Friday, August 12, 2016

FCM let off the hook for not recording customer's phone call

By Anne Sherry, J.D.

The failure of futures commission merchant TransAct to record a customer's phone instructions did not give rise to a presumption in favor of the customer. The customer said that he told TransAct to cancel all of his working orders, but TransAct said it was told to cancel only some of them. The Seventh Circuit observed that TransAct had no legal or contractual obligation to record the phone call, and it deferred to the CFTC's credibility assessment finding TransAct's side of the story more plausible (Witter v. CFTC, August 10, 2016, Wood, D.).

Dispute over phone call. The customer was a mortgage broker, but the TransAct trades were his first foray into commodities trading. He contended that he called TransAct's customer support desk with instructions to (1) place a stop-loss order on his open position in the E-Mini S&P; and (2) cancel all seven of his working orders. According to the customer support representative, however, the instruction was to cancel three of the seven orders—those for Treasury and Dow Index futures contracts, but not the orders for E-Mini S&P contracts. The customer noticed the following day that his account value had dropped by $23,000, alerting him to the fact that his working orders had not been canceled.

Procedure before CFTC. The judgment officer in the CFTC's summary proceeding dismissed the customer's complaint, having found the TransAct representative's testimony more plausible and noted that the customer tended to confuse trading terms, like "position" and "order." The customer appealed to the full Commission, which remanded for further discovery on whether TransAct had actually recorded the call. Although TransAct conceded that it had the technology to record multiple calls, it explained that redirected calls did not get recorded and that this was the fate of the call in question. The judgment officer declined to draw an adverse inference from TransAct's inability to produce a recording and dismissed the complaint based on his original credibility assessment; the CFTC affirmed.

Customer not entitled to inference. In his appeal to the Seventh Circuit, the customer argued that he was entitled to an inference from TransAct's failure to produce a recording of the telephone call because TransAct was legally and contractually required to record the call. These contentions, however, were incorrect: no regulation requires an FCM to record phone instructions to cancel previously authorized orders to buy or sell. Furthermore, while TransAct's customer agreement secured consent to record calls, it did not require TransAct to do so.

TransAct testimony more credible. The Seventh Circuit also stood by the judgment officer's credibility assessment, which could be overturned only in extraordinary circumstances. On the contrary, the record amply supported the credibility ruling. Although the judgment officer found both sides' testimony to be sincere, "but leavened with a bit of self-interest," he noted that the customer tended to mix up trading terms. This was relevant, the appeals court wrote, to what the TransAct representative understood the customer to be asking of him. The terms the customer conflated at the hearing were directly related to the disputed call, and the judgment officer cited other reasons for finding TransAct's explanations more plausible, such as the fact that the customer support representative wrote his affidavit shortly after the disputed call and was more familiar with the telephone recording system.

The case is No. 15-3535.