedly asked if Schor wished to place an

order. (Tr. 262-63; Resp. Ex. 1, 2).

50a

\

18. No Conti account executive told Schor that

the CBT markets were “locked” limit down, so that

trading was impossible. (Tr. 264-65). Schor chose

not to place short orders on October 8, because he

did not wish to sell at the prevailing market prices.

(Tr. 263; Resp. Ex. 1, 2).

19. At the time that complainants Schor and MSA

opened their accounts at Conti, Section 1.55 of the

Commission’s regulations was not in effect.

20. Complainants Schor and MSA have demon-

strated no failure on the part of respondents to dis-

close any relevant risk to them.

21. Respondent Sandor made no representation to

complainants that the market price for GNMA fu-

tures would not fall below a certain level.

22. In the customer agreements entered into by

complainants with respondent Conti, they agreed to

keep their accounts fully margined at all times and

to pay promptly on demand any deficits in their ac-

counts, together with interest and all costs of collec-

tion, including attorneys’ fees. (Resp. Ex. 4, 5, Jf 3,

4).

23. On October 9, complainants’ accounts were un-

dermargined; complainant Schor informed respond-

ents that complainants could not make further mar-

gin deposits to their accounts, and therefore respond-

ents liquidated the accounts pursuant to the customer

agreements. (Tr. 301-02).

24. After liquidation, there remained deficits in

the amount of $55,955.60 in the MSA account, and

$36,393.77 in the Schor account. (Resp. Ex. 6, 7).

Complainants refused demands from respondents to

pay the amount of the deficit, and these amounts re-

main owing. (Resp. Ex. 8).

\

5la

Discussion :

The allegations made by complainants fall into two

categories. First, they allege that Conti personnel

failed to execute selling orders that complainant Schor

attempted to place on October 8, 1979. On the basis

of this factual allegation, complainants allege fraud,

improper supervision of employees, and bucketing.

Respondents deny that Schor ever attempted to place

orders on October 8. The allegation thus essentially

presents a credibility question. I have found respond-

ents’ position more credible based on my assessment

of the demeanor of the witnesses and on the follow-

ing considerations:

1. Schor testified that he was falsely informed by

John Richards that all trading in FNMA futures had

ceased during the early morning of October 8, so that

no trades could be made. Schor testified that, based

on this advice, he determined not to place orders any-

where on October 8, and so did not telephone his

broker at Stotlar. Yet a telephone bill produced at

the hearing showed that Schor did telephone his

Stotler broker during the trading hours on the after-

noon of October 8.

2. Schor failed to place selling orders either at Stot-

ler or Conti during trading hours on October 9, even

though nothing allegedly told him by Conti person-

nel would have indicated that such trades could not

be made.

3. When Schor wrote to Conti on October 23, 1979,

to indicate that he would not pay the deficit in his

account, he made no mention of any false statements

by Conti personnel that GNMA trading had ceased

on October 8.

4. Schor admittedly made false allegations that

Stotler refused to accept orders placed by him on

52a

October 9, both in a letter to Stotler and in resisting

a claim for payment of deficits by Stotler.

On the basis of all the evidence, it appears that

Schor telephoned Conti on October 8, hoping to dis-

cuss his account with Richard Sandor, and, when

Sandor was not present, Schor became upset and im-

patient and ultimately declined to place any market

orders until after the close of trading on October 9,

in the hope of a market rebound. In this process,

Schor acted voluntarily and respondents violated no

provisions of the Commodity Exchange Act or the

Commission’s regulations.

The second group of allegations made by complain-

ants concerns the handling of their accounts prior to

October 8, 1979. Complainants assert that they were

unsuitable for holding long GNMA futures contracts,

that they were not given adequate risk disclosure by

respondents, and that they were misled by assur-

ances from Richard Sandor that the market prices

for GNMA futures would not drop below a certain

level.

Respondents have cited Jensen v. Shearson Hayden

Stone, Inc., 2 Comm. Fut. L. Rep. (CCH { 21,062

(1980)) for the proposition that complainants were

eminently suited to trade futures contracts. Com-

plainant Schor was a _ well-educated, experienced

trader in financial futures at the time he opened his

account with Conti. His business (mortgage bank-

ing) was closely related to the commodity (GNMAs)

he traded at Conti, and he and MSA had substantial

assets and income. In deciding Jensen, Judge Shipe

noted as follows:

In September 1977, the Commission published a

proposed suitability rule. 42 C.F.R. \ 44750.

However, this rule was not adopted because of

53a

the recognition that suitability was implicit in

the existing anti-fraud rules and efforts to fur-

ther codify the concept would risk narrowing its

scope. 48 F.R. 31889.

On October 9, 1981, the Commission denied Jensen’s

application for review, and made the following ob-

servation in a footnote:

In particular, the Commission wishes to disavow

the judge’s reference to, and discussion of, suit-

ability at pp. 16-19 of the initial decision.

Jensen, therefore, may not be cited as authority on

the issue of suitability. Nevertheless, I agree with

respondents that complainants were eminently suited

to trade the futures contracts involved in this pro-

ceeding, and that complainants meet any explicit or

implicit suitability standard that may exist.

Being experienced in trading financial futures,

complainants needed no particular statement of the

risks involved in such trading, and did not claim at

the hearing that they were ignorant of any particu-

lar risks that should have been disclosed. Moreover,

complainants did receive a letter from Conti, at the

time they opened their accounts, outlining in gen-

eral the risks of commodity trading. It appears that

complainants’ only argument as to risk disclosure is

that they should have been provided with the dis-

closure form required by Section 1.55 of the Commis-

sion’s Rules and Regulations, 17 C.F.R. § 1.55. This

regulation, however, applies only to accounts opened

after October 1, 1978, more than two years after the

opening of complainants’ accounts, and so has no ap-

plication here.

As to Richard Sandor’s alleged statements regard-

ing the lowest price the market would reach, I found

54a

complainant Schor’s testimony vague and uncertain,

indicating that at most he had been given a best guess

prognosis. This conclusion is buttressed by the fact

that complainants continued to hold their long posi-

tions for over a month after the market went below

the level allegedly declared to be the bottom. In the

general handling of complainants’ accounts, there

has again been shown no violation of the Commodity

Exchange Act or the Comission’s regulations.

Thus, respondents are entitled to recover the defi-

cit balances in complainants’ accounts, as provided

by their customer agreements and Commission regu-

lation 12.23(b)(2). The amount of these deficits is

not disputed. Respondents, in addition, seek pre-

judgment interest and reasonable attorneys’ fees in-

curred in collecting the deficits, as is also provided by

the customer agreements. Pursuant to Sherwood v.

Madda Trading Co., [1977-80 Transfer Binder]

Comm. Fut. L. Rep. (CCH) § 20,728 (1979), attor-

neys’ fees may not be awarded in a reparations pro-

ceeding in the absence of bad faith or vexatious con-

duct during the course of a proceeding. Under ordi-

nary circumstances, interest on awards is set at 12

percent per annum. Respondents seek only 5 percent

per annum, and I see no reason to disturb any under-

standing that may exist between the parties as to this

issue.

Complainants contend in their objections filed Oc-

tober 16, 1981, that the Commodity Exchange Act, as

amended, does not empower this Commission to make

an award for anything other than damages resulting

for a violation of the Act, and that Commission reg-

ulation 12.23 is without statutory authority. This

may be a neat legal point. However, an administra-

tive law judge is bound by agency regulations and

55a

published agency policies. The rules provide for

counterclaims. I have determined that a valid debit

balance exists on the complainants’ accounts, and

have awarded judgment for the debit balances to re-

spondents.

Conclusions of Law:

1. Complainants have failed to establish that re-

spondents committed any violation of the Commodity

Exchange Act, as amended, or of the regulations en-

acted thereunder, in the handling of complainants’

accounts.

2. Complainants are liable to pay to respondent

Conti the amount of the deficits in their accounts,

1.€., $55,955.60 from complainant MSA and $36,393.77

from comj:lainant Schor, together with pre-judgment

interest at the rate of 5 percent per annum.

ORDER

Complainant MSA is ordered to pay $55,955.60 and

complainant Schor is ordered to pay $36,393.77, to-

gether with 5 percent interest on these sums from

November 1, 1979, and $25.00 each to cover the

filing fee, to respondent Conti within 30 days of the

date of this decision. The complaints of Schor and

MSA are dismissed.

Dated this 19th day of October 1981

/s/ George H. Painter

GEORGE H. PAINTER

Administrative Law Judge

56a

APPENDIX D

UNITED STATES COURT OF APPEALS

FOR THE DISTRICT OF COLUMBIA CIRCUIT

September Term, 1983

No. 83-1703

WILLIAM T. SCHOR, PETITIONER

Vv.

COMMODITY FUTURES TRADING COMMISSION,

and

CONTICOMMODITY SERVICES, INC.

and

RICHARD L. SANDOR, RESPONDENTS

No. 83-1704

MORTGAGE SERVICES OF AMERICA, PETITIONER

Vv.

COMMODITY FUTURES TRADING COMMISSION,

and

CONTICOMMODITY SERVICES, INC.

and

RICHARD L. SANDOR, RESPONDENTS

[Filed Aug. 10, 1984]

57a

PETITIONS FOR REVIEW OF AN ORDER OF

THE COMMODITY FUTURES TRADING

COMMISSION

Before: GINSBURG, Circuit Judge, MACKINNON,

Senior Circuit Judge, and PARKER,“

United States District Judge for the Dis-

trict of Columbia

JUDGMENT

These causes came on to be heard on the petitions

for review of an order of the Commodity Futures

Trading Commission, and were argued by counsel.

On consideration thereof, it is

ORDERED and ADJUDGED, by this Court, that

the order of the Commodity Futures Trading Com-

mission under review herein is hereby affirmed in

part, vacated in part, and reversed in part, and these

cases are remanded for further proceedings, all in

accordance with the Opinion for the Court filed

herein this date.

Per Curiam

For The Court

/s/ George A. Fisher

GEORGE A. FISHER

Clerk

Date: August 10, 1984

Opinion for the Court filed by Circuit Judge Gins-

burg.

* Sitting by designation pursuant to 28 U.S.C. § 292(a).

58a

APPENDIX E

UNITED STATES COURT OF APPEALS

FOR THE DISTRICT OF COLUMBIA CIRCUIT

September Term, 1984

No. 83-1703

WILLIAM T. SCHOR, PETITIONER

Vv.

COMMODITY FUTURES TRADING COMMISSION,

and CONTICOMMODITY SERVICES, INC.,

and RICHARD L. SANDOR, RESPONDENTS

And Consolidated Case No. 83-1704

[Filed Oct. 26, 1984]

BEFORE: Ginsburg, Circuit Judge, MacKinnon,

Senior Circuit Judge, and Parker*, Dis-

trict Judge, United States District

Court for the District of Columbia

* Sitting by designation pursuant to Title 28 U.S.C.

§ 292(a).

59a

ORDER

On consideration of the Petitions for Rehearing of

the Commodity Futures Trading Commission and of

Conticommodity Services, Inc., filed September 24,

1984, it is

ORDERED, by the Court, that the aforesaid Pe-

titions for Rehearing are denied.

Per Curiam

For the Court:

GEORGE A, FISHER, Clerk

By: /s/ Robert A. Bonner

ROBERT A. BONNER

Chief Deputy Clerk

60a

} APPENDIX F

UNITED STATES COURT OF APPEALS

FOR THE DISTRICT OF COLUMBIA CIRCUIT

September Term, 1984

No. 83-1703

WILLIAM T. SCHOR, PETITIONER

v.

COMMODITY FUTURES TRADING COMMISSION,

and CONTICOMMODITY SERVICES, INC.,

and RICHARD L. SANDOR, RESPONDENTS

And Consolidated Case No. 83-1704

[Filed Oct. 26, 1984]

Before: ROBINSON, Chief Judge; WRIGHT, TAMM,

WILKEY, WALD, MIKVA, EDWARDS, GINs-

BURG, BorK, SCALIA and STARR, Circuit

Judges

ORDER

The Suggestions for Rehearing en banc of the Com-

modity Futures Trading Commission and Conticom-

* Sitting by designation pursuant to 28 U.S.C. § 292(a).

'

6la

modity Service, Inc., filed September 24, 1984, have

been circulated to the full Court and a majority of

the Judges in regular active service have not voted in

favor of either. On consideration of the foregoing, it

18 i

ORDERED, by the Court, en banc, that the afore-

said Suggestions are denied.

Per Curiam

For the Court:

Gzorce A. FISHER, Clerk

By: /s/ Robert A. Bonner

RoBertT A. BONNER

Chief Deputy Clerk

Circuit Judges Wald and Starr would grant the sug-

gestions for rehearing en banc. A statement of Cir-

cuit Judge Wald, concurred in by Circuit Judge

Starr, is attached. \

62a

Statement of Judge Wald, concurred in by Judge

Starr:

I would hear this case en banc because it results

in a serious evisceration of a congressionally crafted

scheme for compensating victims of Commodity Fu-)

tures Trading Act (“CFTA”) violations. The rep-

arations provision has, since 1974, provided an ad-

ministrative forum as an alternative to the courts for

such victims to recover their losses. As a practically

necessary corollary, it empowers the agency to decide

counterclaims arising out of the transactions com-

plained of and affecting the account from which the

reparations will be paid. To bifurcate, as the panel’s

decision now requires, the main reparations proceed-

ing from counterclaims between the same parties

makes no sense in the fast-moving money world and

will realistically mean that the courts, not the agency,

will end up dealing with all of these claims. The

faster and less expensive alternative forum will be

decimated.

The panel reasoned that, because Congress did not

explicitly discuss the Article III issues raised by

Northern Pipeline vy. Marathon Pipeline Co., 458 U.S.

50 (1981), during its deliberations in 1974 (pre-

Marathon) and 1982 (post-Marathon), it could not

have meant to give the Commodity Futures Trading

Commission (“CFTC”) jurisdiction over common

law-type counterclaims. But there is no doubt that at

both times, and especially in 1982, Congress expressly

meant to convey such jurisdiction. See, e.g., H.R.

Rep. No. 975, 93rd Cong. 2d Sess. 23 (1974); H.R.

Rep. No. 565 97th Cong., 2d Sess. 55 (1982). To

suggest otherwise is to blink reality. In fact, the 1982

Congress that explicitly extended counterclaim juris-

63a

diction to the CFTC simultaneously considered a

wealth of bankruptcy proposals in the aftermath of

Marathon. See, e.g., King, The Unmaking of a Bank-

ruptcy Court: Aftermath of Northern Pipeline v.

Marathon, 40 Wash. & Lee L. Rev. 99 (1983). Thus

its ignorance of the Article III issue is hardly to be

presumed.

In the face of this clear Congressional intent to

include all counterclaims arising from the same

transaction in administrative reparations proceed-

ings, this court should squarely face the issue of

whether such a statutorily crafted scheme is uncon-

stitutional. I hesitate to say yes in view of the “some-

what dense history of [this] constitutional quandry.”

Marathon, 458 U.S. at 112 (White, J., dissenting).

Indeed, admission to the CFTC administrative forum

is by choice of the complainant; jurisdiction over

common law claims comes only by way of counter-

claims arising out of the main reparations claim

based on the federal violation. Cf. Crowell v. Benson,

285 U.S. 22 (1932). Petitioners to the CFTC forum,

like Schorr, plainly take notice of the counterclaim

risk. Moreover, CFTC petitioners presently enjoy a

private right of action under the CFTA in federal

courts. The choice of an alternative forum—here the

CFTC—might well constitute litigant consent suffi-

cient to raise a significant argument that the CFTC

is constitutional. See Federal Magistrates and the

Principles of Article III, 97 Harv. L. Rev. 1947,

1952-54 (1984) (noting that the Court intended that

consent may be relevant in determining whether Arti-

cle III has been violated).

In sum, this is, so far as I know, the first major

extension of Marathon to a congressionally created

compensation scheme enacted as an alternative to

64a

court adjudication in a specialized financial area in

which federal jurisdiction is primary, in which the

common law counterclaims are incidental and arise

out of this main jurisdiction, and in which access to

the adjudicative forum is by consent and choice of

the complainant. The panel’s reasoning has fatal im-

plications for other alternative administrative forums

to the courts in specialized areas. I believe the case

deserves en banc consideration.

65a

APPENDIX G

1. Article III, Section 1, Clause 1 of the United

States Constitution provides:

The judicial Power of the United States, shall

be vested in one supreme Court, and in such in-

ferior Courts as the Congress may from time to

time ordain and establish.

2. Section 14 of the Commodity Exchange Act, 7

U.S.C. (& Supp. V 1981) 18, provided:

Complaints against registered persons

(a) Petition

Any person complaining of any violation of

any provision of this chapter or any rule, regu-

lation, or order thereunder by any person who

is registered or required to be registered under

section 6d, 6e, 6] or 6m of this title may, at any

time within two years after the cause of action

accrues, apply to the Commission by petition,

which shall briefly state the facts, whereupon,

if, in the opinion of the Commission, the facts

therein contained warrant such action, a copy

of the complaint thus made shall be forwarded

by the Commission to the respondent, who shall

be called upon to satisfy the complaint, or to

answer it in writing, within a reasonable time

to be prescribed by the Commission.

(b) Investigation and hearing

If there appear to be, in the opinion of the

Commission, any reasonable grounds for inves-

tigating any complaint made under this section,

the Commission shall investigate such complaint

66a

and may, if in its opinion the facts warrant such

action, have said complaint served by registered

mail or by certified mail or otherwise on the

respondent and afford such person an opportu-

nity for a hearing thereon before an Administra-

tive Law Judge designated by the Commission in

any place in which the said person is engaged in

business: Provided, That in complaints wherein

the amount claimed as damages does not exceed

the sum of $5,000, a hearing need not be held

and proof in support of the complaint and in sup-

port of the respondent’s answer may be supplied |

in the form of depositions or verified statements

of fact.

(c) Determination

After opportunity for hearing on complaints

where the damages claimed exceed the sum of

$5,000 has been provided or waived and on com-

plaints where damages claimed do not exceed

the sum of $5,000 not requiring hearing as pro-

vided herein, the Commission shall determine

whether or not the respondent has violated any

provision of this chapter or any rule, regula-

tion, or order thereunder.

(d) Bond requirement when complainant is non-

resident; waiver

In case a complaint is made by a nonresident

of the United States, the complainant shall be

required, before any formal action is taken on

his complaint, to furnish a bond in double the

amount of the claim conditioned upon the pay-

ment of costs, including a reasonable attorney’s

67a

fee for the respondent if the respondent shall

prevail, and any reparation award that may be

issued by the Commission against the complain-

ant on any counterclaim by respondent: Pro-

vided, That the Commission shall have author-

ity to waive the furnishing of a bond by a com-

plainant who is a resident of a country which

permits the filing of a complaint by a resident

of the United States without the furnishing of

a bond.

(e) Reparations

If after a hearing on a complaint made by

any person under paragraph (a) of this section,

or without hearing as provided in paragraphs

(b) and (c) of this section, or upon failure of

the party complained against to answer a com-

plaint duly served within the time prescribed, or

to appear at a hearing after being duly notified,

the Commission determines that the respondent

has violated any provision of this chapter, or any

rule, regulation, or order thereunder, the Com-

mission shall, unless the offender has already

made reparation to the person complaining, de-

termine the amount of damage, if any, to which

such person is entitled as a result of such viola-

tion and shall make an order directing the offen-

der to pay to such person complaining such

amount on or before the date fixed in the order.

If, after the respondent has filed his answer to

the complaint, it appears therein that the re-

spondent has admitted liability for a portion of

the amount claimed in the complaint as damages,

the Commission under such rules and regulations

as it shall prescribe, unless the respondent has

68a

already made reparation to the person complain-

ing, may issue an order directing the respondent

to pay to the complainant the undisputed amount

on or before the date fixed in the order, leaving

the respondent’s liability for the disputed

amount for subsequent determination. The re-

maining disputed amount shall be determined in

the same manner and under the same procedure

as it would have been determined if no order had

been issued by the Commission with respect to

the undisputed sum.

(f) Enforcement of reparation award

-If any person against whom an award has

been made does not pay the reparation award

within the time specified in the Commission’s

order, the complainant, or any person for whose

benefit such order was made, within three years

of the date of the order, may file a certified copy

of the order of the Commission, in the district

court of the United States for the district in

which he resides or in which is located the prin-

cipal place of business of the respondent, for en-

forcement of such reparation award by appro-

priate orders. The orders, writs, and processes

of such district court may in such case run, be

served, and be returnable anywhere in the United

States. The petitioner shall not be liable for

costs in the district court, nor for costs at any

subsequent state of the proceedings, unless they

accrue upon his appeal. If the petitioner finally

prevails, he shall be allowed a reasonable attor-

ney’s fee, to be taxed and collected as a part of

the costs of the suit. Subject to the right of

appeal under paragraph (g) of this section, an

69a

order of the Commission awarding reparations

shall be final and conclusive.

(g) Review

Any order of the Commission entered hereun-

der sha!] be reviewable on petition, of any party

aggrieved thereby, by the United States Court

of Appeals for any circuit in which a hearing

was held, or if no hearing was held, any circuit

in which the appellee is located, under the pro-

cedure provided in section 9 of this title. Such

appeal shall not be effective unless within 30

days from and after the date of the reparation

order the appellant also files with the clerk of

the court a bond in double the amount of the

reparation awarded against the appellant condi-

tioned upon the payment of the judgment en-

tered by the court, plus interest and costs, in-

cluding a reasonable attorney’s fee for the ap-

pellee, if the appellee shall prevail. Such bond

shall be in the form of cash, negotiable securities

having a market value at least equivalent to the

amount of bond prescribed, or the undertaking

of a surety company on the approved list of sure-

ties issued by the Treasury Department of the

United States. The appellee shall not be liable

for costs in said court. If the appellee prevails,

he shall be allowed a reasonable attorney’s fee

to be taxed and collected as a part of his costs.

(h) Penalty

Unless the registrant against whom a repara-

tion order has been issued shows to the satis-

faction of the Commission within fifteen days

from the expiration of the period allowed for

70a

compliance with such order that he has either

taken an appeal as herein authorized or has

made payment in full as required by such order,

he shall be prohibited from trading on all con-

tract markets and his registration shall be sus-

pended automatically at the expiration of such

fifteen-day period until he shows to the satisfac-

tion of the Commission that he has paid the

amount therein specified with interest thereon to

date of payment: Provided, That if on appeal

the appellee prevails or if the appeal is dismissed

the automatic prohibition against trading and

suspension of registration shall become effective

at the expiration of thirty days from the date

of judgment on the appeal, but if the judgment

is stayed by a court of competent jurisdiction the

suspension shall become effective ten days after

the expiration of such stay, unless prior thereto

the judgment of the court has been satisfied.

(i) Effective date

The provisions of this section shall not become

effective until fifteen months after October 23,

1974: Provided, That claims which arise within

one year immediately prior to the effective date

of this section may be heard by the Commission

after such fifteen months period.

a ete i cl

Tla

3. Section 14 of the Commodity Exchange Act, 7

U.S.C. 18, provides:

Complaints against registered persons

(a) Petition for actual damages

Any person complaining of any violation of

any provision of this chapter, or any rule, regu-

lation, or order issued pursuant to this chapter,

by any person who is registered under this chap-

ter may, at any time within two years after the

cause of action accrues, apply to the Commission

for an order awarding actual damages proxi-

mately caused by such violation.

(b) Rules and regulations; control over right of

appeal

The Commission may promulgate such rules,

regulations, and orders as it deems necessary.or

appropriate for the efficient and expeditious ad-

ministration of this section. Notwithstanding

any other provision of law, such rules, regula-

tions, and orders may prescribe, or otherwise

condition, without limitation, the form, filing,

and service of pleadings or orders, the nature

and scope of discovery, counterclaims, motion

practice (including the grounds for dismissal of

any claim or counterclaim), hearings (including

the waiver thereof, which may relate to the

amount in controversy), rights of appeal, if any,

and all other matters governing proceedings

before the Commission under this section.

(c) Bond requirement when complainant is non-

resident; waiver

In case a complaint is made by a nonresident

of the United States, the complainant shall be

72a

required, before any formal action is taken on

his complaint, to furnish a bond in double the

amount of the claim conditioned upon the pay-

ment of costs, including a reasonable attorney’s

fee for the respondent if the respondent shall

prevail, and any reparation award that may be

issued by the Commission against the complain-

ant on any counterclaim by respondent: Pro-

vided, That the Commission shall have authority

to waive the furnishing of a bond by a complain-

ant who is a resident of a country which permits

the filing of a complaint by a resident of the

United States without the furnishing of a bond.

(d) Enforcement of reparation award

If any person against whom an award has

been made does not pay the reparation award

within the time specified in the Commission’s

order, the complainant, or any person for whose

benefit such order was made, within three years

of the date of the order, may file a certified copy

of the order of the Commission, in the district

court of the United States for the district in

which he resides or in which is located the prin-

cipal place of business of the respondent, for en-

forcement of such reparation award by appro-

priate orders. The orders, writs, and processes

of such district court may in such case run, be

served, and be returnable anywhere in the

United States. The petitioner shall not be liable

for costs in the district court, nor for costs at

any subsequent state of the proceedings, unless

they accrue upon his appeal. If the petitioner

finally prevails, he shall be allowed a reasonable

attorney’s fee, to be taxed and collected as a part

of the costs of the suit. Subject to the right of

73a

appeal under subsection (e) of this section, an

order of the Commission awarding reparations

shall be final and conclusive.

(e) Review

Any order of the Commission entered hereun-

der shall be reviewable on petition of any party

aggrieved thereby, by the United States Court

of Appeals for any circuit in which a hearing

was held, or if no hearing was held, any circuit

in which the appellee is located, under the pro-

cedure provided in section 9 of this title. Such

appeal shall not be effective unless within 30

days from and after the date of the reparation

order the appellant also files with the clerk of

the court a bond in double the amount of the

reparation awarded against the appellant condi-

tioned upon the payment of the judgment en-

tered by the court, plus interest and costs, in-

cluding a reasonable attorney’s fee for the ap-

pellee, if the appellee shall prevail. Such bond

shall be in the form of cash, negotiable securities

having a market value at least equivalent to the

amount of bond prescribed, or the undertaking

of a surety company on the approved list of sure-

ties issued by the Treasury Department of the

United States. The appellee shall not be liable

for costs in said court. If the appellee prevails,

he shall be allowed a reasonable attorney’s fee to

be taxed and collected as a part of his costs.

(f) Automatic bar from trading and suspension

for noncompliance; effect of appeal

Unless the party against whom a reparation

order has been issued shows to the satisfaction

T4a

of the Commission within fifteen days from the

expiration of the period allowed for compliance

with such order that either an appeal as herein

authorized has been taken or payment of the

full amount of the order (or any agreed settle-

ment thereof) has been made, such party shall

be prohibited automatically from trading on all

contract markets and, if the party is registered

with the Commission, such registration shall be

suspended automatically at the expiration of such

fifteen-day period until such party shows to the

satisfaction of the Commission that payment of

such amount with interest thereon to date of

payment has been made: Prov'ded, That if on

appeal the appellee prevails or if the appeal is

dismissed, the automatic prohibition against

trading and suspension of registration shall be-

come effective at the expiration of thirty days

from the date of judgment on the appeal, but if

the judgment is stayed by a court of competent

jurisdiction, the suspension shall become effective

ten days after the expiration of such stay, unless

prior thereto the judgment of the court has been

satisfied.

(g) Effective date

The provisions of this section shall not become

effective until fifteen months after October 23,

1974: Provided, That claims which arise within

one year immediately prior to the effective date

of this section may be heard by the Commission

after such fifteen months period.

75a

4. Section 6(b) of the Commodity Exchange Act,

7 U.S.C. (1976 ed.) 9, provided:

Exclusion of persons from privilege of “contract

markets”; procedure for exclusion; review by

court of appeals

If the Commission has reason to believe that

any person (other than a contract market) is

manipulating or attempting to manipulate or

has manipulated or attempted to manipulate the

market price of any commodity, in interstate

commerce, or for future delivery on or subject

to the rules of any contract market, or has will-

fully made any false or misleading statement of

a material fact in any registration application

or any report filed with the Commission under

this chapter, or willfully omitted to state in any

such application or report any material fact

which is required to be stated therein, or other-

wise is violating or has violated any of the pro-

visions of this chapter or of the rules, regula-

tions, or orders of the Commission thereunder,

it may serve upon such person a complaint stat-

ing its charges in that respect, which complaint

shall have attached or shall contain therein a

notice of hearing, specifying a day and place not

less than three days after the service thereof,

requiring such person to show cause why an

order should not be made prohibiting it from

trading on or subject to the rules of any con-

tract market, and directing that all contract

markets refuse all trading privileges to such

person, until further notice of the Commission,

and to show cause why the registration of such

person, if registered as futures commission mer-

76a

chant or any person associated therewith as de-

scribed in section 6k of this title, commodity

trading advisor, commodity pool operator, or as

floor broker hereunder, should not be suspended

or revoked. Said hearing may be held in Wash-

ington, District of Columbia, or elsewhere, before

the Commission, or before an Administrative

Law Judge designated by the Commission, which

Administrative Law Judge shall cause all evi-

dence to be reduced to writing and forthwith

transmit the same to the Commission. Upon evi-

dence received, the Commission may prohibit such

person from trading on or subject to the rules of

any contract market and require all contract

markets to refuse such person all trading privi-

leges thereon for such period as may be specified

in the order, and, if such person is registered as

futures commission merchant or any person as-

sociated therewith as described in section 6k of

this title, commodity trading advisor, commodity

pool operator, or as floor broker hereunder, may

suspend, for a period not to exceed six months,

or revoke, the registration of such person, and

may assess such person a civil penalty of not

more than $100,000 for each such violation. No-

tice of such order shall be sent forthwith by reg-

istered mail or by certified mail or delivered to

the offending person and to the governing boards

of said contract markets. After the issuance of

the order by the Commission, the person against

whom it is issued may obtain a review of such

order or such other equitable relief as to the

court may seem just by filing in the United

States court of appeals of the circuit in which

the petitioner is doing business a written peti-

tion, within fifteen days after the notice of such

T7a

order is given to the offending person praying

that the order of the Commission be set aside.

A copy of such petition shall be forthwith t ans-

mitted by the clerk of the court to the Commis-

sion and thereupon the Commission shall file in

the court the record theretofore made, as pro-

vided in section 2112 of title 28. Upon the filing

of the petition the court shall have jurisdiction to

affirm, to set aside, or modify the order of the

Commission, and the findings of the Commission

as to the facts, if supported by the weight of

evidence, shall in like manner be conclusive.

78a

5. Section 6(b) of the Commodity Exchange Act,

7 U.S.C. 9, provides:

Exclusion of persons from privilege of “contract

markets”; procedure for exclusion; review by

court of appeals

If the Commission has reason to believe that

any person (other than a contract market) is

manipulating or attempting *o manipulate or has

manipulated or attempted to manipulate the mar-

ket price of any commodity, in interstate com-

merce, or for future delivery on or subject to the

rules of any contract market, or has willfully

made any false or misleading statement of a ma-

terial fact in any registration application or any

report filed with the Commission under this chap-

ter, or willfully omitted to state in any such ap-

plication or report any material fact which is

required tu be stated therein, or otherwise in vio-

lating or has violated any of the provisions of

this chapter or of the rules, regulations, or or-

ders of the Commission thereunder, it may serve

upon such person a complaint stating its charges

in that respect, which complaint shall have at-

tached or shall contain therein a notice of hear-

ing, specifying a day and place not less than

three days after the service thereof, requiring

such person to show cause why an order should

not be made prohibiting it from trading on or

subject to the rules of any contract market, and

directing that all contract markets refuse all

trading privileges to such person, until further

notice of the Commission, and to show cause why

the registration of such person, if registered with

the Commission in any capacity, should not be

19a

suspended or revoked. Said hearing may be held

in Washington, District of Columbia, or else-

where, before the Commission, or before an Ad-

ministrative Law Judge designated by the Com-

mission, which Administrative Law Judge shall

cause all evidence to be reduced to writing and

forthwith transmit the same to the Commission.

Upon evidence received, the Commission may

prohibit such person from trading on or subject

to the rules of any contract market and require

all contract markets to refuse such person all

trading privileges thereon for such period as may

be specified in the order, and, if such person is

registered with the Commission in any capacity,

may suspend, for a period not to exceed six

months, or revoke, the registration of such per-

son, and may assess such person a civil penalty

of not more than $100,000 for each such viola-

tion. Notice of such order shall be sent forth-

with by registered mail or by certified mail or

delivered to the offending person and to the gov-

erning boards of said contract markets. After

the issuance of the order by the Commission, the

person against whom it is issued may obtain a

review of such order or such other equitable re-

lief as to the court may seem just by filing in the

United States court of appeals of the circuit in

which the petitioner is doing business, or in the

case of an order denying registration, the circuit

in which the petitioner’s principal place of busi-

ness listed on petitioner’s application for regis-

tration is located, a written petition, within fif-

teen days after the notice of such order is given

to the offending person praying that the order of

the Commission be set aside. A copy of such pe-

80a

tition shall be forthwith transmitted by the clerk

of the court to the Commission and thereupon

the Commission shall file in the court the record

theretofore made, as provided in section 2112 of

title 28. Upon the filing of the petition the court

shall have jurisdiction to affirm, to set aside, or

modify the order of the Commission, and the

findings of the Commission as to the facts, if

supported by the weight of evidence, shall in like

manner be conclusive.

8la

6. CFTC Regulation 12.23(b) (2), 17 C.F.R. 12.23

(1983), provided:

Response to complaint.

Within forty-five (45) days after the com-

plaint was forwarded by registered mail, certi-

fied mail, or otherwise to the registrant, or

within such further time as the Commission may

permit, each registrant shall either satisfy the

complaint or answer it in writing.

* * * * *

(b) Answer—

* * * * *

(2) Counterclaims. An answer may set forth

as a counterclaim facts alleging a violation and

a request for a reparation award that would be

a proper subject for a complaint under § 12.21

or any claim which at the time the complaint is

served the registrant has against the complain-

ant if it arises out of the transaction or occur-

rence or series of transactions or occurrences set

forth in the complaint.

82a

7. CFTC Regulation 12.19, 17 C.F.R. 12.19

(1984), provides:

Counterclaim. -

A registrant may, at the time of filing an an-

swer to a complaint, set forth as a counterclaim:

(a) Facts alleging a violation and a request for

a reparation award that would be a proper sub-

ject for a complaint under § 12.13 of these rules;

or (b) any claim which at the time the complaint

is served the registrant has against the complain-

ant if it arises out of the transaction or occur-

rence or series of transactions or occurrences set

forth in the complaint.

3X OV. S. GOVERNMENT PRINTING OFFiCl; 1985 461531 10191