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CFTC v. FRANKWELL BULLION LTD.

August 14, 1995

COMMODITY FUTURES TRADING COMMISSION and THE COMMISSIONER OF THE STATE OF CALIFORNIA, Plaintiffs,
v.
FRANKWELL BULLION LTD., a Hong Kong corporation; FRANKWELL INVESTMENT SERVICES, INC., a California corporation; MAYWELL INVESTMENT SERVICES, INC., a California corporation; FRANKWELL INVESTMENT SERVICES (TEXAS) INC., a Texas corporation; and FRANKWELL MANAGEMENT SERVICE (NEW YORK) INC., a New York corporation, Defendants.



The opinion of the court was delivered by: D. LOWELL JENSEN

 I. BACKGROUND

 Litigation in the matter formally commenced June 20, 1994, when plaintiffs filed a motion seeking issuance of a temporary restraining order and appointment of a temporary receiver. The complaint charged a number of violations of federal and state law, contending that from August 22, 1991, defendants violated sections 5 and 6 of the federal Commodity Exchange Act, 7 U.S.C. §§ 1-25 ("the Act") by improperly engaging in commodities trades in the foreign currency and precious metals market. See Complaint at P 32.

 On June 21, 1994, plaintiffs appeared before the Court ex parte, and the sought relief was granted against defendants. The Court also ordered defendants at that time to show cause why a preliminary injunction should not issue. That matter was ultimately heard by the Court July 12, 1994. The Court denied plaintiff's motion for a preliminary injunction.

 Following submission of a report on distribution of funds by the temporary receiver in this matter, the Court terminated the temporary receivership created by this Court's Order of June 21, 1994. The Court directed the temporary receiver to file his final account and report, and request for compensation.

 Defendants presently move to dismiss the complaint or for summary judgment. They also move to amend their answer to assert the additional affirmative defense of preemption of state law claims. Plaintiffs' move for reconsideration of the Court's denial of their motion for a preliminary injunction, and move to strike certain of defendant's affirmative defenses. The temporary receiver moves for compensation.

 A. The Court's Denial of Preliminary Injunction

 In denying plaintiff's motion for a preliminary injunction, the Court addressed four primary areas: (1) whether defendants have engaged in the trading of precious metals; (2) whether defendants' contracts are "futures," which are regulated by the Commodities Exchange Act ("the Act"), or "spot trades," which are not; (3) whether, even assuming that the contracts were properly classified as "futures," they are nonetheless excluded from coverage of the act by virtue of the Treasury Amendment to the Act; and (4) whether plaintiffs presented evidence of "irreparable injury."

 The Court found that the "record is barren of any evidence that precious metals are or were actually traded by defendants." The Court noted that plaintiff's counsel ultimately conceded at oral argument that defendant have not engaged in such trading. The Court found plaintiffs' contention that it is unnecessary to bring forth evidence of any actual trades involving metals to be unavailing: "Nothing has been put before the court suggesting that the CFTC's jurisdiction is so vast as to encompass unfulfilled representations to engage in metals trading." Thus, the Court found that only those challenges to foreign currency trading, and not to precious metals trading, were properly before the court for purposes of the preliminary injunction.

 The Court then turned to a classification of defendants' contracts as "futures" or "spot trades." The Court found that a number of defining characteristics of futures contracts were absent in defendants' contracts. Mainly, there was no fixed delivery date or fixed price at which the customer had to liquidate the contract, unlike the typical futures contract. Moreover, the contract could be liquidated on the same day the purchase was made or at a later date, by automatically rolling over one's positions on a daily basis and liquidating at a future time. Thus, the Court held that the "apparent distinction between ordinary futures contracts and the contracts at issue renders suspect the allegations of plaintiff's complaint, such that it cannot be found at this time that plaintiffs are ultimately likely to succeed on the merits of their underlying complaint."

 Finally, the Court noted a "second obstacle inhibiting plaintiff's efforts to persuade the Court of this actions's merits":

 
Even were the Court to find that the contracts at hand were properly classified as "futures," it is possible they would be excluded from coverage of the Act by virtue of the Treasury Amendment to the Act.

 "The Court is unpersuaded at this time that plaintiffs' interpretation of the Amendment is appropriate." Thus, the Court denied the motion for a preliminary injunction.

 II. DISCUSSION

 A. Defendant's Motion to Dismiss or for Summary Judgment

 1. Parties' Arguments

 Defendants contend that "based on the law and this Court's findings" in denying plaintiff's motion for a preliminary injunction, "there is no issue whose resolution requires that this case proceed any further." Defendants claim that the Court has made the legal determination from undisputed evidence that the transactions in question are spot transactions, not futures transactions. Defendants note that the Court was presented with extensive briefing and evidence on both sides, and argues that summary judgment is therefore appropriate at this point. Defendants also argue that the transact ions are exempted from CFTC jurisdiction as a matter of law by virtue of the Treasury Amendment. Defendants contend that since the federal claims should be dismissed, the state law claims should be dismissed as well.

 Plaintiff counters that use of a Rule 12(b)(6) motion is inappropriate, and summary judgment is not warranted since there are genuine issues of material fact remaining and defendants are not entitled to summary judgment as a matter of law. Plaintiffs contend that this Court was incorrect regarding its legal conclusions in its prior order. Further, plaintiffs allege various genuine issues of material fact which remain for trial. Plaintiffs contend that it remains disputed whether there is an automatic daily "rollover" resulting from a "daily closing." Plaintiffs also claim that there is a genuine issue of material fact as to defendants' assertions regarding the price at which the Frankwell contracts are liquidated. Further, plaintiffs claim that there is a genuine issue of material fact as to whether defendants offered contracts in gold and silver.

 2. Legal Standard for Summary Judgment

 The Federal Rules of Civil Procedure provide for summary adjudication when "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the party is entitled to a judgment as a matter of law." Fed. R. Civ. P. 56(e).

 In a motion for summary judgment "if the party moving for summary judgment meets its initial burden of identifying for the court those portions of the materials on file that it believes demonstrate the absence of any genuine issues of material fact," the burden of production then shifts so that "the nonmoving party must set forth, by affidavit or as otherwise provided in Rule 56, 'specific facts showing that there is a genuine issue for trial.'" T.W. Elec. Service Inc., v. Pacific Elec. Contractors Ass'n, 809 F.2d 626, 630 (9th Cir. 1987) (citing Celotex Corp. v. Catrett, 477 U.S. 317, 91 L. Ed. 2d 265, 106 S. Ct. 2548 (1986)); Kaiser Cement Corp. v. Fischbach & Moore, Inc., 793 F.2d 1100, 1103-04 (9th Cir.), cert. denied, 479 U.S. 949, 93 L. Ed. 2d 384, 107 S. Ct. 435 (1986).

 3. Analysis

 Plaintiffs contend that defendants are liable under the Commodities Exchange Act for engaging in futures transactions in foreign currency and precious metals without conducting them on or ...


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