California Federal Court Tosses CFTC Enforcement Action Against Precious Metals Dealer, Rejecting Commission View of “Actual Delivery” and “Manipulative or Deceptive Device”

The California federal court judge who, at the end of March, tentatively dismissed the enforcement action by the Commodity Futures Trading Commission against Monex Deposit Company and other defendants for alleged fraud in connection with their financed sale of precious metals to retail persons, issued a final order confirming the dismissal on May 1.

In his ruling, the judge – the Hon. James V. Selna – emphasized the two basic pillars of his tentative order, that: 

1. actual delivery of precious metals in financed transactions to retail persons falls outside the CFTC’s authority when ownership of real metals is legally transferred to such persons within 28 days even if the seller retains control over the commodities because of the financing beyond 28 days; and 
2. the CFTC cannot use the prohibition against persons engaging in any manipulative or deceptive device or contrivance in connection with the sale of any commodity in interstate commerce enacted as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act to prosecute acts of purported fraud except in instances of fraud‑based market manipulation.

(Click here for background on the CFTC enforcement action and an overview of the tentative order in the article, “California Federal Court Potentially Poised to Limit CFTC’s Dodd-Frank Fraud-Based Anti-Manipulation Authority in Monex Enforcement Action” in the April 22, 2018 edition of Bridging the Week.)

My View: As I indicated in the Legal Weeds section of my earlier article on this enforcement action, this decision has significant implications beyond precious metals. For example, it is very relevant for cryptocurrency exchanges that may desire to provide financing in connection with retail persons’ purchases of virtual currencies and propose to hold such commodities in so-called “multi-sig” wallets they control at least in part. It is also very relevant in considering the application of the CFTC’s Dodd-Frank granted authority to prosecute persons for alleged manipulative or deceptive devices or contrivances in connection with non-market-based fraud.

However, this is just a decision of one federal court in one district of California. It seems likely the CFTC will appeal this decision.