SCOTUS asked to reject CFTC’s proximate cause theory and authority to impose lifetime industry bans

By Brad Rosen, J.D.

Precious metals dealer Southern Trust Metals, Loreley Overseas Corporation, an overseas affiliate, and its principal Robert Escobio, in a petition for writ of certiorari, are asking the United States Supreme Court to overturn an Eleventh Circuit ruling that adopted the CFTC’s position with regard to its fraud determination and sanctions. In particular, the petitioners contend that the appellate court erred by deciding that foreseeability and reliance alone, absent any finding of loss causation are sufficient to establish proximate cause. Additionally, the petitioners are asking the high court to overturn lifetime industry bans, arguing that such injunctions constitute penalties which are unconstitutional in violation of separation-of-powers principles (Southern Trust Metals, Inc. v. CFTC, February 15, 2019).

District court ruling. The federal court for the Southern District of Florida found in favor of the CFTC that the corporate defendants and its principal Robert Escobio had defrauded its customers under the Commodity Exchange Act (CEA). Specifically, the court found that the defendants engaged in margined derivatives transactions while purporting to actually purchase precious metals on behalf of customers. The court enjoined the defendants from further violations and ordered payment of a $357,032 civil monetary penalty and $2,103,617 in customer restitution. As a controlling person, Escobio was found jointly and severally liable for Southern Trust’s violations of the antifraud provisions of the CEA and CFTC regulations.

Eleventh Circuit proceedings. In an initial ruling, an Eleventh Circuit panel upheld a district court judgment in favor the CFTC finding that defendants Southern Trust Metals, Inc., Loreley Overseas Corporation, and Robert Escobio violated the Commodities Exchange Act. That judgment was based on CFTC claims that the defendants failed to register as futures commission merchants, transacted the purchase and sale of contracts for the future delivery of a commodity future outside of a registered exchange, and promised to invest customers’ money in precious metals but instead invested the funds in futures. Notwithstanding, the appellate court rejected and vacated the portion of the judgment relating a restitution award for a group of investors whose losses were associated solely with the registration violations. That portion of the judgement was remanded to the district court.

A subsequent judgement of the appellate court was entered on July 12, 2018. That pleading is contained in Appendix A of the petition. The petitioners then sought a rehearing en banc which was denied by a ruling dated October 18, 2018 as set forth in Appendix D of the petition.

Petition for writ of certiorari. The petition, filed on February 15, 2019, asks the Court to consider the two following questions:

1. Whether foreseeability and reliance alone, without any proof of loss causation, satisfy Section 13a-1(d)(3)(A) of the Commodity Exchange Act’s proximate cause requirement, in contravention of the Supreme Court’s decisions in Bank of America Corp. v. City of Miami and Dura Pharmaceuticals, Inc, v. Broudo; and
2. Whether a lifetime industry ban is a penalty and therefore beyond a district court’s statutory and equity power to issue without violating separation-of-powers principles.

In their filing to the Supreme Court, the petitioners assert that the CEA limits restitution in enforcement actions to “losses proximately caused” by a violation of Section 13a-1(d)(3)(A) of the CEA. They contend that the Court’s 2017 decision in Bank of America Corp. v. City of Miami, Florida holds foreseeability is not enough to satisfy proximate cause. Moreover, they argue that establishing proximate cause under the Court’s 2005 decision, Dura Pharmaceuticals, Inc. v. Broudo requires a plaintiff to show loss causation, meaning “not only that had he known the truth he would not have acted but also that he suffered actual economic loss.” The petitioners contended that the Eleventh Circuit erred by ruling that foreseeability and reliance are all Section 13a-1(d)(3)(A) of the CEA requires to satisfy proximate cause and specifically held loss causation is not required.

The petitioners also contend that the Eleventh Circuit also erred by affirming a lifetime industry ban against them. They assert that the injunctive relief provisions of CEA Section 13a-1(a) authorize no such relief, and further note that the circuits are split on whether an injunction may be deemed to be a permissible penalty.

The case is No. 18-1123.