U.S. Commodity Futures Trading Comm'n v. eFloorTrade, LLC

U.S. COMMODITY FUTURES TRADING COMMISSION, Plaintiff, v. EFLOORTRADE, LLC; and JOHN A. MOORE, Defendants.

16 Civ. 7544 (PGG)

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK

April 3, 2020

MEMORANDUM OPINION & ORDER

PAUL G. GARDEPHE, U.S.D.J.:

This is a civil enforcement action brought by the U.S. Commodity Futures Trading Commission ("CFTC") against Defendants eFloorTrade, LLC and John Moore. The CFTC alleges that, between October 2010 and October 2015 (the "Relevant Period"), Defendants (1) made false or misleading statements to the CFTC, in violation of 7 U.S.C. § 9(2); (2) failed to keep and produce required books and records, in violation of 7 U.S.C. § 4g(a), 17 C.F.R. §§ 1.31(a)(1) and (2), and 17 C.F.R. §§ 1.35(a)(1) and (3); (3) failed to make and/or prepare required records, in violation of 7 U.S.C. § 4g(a) and 17 C.F.R. § 1.35; and (4) failed to supervise, in violation of 17 C.F.R. § 166.3. (Cmplt. (Dkt. No. 1))

The Court granted the CFTC summary judgment as to liability. (Order (Dkt. No. 63)) The CFTC now moves for a permanent injunction and civil monetary penalties. (Pltf. Br. (Dkt. No. 93)) For the reasons stated below, the CFTC's motion for injunctive relief will be granted to the extent that Defendants will be (1) permanently enjoined from committing the conduct for which they were found liable; and (2) enjoined from registering with the CFTC or acting as a principal of any person registered with the CFTC for five years.¹ The Court will also impose an $80,000 civil monetary penalty on Defendants for the supervisory and recordkeeping violations (Counts Two through Four) and a $140,000 civil monetary penalty on Moore for making false statements to the CFTC (Count One).

BACKGROUND

I. FACTS²

A. The Parties

The CFTC is responsible for administering and enforcing the provisions of the Commodity Exchange Act (the "Act"), 7 U.S.C. §§ 1 et seq. (2012), and the regulations promulgated thereunder, 17 C.F.R. §§ 1.1 et seq. (the "Regulations"). (Order (Dkt. No. 63) at 1)

Defendant eFloorTrade provides trade execution services to customers who have subscribed to third party trading systems ("TPTSs") located throughout the United States, including in this District. (Id.) TPTS customers provide eFloorTrade with a letter of direction instructing the company to place buy or sell orders on their behalf. (Id.) When an eFloorTrade customer uses a TPTS, trading instructions or signals are electronically sent to eFloorTrade, and the company then electronically places orders on behalf of its customers with a futures commission merchant. (Id.) The instructions sent to eFloorTrade include the specific futures contract to trade, whether to buy or sell, and a stop price. (Id.) Since April 3, 2000, eFloorTrade has been registered with the CFTC as an "introducing broker."³ (Id.)

Defendant John Moore ("Moore") has been registered with the CFTC as an "associated person" of eFloorTrade since April 2000.⁴ (Id. at 3) He has been registered with the CFTC as an associated person and principal with other CFTC registrants since August 1988. (Id.)

eFloorTrade is wholly owned and operated by Moore and members of his immediate family, including his son Chris Moore and his wife Ann Moore. (Id.) Chris Moore monitors trades placed on behalf of TPTS customers, and is familiar with the records that eEloorTrade is required to make and keep concerning these customers. (Id.) Ann Moore is eFloorTrade's bookkeeper and handles certain compliance duties. (Id.)

Moore, who holds Series 3 (National Commodity Futures) and Series 30 (Branch Manager) licenses, is the managing member, majority owner, and chief compliance officer of eFloorTrade. (Id.) In those roles, Moore is responsible for (1) ensuring that eFloorTrade complies with its obligations under the Act and Regulations; (2) adopting and enforcingeFloorTrade's internal policies and procedures; (3) supervising eFloorTrade's employees, officers, and agents in all aspects of their duties; (4) preparing eFloorTrade's financial books and records; and (5) ensuring that eFloorTrade maintains trading instructions or signals received from TPTSs. (Id. at 3-4) Moore is also responsible for overseeing each day's trading activity; for calculating eFloorTrade's required net capital; for reconciling the prior day's executed transactions; for monitoring customer trading to detect unusual or suspicious activity; and for ensuring that eFloorTrade is paid commissions for the orders it places on behalf of its customers. (Id. at 4)

As a designated Branch Manager, Moore is also responsible for supervising sales solicitations, approving customer account forms, reviewing and responding to customer complaints, and training staff. (Id.)

During the Relevant Period, eFloorTrade received $2,438,012 in commissions and paid $28,140 in fees to futures commission merchants, resulting in net commissions of $2,409,872. (Id.) As of September 2015, eFloorTrade had approximately a hundred customers, including both self-directed customers who were trading pursuant to a TPTS, and customers with accounts managed by a trading advisor. (Id.)

Each year between 2010 and 2015, Moore signed the National Futures Association's annual self-examination questionnaire, affirming that eFloorTrade's written procedures were adequate to meet its regulatory responsibilities. (Id.)

B. Defendants' Regulatory Obligations

An introducing broker's recordkeeping obligations are set forth in Section 4g(a) of the Act, 7 U.S.C. § 6g(a) (2012) and Commission Regulations 1.31(a), 1.35(a) and (b), 17C.F.R. §§ 1.31(a), 1.35(a) and (b) (2013).⁵ (Id. at 4-5) Under the Act and Regulations, eFloorTrade must prepare and keep certain records, and produce them to the CFTC on demand. (Id. at 5 (citing 7 U.S.C. § 6g(a), 17 C.F.R. §§ 1.31(a), 1.35(a)) For example, Defendants are required to maintain complete and systematic records concerning their commodity futures business, including all pertinent data and memoranda of transactions, 17 C.F.R. § 1.35(a)(1), all orders (filled, unfilled, or cancelled), id., and order tickets or other written records of orders that eFloorTrade receives from or on behalf of a customer, 17 C.F.R. § 1.35(b)(1). (Id.) All required books and records must be kept for five years, and "records exclusively created and maintained on paper [must be] readily accessible for no less than two years" after their creation. 17 C.F.R. § 1.31(b). (Id.) eFloorTrade was also obligated to immediately provide, at the CFTC's request, "easily readable hard-copy image[s]" of required records, and to provide required records in an electronic format specified by the CFTC. (Id. (citing 17 C.F.R. § 1.31(a)(2), (b)(2)(ii)))

During the Relevant Period, eFloorTrade received signals or instructions for TPTS customers through an electronic trading platform known as TradeStation, which ran on a computer located in eFloorTrade's offices. (Id.) Under the Act and Regulations, eFloorTrade was obligated to keep or preserve all of the original signals or instructions received on TradeStation. (Id.) Moore also received a text message on his cell phone with a duplicate copy of the trading instructions or signals received from one particular TPTS, TrendFinder, and Defendants were required to retain these text messages under the Act and Regulations. (Id.)

Because Moore is a registered associated person with supervisory responsibilities, and because eFloorTrade is a registered introducing broker, both Defendants are obligated to diligently supervise the handling of customer accounts. (Id. at 6) Under Commission Regulation 166.3, 17 C.F.R. § 166.3, registrants such as Moore and eFloorTrade are required to diligently supervise the handling by their partners, employees, and agents of all activities relating to their business as a CFTC registrant. (Id.) Moreover, registrants such as Moore and eFloorTrade have an affirmative duty to establish, implement, and enforce an adequate supervisory system and must perform their supervisory duties diligently. (Id.)

C. Stipulation Concerning Defendants' Recordkeeping and Supervisory Obligations

In a July 25, 2017 stipulation (Stipulation (Dkt. No. 51-20)), the parties agreed that:

1. From October 2010 to October 2015 ("Relevant Period"), [eFloorTrade] violated its recordkeeping obligations under Section 4g(a) of the Commodity Exchange Act (the "Act") and Commission Regulations 1.31 and 1.35 when at various times, (through the conduct of Moore and/or [eFloorTrade]'s employees, officers and agents) it failed to keep full, complete, and systematic records of all transactions relating to its business of dealing in commodity futures for a period of five years from the date thereof, and to produce them for inspection to the CFTC. These records included, but are not limited to: (1) trading instructions or trading signals [eFloorTrade] electronically received from a third party trading system provider specifying the commodity interest to be bought or sold for a customer's account, and (2) a written record of all customer orders (filled, unfilled or cancelled).

2. Moore directly and indirectly controlled [eFloorTrade] and its employees. Pursuant to Section 13(b) of the Act, 7 U.S.C. § 13c(b), Moore is liable as a controlling person for [eFloorTrade]'s violations stipulated to in paragraph 1.

. . . .

4. [eFloorTrade] also violated Section 4g(a) of the Act and Regulation 1.35 when at various times (through the conduct of Moore and/or [eFloorTrade]'s employees, officers and agents) it failed to prepare, immediately upon receipt, a written record of [eFloorTrade]'s customer's order including accountidentification and order number and record thereon, by timestamp or other timing device, the date and time, to the nearest minute, the order was received for its customer who subscribed to a third party trading system.

5. Moore directly and indirectly controlled [eFloorTrade] and its employees. Pursuant to Section 13(b) of the Act, 7 U.S.C. § 13c(b), Moore is liable as a

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