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U. S. Commodity Futures Trading Commission v. Wilson

United States District Court, D. Massachusetts

July 17, 2014

U.S. COMMODITY FUTURES TRADING COMMISSION
v.
JOHN B. WILSON AND JBW CAPITAL LLC

Order Filed: May 16, 2014

For Commodity Futures Trading Commission, Plaintiff: W. Derek Shakabpa, LEAD ATTORNEY, Commodity Futures Trading Commission, New York, NY; David Acevedo, United States Commodity Futures Trading Commission, Division of Enforcement, New York, NY.

For John B. Wilson, JBW Capital LLC, Defendants: Philip M. Giordano, LEAD ATTORNEY, Reed & Giordano, P.A., Boston, MA; Garrett A. Marques, Reed & Giordano, P.A., Boston, MA.

For John B. Wilson, ThirdParty Plaintiff: Philip M. Giordano, LEAD ATTORNEY, Reed & Giordano, P.A., Boston, MA; Garrett A. Marques, Reed & Giordano, P.A., Boston, MA.

For JBW Capital LLC, ThirdParty Defendant: Philip M. Giordano, LEAD ATTORNEY, Reed & Giordano, P.A., Boston, MA; Garrett A. Marques, Reed & Giordano, P.A., Boston, MA.

OPINION

MEMORANDUM AND ORDER ON PLAINTIFF'S MOTION FOR RECONSIDERATION

Richard G. Stearns, UNITED STATES DISTRICT JUDGE.

On May 16, 2014, the court granted plaintiff Commodity Futures Trading Commission's (CFTC) motion for summary judgment against defendants John B. Wilson and JBW Capital LLC for violations of the Commodity Exchange Act (CEA), 7 U.S.C. § § 6m(1), 6b(a)(2)(i)-(iii), 6b(a)(1)(A)-(C),[1] and 6o(1)(A)-(B). The court granted the CFTC's request for injunctive relief, as well as its request for civil penalties pursuant to 7 U.S.C. § 13a-1(d)(1), and 17 C.F.R. § 143.8. The court denied the CFTC's request for the additional remedy of restitution. The court requested a proposed order from the CFTC, directing the calculation of civil penalties on a statutory per-violation basis.

On May 27, 2014, the CFTC filed a motion for partial reconsideration of the judgment " with respect to restitution." See Dkt. #68. Relying on the court's reference to FTC v. Verity Int'l, Ltd., 443 F.3d 48, 67 (2d Cir. 2006), the CFTC alleges that the court defied " First Circuit precedent" in declining to order restitution.

A motion for reconsideration of an order to grant summary judgment is treated as a motion under Fed.R.Civ.P. 59(e), and is appropriate only " in a limited number of circumstances." United States v. Allen, 573 F.3d 42, 53 (1st Cir. 2009). " Motions under Rule 59(e) must either clearly establish a manifest error of law or must present newly discovered evidence." F.D.I.C. v. World Univ. Inc., 978 F.2d 10, 16 (1st Cir. 1992). The manifest error exception " requires a definite and firm conviction that a prior ruling on a material matter is unreasonable or obviously wrong," Ellis v. United States, 313 F.3d 636, 648 (1st Cir. 2002), and " to prevail on a Rule 59(e) motion based on 'manifest error of law,' the moving party must demonstrate that errors were made which were so egregious that an appellate court could not affirm the district court's judgment." See Kelly v. City of Fort Thomas, Kentucky, 610 F.Supp.2d 759, 781 (E.D. Ky. 2009) (collecting cases).[2]

The CFTC has made no such showing. Rather, the CFTC iterates the arguments for restitution that were made in its summary judgment pleadings and cites First Circuit precedent essentially affirming the discretion of a district court to fashion a remedy tailored to the facts of a given case.[3] The additional cases cited by the CFTC neither compel an order of restitution as a matter of law, nor are the facts of those retail advertising cases analogous to those in this case. While the court was not persuaded by the CFTC's argument that restitution should be awarded, " [t]hat [a party] has a difference of opinion with the Court in this matter is not grounds for reconsideration under Rule 59(e)." Trabal Hernandez v. Sealand Servs. Inc., 230 F.Supp.2d 258, 260 (D. P.R. 2002). Consequently, the motion to reconsider is DENIED.

SO ORDERED.

Page 353

For Commodity Futures Trading Commission, Plaintiff: David Acevedo, United States Commodity Futures Trading Commission, Division of Enforcement, New York, NY.

For JBW Capital LLC, ThirdParty Defendant: Philip M. Giordano, LEAD ATTORNEY, Garrett A. Marques, Reed & Giordano, P.A., Boston, MA.

For Commodity Futures Trading Commission, Plaintiff: W. Derek Shakabpa, LEAD ATTORNEY, Commodity Futures Trading Commission, New York, NY.

OPINION

Page 354

MEMORANDUM AND ORDER ON PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT

Richard G. Stearns, UNITED STATES DISTRICT JUDGE.

The Commodity Futures Trading Commission (CFTC) accuses defendants John B. Wilson and JBW Capital LLC (JBW), of civil violations of the Commodity Exchange Act (CEA). The CFTC alleges that Wilson (and JBW, see § 2(a)(1)(B) of the CEA) violated 7 U.S.C. § § 6m(1), 6b(a)(2)(i)-(iii), 6b(a)(1)(A)-(C),[1] and 6o(1)(A)-(B) by (1) failing to register with the CFTC as a commodity pool operator (CPO) while operating such a pool, (2) knowingly and willfully making misrepresentations of material fact to the pool investor-participants, and (3) using means of interstate commerce to defraud and deceive the participants. The CFTC seeks summary judgment, an order of permanent injunction, a permanent trading ban, and a permanent registration ban, against Wilson and JBW. The CFTC also seeks the payment of restitution and civil monetary penalties. Wilson and JBW, for their

Page 355

part, argue that a material dispute over scienter precludes entry of summary judgment.[2]

BACKGROUND

JBW was registered as a Massachusetts limited liability company on July 23, 2007, and Wilson, a Massachusetts resident, was listed as its sole registered agent. See JBW Cert. of Org. (Dkt. #55-6 at 10-11). The JBW Operating Agreement stated that JBW's business purpose was to " invest in stocks, bonds, derivatives, commodity futures, financial futures, stock index futures, options on stocks, and options on futures." See JBW Operating Agmt. (Dkt. #55-5) ¶ 5. The Operating Agreement also stated that Wilson was the Manager of JBW and would be compensated for his services, and that, as Manager, he had " sole responsibility" over the investment and management of JBW's assets. See id. ¶ ¶ II(3) & II(6). Neither Wilson nor JBW was ever registered with the CFTC as a CPO, nor did either file a notice with the National Futures Association (NFA) claiming to be exempt from CFTC registration.

In September of 2007, Wilson accepted contributions for JBW from several investors. The initial investors in JBW were family members and acquaintances of Wilson, including Stephen Wilson (Wilson's brother), Peter Parsons, Thomas Trafton, Peter Trafton, and Jeyhsin Yao. In his affidavit in opposition to the CFTC's motion for summary judgment, Wilson refers to these initial investors as the " founders" of JBW. See Wilson Aff. (Dkt. #58-4) ¶ 2.

On September 10, 2007, Wilson opened a bank account for JBW at Sovereign Bank, and on September 12, 2007, he opened a trading account for JBW at MF Global, Inc. (MFG). Wilson deposited funds from JBW investors into the JBW bank account and then transferred the pooled funds to the MFG trading account. Wilson used the money to begin trading in commodity futures in October of 2007, and initially used an algorithm called the " Humphrey Program" to trade commodity futures.[3]

By December 31, 2007, JBW had thirteen pool participants. In March of 2008, JBW accepted funds from at least eight new pool participants. At some point, each of the investors in JBW was sent a " Certificate of Beneficial Interest" (CBI) purporting to show each investor's pro rata percentage share of the pooled funds. During the life of the unregistered pool, Wilson obtained over $2,000,000 from twenty-five pool participants (excluding himself), had total net trading losses of approximately $1,800,000, and returned approximately $227,000 to the investors.

It is undisputed that in operating JBW, Wilson used the telephone and emails.

Page 356

See Defs.' Resp. to Stmt. of Facts (Dkt. #59) ¶ 19. Wilson circulated periodic reports to JBW investors, including statements reporting JBW's Net Asset Value (NAV).

False and Misleading Statements

Wilson admitted to receiving daily and monthly statements of account from MFG, through which he conducted the trading on behalf of JBW. See Wilson Dep. 104:4-10, Sep. 22, 2011 (Dkt. #55-14) (Wilson 9/22/11 Dep.). Wilson also admitted to sending various emails to the pool participants containing information about the status of the pool, including updated NAV values. The following chart summarizes the emails sent by Wilson to pool participants prior to September of 2008.[4]

Date

NAV reported by Wilson

Actual JBW NAV

As of 11/30/07

$159,460.00

$159,460.00

12/21/07

$180,071.00

$177,385.00

3/01/08

$566,076.13

$553,523.00

5/30/08

$2,029,271.00

$1,041,399.00

On September 1, 2008, JBW's trading account at MFG reflected a net balance of approximately $2,558,347. On September 11, 2008, JBW experienced a net trading loss of approximately $1,045,632. Notwithstanding, on September 13, 2008, Wilson reported by email to JBW investors that " Today's NAV" was $2,475,941. See Slowly Decl., Ex. 12 (Dkt. #55-6 at 2). The actual NAV on September 13, 2008, was approximately $1,149,628. Wilson admits to circulating this email and it is undisputed that he knew that the $2,475,941 NAV figure was inaccurate. See Wilson Dep. 105:4-10, Nov. 20, 2013 (Dkt. #55-19) (Wilson 11/20/13 Dep.); cf. Defs.' Opp'n (Dkt. #58) at 15 (listing a plethora of allegedly disputed facts regarding whether Wilson committed " any fraudulent act," but failing to allege that Wilson did not know the actual NAV amount on September 13, 2008). On September 15 and 16, 2008, JBW experienced another net futures trading loss of over one million dollars. See Slowly Decl., Ex. 35 (Dkt. #55-7).

On September 22, 2008, Wilson again emailed the JBW pool participants (with the exception of Daniel Mann, a pool participant who had recently agreed to invest), admitting the September 11, 2008 loss, and noting that he had already spoken to each of the email recipients personally. He wrote:

[I] . . . want to again express my apologies for the remarkable loss I incurred. I also want to apologize for not reporting the $1M loss of 9/11 in my weekly report. My intention was not to deceive but to " roll" the loss into the next week and hopefully show some recovery. Clearly a recovery was not the case because I experienced the second major loss on the following Monday.

I will be sending a report later this month which will explain how I plan to recover from this. Each of you know this is my profession and only source of income. I will make a recovery and make every effort to make each investor whole.

Slowly Decl., Ex. 13 (Dkt. #64-1) (emphasis added). Wilson acknowledged writing

Page 357

this email. See Wilson 9/22/11 Dep. 220:21-222:13.

Prior to sending the September 22, 2008 email admitting the September 11 loss, Wilson welcomed Daniel Mann into JBW, emailing him on September 17, 2008, to confirm receipt of his $100,000 investment. Slowly Decl., Ex. 57 (Dkt. #55-10 at 6). Wilson admits that this email was sent after the September 11 losses, and that when he received the funds from Mann, he did not disclose the precipitous losses the fund had incurred during the previous few days. See Wilson 9/22/11 Dep. 220:4-16. Mann was also omitted from the September 22, 2008 confessional email that Wilson sent to the other pool participants.

At the end of September, Wilson sent an email to each of the investors with a " recovery plan." Wilson pledged to transfer $200,000 of his own funds to the trading account, stated that he would modify his " automated trading program" to contain a " stop loss order" feature, and that he would be soliciting new investor contributions, but that he would segregate the new investor contributions for purposes of his compensation. See Wilson 11/20/13 Dep. 112:17-114:11. Wilson admitted that he did not actually modify the program to include a stop-loss order feature, and admitted that he did not actually segregate new funds received (from Mann), contrary to the statements in his recovery plan e-mail. Id. 114:12-20.

On December 12, 2008, Wilson emailed an NAV update to Mann, falsely stating that Mann's investment in JBW was worth approximately $120,867, despite the fact that the NAV for the entire pool barely exceeded $42,000 (Wilson had incurred a net trading loss of approximately $161,875 on December 1, 2008, which he had not disclosed to Mann).

On December 15, 2008, Wilson emailed Mann a CBI, recognizing Mann's initial $100,000 capital contribution (from September). The CBI represented that Mann's percentage interest in JBW as of September 28, 2008, was 3.76% of the total fund. The actual NAV of ...


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