CFTC v. Co Petro Marketing Group, Inc.

Co Petro Marketing Group, Inc. (Co Petro) (defendant), a California-licensed gasoline broker, offered and sold contracts for the future purchase of petroleum products. The contracts, referred to as agency agreements, appointed Co Petro as agent to purchase the specified quantity of fuel at a fixed price for delivery at an agreed-on future date. Each agency agreement required that the customer pay a deposit calculated by reference to a percentage of the purchase price. There was no requirement that the customer accept delivery of the product. Rather, instead of taking physical delivery, the customer would later appoint Co Petro as the agent to sell the fuel. If the price rose since the time of purchase, Co Petro would remit the profit to the customer and return the deposit. If the price fell, Co Petro would deduct the loss from the deposit and remit any remaining deposit. Co Petro marketed the agency agreements as investment vehicles, and customers generally purchased the agency agreements solely for speculative purposes, with no intention of taking delivery of the fuel. The Commodity Futures Trading Commission (CFTC) (plaintiff) filed an action in federal district court against Co Petro, claiming that Co Petro violated the Commodity Exchange Act on the basis that the agency agreements were contracts for the sale of a commodity for future delivery and were thus required to be sold by or through a regulated contract market. Co Petro argued that its activities were not subject to CFTC jurisdiction because the agency agreements were cash forward contracts excluded from the Commodity Exchange Act’s coverage. The district court ruled in the CFTC’s favor, and Co Petro appealed.