Purdy v. CFTC

Theodore Purdy Sr. (plaintiff) began investing in precious metals in 1972, purchasing Krugerrands and silver bars from Monex International (Monex) and storing the metals under his kitchen sink. Starting in 1980, Purdy began using leverage in his investment transactions, but he continued to place these transactions through Monex, which was a registered leverage-transaction merchant. In his first two months of making leveraged transactions, Purdy lost $14,000. Purdy retired in 1983 after selling his 50-year-old auto parts business, and he then decided to use all or some of the sale proceeds to continue to purchase leveraged contracts using Monex. In early 1983, the price of silver dropped by 50 percent overnight, causing Purdy to suffer huge losses. Instead of closing out his investments, however, Purdy invested more, believing that the market would bounce back. In early 1985, Purdy asked his account representative at Monex how he could go about recouping the losses. The representative suggested that Purdy hedge his long positions with short positions. Purdy followed this advice. Later that year, there were news reports that Brazil might default on foreign bank loans. Purdy’s account representative called to inform Purdy that the default could increase the price of silver and that the short positions would inhibit the profits from any rise in the price. Purdy authorized the sale of most of his short positions, but then Brazil ended up not defaulting. Purdy did not reinstate the short positions. Ultimately, from 1980 through 1985, Purdy gave Monex $1,313,323 but only withdrew $675,614 in precious metals or funds, and Monex charged $217,934 in interest on the leverage accounts. After closing his accounts, Purdy filed a reparations complaint against Monex. As later amended, the complaint alleged that Monex committed bucketing, fraud, and numerous violations of the Commodity Exchange Act (CEA) and the rules of the Commodity Futures Trading Commission (CFTC). An administrative-law judge (ALJ) ruled against Purdy, concluding that he failed to prove by a preponderance of the evidence that Monex violated the CEA or any rules of the CFTC. Purdy appealed to the Commission, which affirmed the ALJ’s decision. Purdy then filed a petition for review of the Commission’s ruling with the United States Court of Appeals for the Fifth Circuit.