CFTC v. American Precious Metals L.L.C.

American Precious Metals, L.L.C. (APM) (defendant) was a company that purported to sell physical precious metals. Operations were managed by Harry Robert Tanner (defendant) and Sammy J. Goldman (defendant). APM described the investment as a leverage program. Customers were told that APM would sell them physical precious metals on a leveraged basis, that the loan was arranged through a company called Global Asset Management (Global), that the precious metals were physically stored in an independent facility, and that interest would accrue on the funds lent by Global. In reality, according to allegations by the Commodity Futures Trading Commission (CFTC), APM took a 40 percent commission and then sent the remaining funds to Global. Global then opened accounts in Global’s name, in which it held over-the-counter positions on margin in precious-metal derivatives. APM concealed the arrangement from its customers by generating fraudulent statements. The agreements that APM customers signed provided for an initial five-year term, followed by automatic five-year successive terms. Based on these allegations, the CFTC brought an action against APM for violation of § 19 of the Commodity Exchange Act (CEA), which prohibited the offering of certain margin trades. APM, Tanner, and Goldman moved to dismiss, arguing that the transactions did not fall within § 19 because they were shorter than the regulatorily prescribed minimum term of 10 years for leverage contracts. The CFTC responded that its jurisdiction under § 19 was not limited to leverage contracts. APM, Tanner, and Goldman pointed to three statements that the CFTC had previously made regarding the scope of § 19. First, in the preamble to a related regulation, the CFTC said, that “those transactions that do not meet the Commission’s definition of a leverage contract are not within the Commission’s regulatory jurisdiction under section 19.” Second, the CFTC’s general counsel once stated in a letter that “transactions that do not meet the Commission’s leverage contract . . . are not subject to regulation under section 19,” although the letter did also state that transactions must be examined case by case. Third, the CFTC previously issued an interpretive letter stating that leverage contracts were not subject to regulation under § 19.