United States Court of Appeals,

                                            Fifth Circuit.

                                            No. 91–4454.

                               Theodore PURDY, et al., Petitioners,

                                                  v.

              COMMODITY FUTURES TRADING COMMISSION, Respondent.

                                           Aug. 17, 1992.

Appeal from a decision of the Commodity Futures Trading Commission.

Before BROWN, KING and WIENER, Circuit Judges.

       JOHN R. BROWN, Circuit Judge:

       This dispute arose from a complaint to the Commodity Futures Trading Commission ("CFTC"

or "Commission") by an elderly investor who lost a fortune investing (one might say gambling) in

precious metal leverage contracts. After a judgment for the broker house by an Administrative Law

Judge ("ALJ"), and subsequent summary affirmation by the Commission, the investor appeals to this

court. Finding his complaints more at issue with the present state of the law, and not with any actual

violations, we affirm the decision of the Commission.



                                       The Road to Las Vegas

       Theodore Purdy Sr.1 is a self-employed businessman who sold his fifty-year-old auto parts

business and retired in 1983. At the time of his retirement, Purdy's business grossed $1.5 million

annually, and he paid himself approximately $150,000 a year. Both he and his son, Theodore Purdy,

Jr., have high school educations and, prior to their first dealings with Monex International ("Monex"),

had no investing experience.



       In 1972, Purdy started buying Krugerrands from Monex with cash, and stored the coins under


   1
    Theodore Purdy Sr. will be referred to as "Purdy." Teddy Purdy Jr. will be "Theodore Purdy,
Jr." The two combined will be "Purdys."
his kitchen sink. By 1980, he had purchased over 1,100 Krugerrands and some silver bars, all stored

under the sink. At this time John Mullins, one of Monex' account representatives, informed Purdy

about precious metal leverage accounts.



                                            The Rules of the Game

             Leverage contracts arrived in the late 1960s and early 1970s as a way for individual investors

to purchase precious metal coins or bars from coin dealers on a credit basis.2 An investor paid down

20–30 percent of the full purchase price plus sales commissions, and signed a credit agreement for

the balance, which stipulated interest rates and the possibility of margin calls if the commodity price

dropped.3



             Investment houses promoted leverage contracts as a hedge against inflation for individuals

who found futures markets undesirable. Futures require larger investments, are more volatile, and

are short-term in nature.4



             In 1974, Co ngress amended the Commodities Exchange Act5 ("CEA" or "the Act") to

establish the CFTC.6 The CFTC received exclusive jurisdiction over transactions involving "contracts

of sale of a commodity for future delivery." 7 U.S.C.A. § 2 (West Supp.1992). This exclusive

   2
   See Hearings on S. 2485, S. 2837, and H.R. 13113 Before the Senate Comm. on Agriculture,
Nutrition, and Forestry, 93d Cong.2d Sess., pt 3 at 748 (1974) (Statement of M. Martin Rom,
Chairman, International Precious Metals Corporation).
   3
     Hearings on S. 2391 Before Subcomm. on Agricultural Research and General Legislation of
the Senate Comm. on Agriculture, Nutrition, and Forestry, 95th Cong., 2d Sess. 625 (1978)
(statement of International Precious Metals Corporation). Hearings on H.R. 10285 Before the
Subcomm. on Conservation and Credit of the House Comm. on Agriculture, 95th Cong., 2d Sess.
719 (1978) (statement of International Precious Metals Corporation).
   4
       

Exchange Act, ch. 369, § 1, 42 Stat. 998 (1922); ch. 545, § 1, 49 Stat. 1491
(1936) (codified as amended at 7 U.S.C.A. §§ 1–24 (West 1980)).
   6
   Commodity Futures Trading Commission, Pub.L. No. 93–463, 88 Stat. 1389 (codified as
amended in scattered sections of 5 U.S.C.A. (West 1980) and 7 U.S.C.A. (1980)).
jurisdiction included regulation of leverage transactions in gold and silver bullion and bulk coins. 7

U.S.C.A. §§ 2, 15a (§ 15a repealed 1978) (West Supp.1992). Additionally, 7 U.S.C.A. § 15a

allowed the Commission to regulate any leverage contract it determined to be a contract for future

delivery.



          In 1978 Congress replaced 7 U.S.C.A. § 15a with 7 U.S.C.A. § 23(b) (West 1980), amended

by 7 U.S.C.A. § 23(b) (West Supp.1992).7 This legislation reinforced the Commission's authority

to regulate, as futures, any leverage transaction it determined to be a futures contract. 7 U.S.C.A.

§ 23(d) (West 1980), amended by 7 U.S.C.A. § 23(b) (West Supp.1992).



          The Commission has periodically exercised its regulatory powers over leverage contracts.

In 1975, it adopted Rule 30.03 (now Rule 31.3) to prohibit fraud in leverage transactions.8 In 1979

   7
    Futures Trading Act of 1978, Pub.L. No. 95–405, § 23, 92 Stat. 865, 876–877 (1978). The
Senate Report accompanying the bill that was eventually enacted identified the following
characteristics of leverage contracts:

                  (1) standard units, quality, and terms and conditions; (2) payment and
                  maintenance of "margin"; (3) closeout by an offsetting transaction or by delivery,
                  after payment in full; and (4) no right or interest in a specific lot of the
                  commodity. The leverage dealer is the principal to every transaction and functions
                  as a market maker. The leverage dealer, however, does not guarantee a
                  repurchase market and further reserves the right to cease operating as a market
                  maker or broker for the customer. Most customer commitments are covered or
                  "hedged" in futures, forwards, or physical inventory; most physical inventory,
                  however, is encumbered through bank loans. Leverage contract bid/ask prices are
                  determined by dealer adjustments to spot and futures market quotations.

          S.Rep. No. 850, 95th Cong., 2d Sess. 26 (1978), reprinted in 1978 U.S.C.C.A.N. 2087,
          2114.
   8
       The rule states in relevant part:

                  It shall be unlawful for any person ... (a) To employ any device, scheme, or artifice
                  to defraud, (b) To make any untrue statement of a material fact or to omit ... a
                  material fact necessary in order to make the statements made in the light of the
                  circumstances ... not misleading, or (c) To engage in any [conduct] which operates
                  ... as a fraud ... in connection with (1) an offer to make or the making of, any
                  transaction for the purchase, sale or delivery of [gold and silver bullion or bulk
                  coins] ... pursuant to ... a margin account, margin contract, leverage account, or
                  leverage contract ... or (2) the maintenance or carrying of any such contract.
the Commission imposed a moratorium on the entry of new firms offering leverage contracts. 17

C.F.R. §§ 31.1, 31.2 (1986).9 Firms actively selling leverage contracts prior to June 1, 1978 were

allowed to continue. 

Congress amended the Act, directing the Commission to establish regulations for

"leverage transaction merchants" handling gold and silver bullion and bulk coin transactions. 10

Congress also required the Commission to regulate leverage contracts as an entirely separate class

of transactions, distinct from futures contracts.11



              In 1984, the Commission adopted their final rules, codified at 17 C.F.R. Part 31. Part 31

defined a leverage contract, and also prescribed disclosure, minimum net capital, and cover

requirements. The Commission also continued the moratorium on the entry of new firms, and

required registration of existing firms, including Monex.



                                                 The Casino

              Monex is a registered leverage transaction merchant ("LTM") and commodity trading advisor

("CTA"). John Albrecht is a registered associated person ("AP") of Monex.12 Monex has actively


              17 C.F.R. § 31.3.
   9
    All references to 17 C.F.R. are to the 1986 edition unless noted otherwise, as this edition
contains the applicable CFTC rules relevant to this dispute.
   10
     Futures Trading Act of 1982, Pub.L. No. 97–444, § 234, 96 Stat. 2294 (codified as amended
at 7 U.S.C.A. § 23 (West Supp.1992)).
   11
        

transaction merchant" is defined in 17 C.F.R. § 1.3(oo) as "any individual,
association, partnership, corporation, trust or other person that is engaged in the business of
offering to enter into, entering into or confirming the execution of leverage contracts, or soliciting
or accepting orders for leverage contracts and who accepts leverage customer funds (or extends
credit in lieu thereof) in connection therewith."

                     A "Leverage contract" is defined in 17 C.F.R. § 31.4(w) as:

                            a contract, standardized as to terms and conditions, for the long-term (ten
bought and sold leverage contracts on precious metals since 1967.13 Monex operates like a typical

LTM as regulated by the Act. It buys and sells precious metals for individuals, either on a credit or

cash basis. Monex acts as a principal, not broker, for these transactions, and bases its prices on world

market conditions. If a buyer pays full price, then Monex delivers the actual precious metals to the

customer. If, however, the buyer elects a credit plan, then Mo nex establishes a ten year purchase


                       years or longer) purchase ("long leverage contract") or sale ("short
                       leverage contract") by a leverage customer of a leverage commodity which
                       provides for:

                       (1) Participation by the leverage transaction merchant as a principal in
                       each leverage transaction;

                       (2) Initial and maintenance margin payments by the leverage customer;

                       (3) Periodic payment by the leverage customer or accrual by the leverage
                       transaction merchant of a variable carrying charge or fee on the unpaid
                       balance of a long leverage contract, and periodic payment or crediting by
                       the leverage transaction merchant to the leverage customer of a variable
                       carrying charge or fee on the initial value of the contract plus any margin
                       deposits made by the leverage customer in connection with a short leverage
                       contract;

                       (4) Delivery of a commodity in an amount and form which can be readily
                       purchased and sold in normal commercial or retail channels;

                       (5) Delivery of the leverage commodity after satisfaction of the balance due
                       on the contract; and

                       (6) Determination of the contract purchase and repurchase, or sale and
                       resale prices by the leverage transaction merchant.

                "Commodity trading advisor" is defined in 17 C.F.R. § 1.3(bb) as "any person
        who, for compensation or profit engages in the business of advising others as to the value
        of or the advisability of trading in any [futures contract] ... or any leverage transaction ...
        or who for compensation or profit, and as part of a regular business, issues or promulgates
        analyses or reports concerning any of the foregoing."

               "Associated person" of an LTM is defined in 17 C.F.R. § 1.3(aa)(5) as an
        employee or agent "in any capacity which involves: (i) the solicitation or acceptance of
        leverage customers' orders ... for leverage transactions...." (emphasis added).

                 "Carrying charges for a leverage contract" are defined in 17 C.F.R. § 31.4(1) as:
        "all service and interest changes (sic) paid periodically by a leverage customer to a
        leverage transaction merchant, while a long leverage contract remains open."
   13
     For a general description of Monex's business operations similar to the operations here at
issue, see Moody v. Monex Int'l, Ltd. [1980 Transfer Binder] Fed.Sec.L.Rep. (CCH) ¶ 97,714,

(D.Utah 1980).
contract; financing the balance while the buyer pays periodic interest charges. Monex covers its

physical delivery obligations by maintaining inventory, and trading in the futures market.



        Monex operat ed as an LTM prior to June 1, 1978; therefore it was not affected by the

moratorium on new firms selling leverage contracts.          In 1984, when registration became a

requirement, all existing LTM's had to apply for registration before April. Monex filed its registration

application in August. The CFTC instituted action against Monex to enforce the application

requirement. While the CFTC reviewed Monex' application, it granted Monex the privilege of

continuing to operate as an LTM. This was standard practice while the Commission made a final

determination on an LTM's registration application. Albrecht, as an AP, also filed a tardy registration

application, and the Commission treated him in the same manner as Monex.



                                               The Play

        In 1980, Purdy began leveraged investing with Monex. At that time, John Mullins handled

Purdy's accounts. For each leveraged transaction made, Purdy received a Commodity Account

Agreement, which he signed and returned to Monex, and an Offering Statement (essentially a risk

disclosure statement). He bought silver bars on the margin, and within two months, he lost about

$14,000. He closed out these accounts, but continued to buy metals from Monex at full price. In

1982, John Albrecht began handling Purdy's accounts for Monex.



        Purdy sold his business in 1983, and decided to use all or some of the proceeds to purchase

leverage contracts from Monex again, although this time on a much larger scale. Purdy believed that,

despite his early losses, precious metals provided the best hedge against the inflationary times that

certainly would prevail in the 1980's. His strategy was to use some precious metals stored under the

sink14 as starting capital. He then could invest in as much gold and silver as possible by trading on


   14
    This was in no sense a sinking fund. Rather it was the customary storage place for Purdy's
securities, metals, etc.
the margin, thus maximizing profits. The money saved by leveraging, and t e pro ceeds thereof,
                                                                        h

would support his living expenses, he contemplated.



         Purdy opened twelve accounts for the purpose of executing his investment plan.15 Some he

bought on the margin. Others he paid full price for the metal, then immediately used the metal as

collateral for a loan from Monex, effectively turning these transactions into margin accounts as well.

Early in 1983, he suffered huge losses in three days when the price of silver dropped by fifty percent

overnight.16 Rather than cut his losses, Purdy continued to invest heavily; delving deeper into his

metals stored at home under the sink and obtaining loans from Monex on other, more profitable,

accounts. Purdy testified that he believed "the metal market will come back," and he felt that "[i]f

I get something I believe in I will stay with it." Throughout 1983 and 1984, Purdy continued to lose

money.



         When 1985 began, losses in Purdy's accounts exceeded $1,250,000. Purdy asked Albrecht

what could be done to stop the financial hemorrhage. Albrecht suggested hedging long investments

with short investments, but tempered his advice with the caveat that although short postures would

stop losses, they would prevent gains as well.17 Purdy then bought some short contracts.




   15
     From 1980 until 1985, when he stopped investing, Purdy opened twelve accounts with
Monex. The record reflects that for each one, he received and signed a Commodity Account
Agreement, and received the current Offering Statement. Executing these signed Commodity
Account Agreements was a prerequisite to Monex's dealing with Purdy; if Purdy would not sign
and return them, Monex would not sell to Purdy. Purdy had total control over each account, and
made all investment decisions, sometimes after consulting with family.
   16
    The record conflicts as to the exact amount of these losses, but they were at least as high as
$75,000 and may have been in excess of $290,000.
   17
     Prior to 1985, Purdy purchased long leverage contracts. In layperson's terms, "long" means
the investor speculates that the price will go up over time. The investor hopes to buy low now,
and sell high later, although not necessarily ten years later as is the term for a standard leverage
contract at Monex. "Short" means the investor wants the price to go down over time. The
investor then "sells" a leverage contract to Monex, and "buys" it back at a lower price later, thus
making a profit (assuming the price did actually decrease over time).
          In March of 1985, news wire services reported the possibility of Brazil's default on foreign

bank loans. Albrecht called Purdy and stressed to him that Brazil's default could increase the price

of silver. Albrecht explained that Purdy's short positions would inhibit profits should the price of

silver rise due to Brazil's default. Purdy authorized Albrecht to sell most of the short contracts, but

when Brazil did not default, Purdy did not immediately reinstate his short hedges. Purdy bought short

again in July 1985, but then closed all accounts with Monex in September 1985.



          In sum, from 1980 through 1985 Purdy sent $1,313,323 to Monex, but he withdrew $675,614

in the form of precious metal or funds. Monex charged him $217,934 in interest for the leverage

accounts he maintained at Monex.



          Almost a year after closing his accounts Purdy filed a reparat ion complaint with the

Commission. After two failed attempts to file a complaint that alleged a specific violation and actual

damages suffered, Purdy obtained new counsel through the assistance of the Commission. The

second amended complaint charged Monex with bucketing, fraud, and numerous violations of the

CEA and the Rules of the CFTC.



          After Herculean discovery efforts by both sides, a hearing was held before an ALJ in Houston,

Texas, in December 1987. Counsel represented both sides; presenting evidence and cross-examining

witnesses. The ALJ issued his Initial Decision ("ID") on June 29, 1988,18 concluding that Purdy failed

to establish by a preponderance of the evidence any actual violations by Monex. The ALJ

summarized the case as follows:



          In truth, Purdy knew at all times that he could simply exit the market and stop his losses. But
          Purdy wanted to remain in the "game." Purdy knew as early as March 1983 that he had lost
          substantial sums of money. Later he increased his exposure to risk. Nothing in this record
          shows that his account executive, Albrecht, or any other employee or officer of Monex
          exerted undue pressure on Purdy to maintain his positions with Monex. To his credit, Purdy

   18
        Purdy v. Monex Int'l, Ltd., CFTC Docket No. 86–R244, 

(June 29, 1988).
          has made it clear throughout this proceeding that he made all of the decisions regarding
          trading on the accounts.

                   The truth is Purdy believed precious metals prices would escalate in the 1980's. And
          had precious metals prices soared in 1983, 1984, and 1985, this case would not be in
          litigation. Purdy would have recovered his losses, and might well have made a substantial
          profit.

          Purdy filed a proper and timely notice of appeal with the Commission in July of 1988. On

May 20, 1991 the Commission affirmed the ID without opinion, as allowed by 17 C.F.R. §

12.406(b).19 Purdy then filed a timely petition for review with this court. 7 U.S.C.A. §§ 6(b), 9, and

18(e) (West Supp.1992).



                                          Standard of Review:

           Section 18(e) of Title 7, U.S.C.A., states that review of any order from the Commission

"shall be reviewable on petition ... by the United States Court of Appeals. 7 U.S.C.A. § 18(e) (West

Supp.1992). The court will then have the power to "affirm, to set aside, or modify the order of the

Commission, and the findings of the Commission as to the facts, if supported by the weight of

evidence, shall ... be conclusive." 7 U.S.C.A. § 9 (West Supp.1992).20 The question thus arises:

what level of appellate scrutiny do we apply to the Commission's order?




   19
        The Commission's Order in relevant part states:

                           Review of the record and the briefs submitted by the parties establishes that
                  the result reached in the initial decision is substantially correct. Because we also
                  conclude that the parties have not raised important questions of law or policy that
                  merit discussion, we are affirming the initial decision without opinion. In taking
                  this action, we do not endorse either the precise legal theory applied by the
                  presiding officer or the specific reasoning reflected in the initial decision.
                  Accordingly, the initial decision shall neither be cited as Commission precedent in
                  any Commission proceeding nor deemed an expression of the Commission's views
                  on the issues raised in this case.
   20
     Words identical to these are found in other laws allowing judicial review of administrative
proceedings. See, e.g., 15 U.S.C.A. § 45(c) (West 1973); ("The findings of the Commission as
to the facts, if supported by the evidence, shall be conclusive."), 29 U.S.C.A. § 210(a) (West
Supp.1992); ("[F]indings of fact ... when supported by substantial evidence shall be conclusive."),
29 U.S.C.A. § 160(e) (West Supp.1992); ("[F]indings of the Board ... if supported by substantial
evidence ... shall be conclusive.").
        The Supreme Court has held such language to require support by "substantial evidence."

Washington, Va., Md. Coach Co. v. NLRB, 

, 147, 

, 659, 

, 970

(1936).21 This means that the relevant evidence would suffice so that "a reasonable mind might

accept [it] as adequate to support a conclusion." Consolidated Edison Co. v. NLRB, 

,

229, 

, 216, 

, 140 (1938).



        Recent decisions have held the standard to be a "preponderance" or "greater weight" test.

Kent v. Hardin, 

, 1349 (5th Cir.1970), Haltmier v. CFTC, 

, 560 (2d

Cir.1977), Dohmen–Ramirez v. CFTC, 

, 856 (9th Cir.1988). This does not suggest that

an appellate court should reweigh the evidence to see which party the evidence favors. Instead the

court should "review the record with the purpose of determining whether the finder of fact was

justified, i.e. acted reasonably in concluding that the evidence, including the demeanor of the

witnesses, the reasonable inferences drawn therefrom and other pertinent circumstances, supported

his findings." 

.



        Both the "substantial evidence" and "preponderance" tests require essentially the same review.

A court of appeals does not re-evaluate the evidence, but goes beyond the "scintilla" test,

Consolidated 

, 59 S.Ct. at 

, to determ ine if the

Commission's (or its designee, the ALJ's) conclusions based on the facts were justified.



        Petitioner contends de novo review is required because the Commission did not expressly

adopt the ALJ's opinion and findings, see supra note 19; therefore the Commission's summary

affirmance doesn't have the status of a final decision. This contention is groundless simply because

   21
     In general, judicial review of the Commission's final rulings are governed by the
Administrative Procedures Act ("APA"). The APA applies to all administrative agencies,
including the Commodity Futures Trading Commission. 5 U.S.C. § 701 (West 1977). When a
court reviews agency action, the court shall "(2) hold unlawful and set aside agency action,
findings, and conclusions found to be ... (E) Unsupported by substantial evidence in a case subject
to sections 556 and 557 of this title." 5 U.S.C.A. § 706 (West 1977). A hearing before an ALJ is
controlled by 5 U.S.C.A. §§ 556 and 557 (West 1977).
the APA states that "an initial decision ... becomes the decision of the agency." 5 U.S.C.A. § 557(b)

(West 1977).



       In addition, the CFTC rules say if the Commission summarily affirms the initial decision of

the ALJ, as it did here, then it may order without opinion, and the order becomes the Commission's

final decision. 17 C.F.R. § 12.406(b).



        Purdy further asserts that because the Commission declined to review the ALJ's decision, we

should do so de novo. This argument lacks foundation as well since the Commission's order of

summary affirmance states "[r]eview of the record and the brief ... establishes that the result reached

... is substantially correct." (emphasis added) Although the Commission did not endorse "the precise

legal theory" or "specific reasoning" of the ALJ's ID, the Commission held the legal and policy issues

to be undeserving of further discussion. The Commission, therefore, affirmed without an opinion,

pursuant to 17 C.F.R. § 12.406(b).



        Lastly, despite Purdy's claim that de novo review is warranted because the ALJ wholly

adopted the Respondent's proposed findings of fact, we find the record reflects ample examples of

the ALJ's independent findings of fact. Petitioner labels such wholesale adoption of Respondent's

proposed findings of fact as arbitrary and capricious. He cites Pennzoil v. FERC, 

,

(5th Cir.1986) and NLRB v. Brooks Cameras, 

(9th Cir.1982) to support his contention

that when an agency fails to consider all factors and provide a reasoned basis for the agency's

decision, de novo review is warranted. These cases, however, ruled on facts where the Commission's

findings did not agree with the ALJ's. In such a case, the appellate court should make a more

searching review. Here, the ALJ and Commission agree on the findings, and so a substantial evidence

review is warranted.



       Substantial evidence reflects deference to the expertise of an administrative agency in the
highly complex area of commodities regulation. Such review is somewhat comparable to the

deference given to a jury. "In the case of the jury, it offers the common wisdom of numbers—large

numbers of decision makers not jaded by formal daily contact with the law. The agency offers the

specialized wisdom of expertise—decision makers supposedly expert in the minutiae of the immediate

subject matter." 2 St even A. Childress & Martha S. Davis, Standards of Review § 15.4, at 273

(1986).



          We view our task here as a search for substantial evidence in the record that would reasonably

uphold the factual findings of the ALJ.



                                            Proximate Cause

          The CFTC designated the ALJ to hold a hearing for reparations regarding Purdy's complaint.

Reparation proceedings are for "[a]ny person complaining of any violation of any provision, ... rule,

regulation, or order issued pursuant to this chapter, by any person who is registered under this

chapter." 7 U.S.C.A. § 18(a) (West Supp.1992). The complainant may "at any time within two years

after the cause of action accrues, apply to the Commission for an order awarding actual damages

proximately caused by such violation." 7 U.S.C.A. § 18(a) (West Supp.1992) (emphasis added).



          Although not defined in the statute, majority common law (including Texas, Purdy's residence

at the time of the transactions at issue here), defines proximate cause as: (1) cause in fact ("but for"

causation), and (2) foreseeability. In re Air Crash at Dallas/Fort Worth Airport, 

,

1085 (5th Cir.1991), cert. denied sub nom. Connors v. United States, ––– U.S. ––––, 

,

(1991), Urbach v. United States, 

, 831 (5th Cir.1989), Pope v. Rollins

Protective Serv. Co., 

, 202 (5th Cir.1983).22

   22
     Other courts hold to similar definitions. The Ninth Circuit interpreted causation in the
context of the Home Owners' Loan Act (HOLA) of 1933 (as amended in 1982: "Any person may
sue for and have injunctive relief ... against threatened conduct that will cause loss or damage...."
12 U.S.C.A. § 1464(q)(2)(A) (West 1989) (emphasis added)) as "requir[ing] that the wrongful
conduct be both the factual and legal cause of the injury." Sundance Land v. Community First
           The ALJ was the designated fact finder for Purdy's reparation proceeding. Thus, under the

substantial evidence standard of review, if the ALJ found Purdy sustained no injuries caused in fact

by the respondent-intervenor's alleged CEA violations, then we must find substantial evidence to

support the ALJ's findings as to proximate cause.



        The ALJ based much of his decision on weighing the conflicting testimony given by both

Monex and the Purdys. As finder of fact, he sat in the best position to evaluate the credibility of the

witnesses, their demeanor, and their testimony. After hearing all the oral statements, and reviewing

a "huge record," the ALJ came to a crucial core conclusion which permeates this entire case:

"Complainant's losses were not caused by any wrongdoing on the part of Respondents. Rather, those

losses resulted from Complainant's intractable belief that precious metals prices would increase in the

1980's."     In order to evaluate the ALJ's conclusions on causation and breach of statutory

requirements, we will now review the evidence regarding Petitioner's specific allegations.



                                               Interest

        Purdy contends Monex fraudulently charged interest, resulting in Monex' unjust enrichment.

Purdy relies on a CFTC staff study characterizing interest on unpaid margin balances as

"preposterous" because no loan is made to company customers.23



        Furthermore, Purdy characterizes his debt to Monex as a demand obligation which therefore

precludes interest charges. Steingut v. Guaranty Trust Co. of N.Y., 

(2d Cir.1947) cert.

denied 

, 

, 

(1947). However, in Steingut, the interest paid on



Fed. Sav. & Loan, 

, 662 (9th Cir.1988) (emphasis added). The Eighth Circuit says
proximate cause "exists if injury would not have occurred but for negligence, injury was natural
and probable result of negligence, and there was no efficient intervening cause." Rule by Rule v.
Lutheran Hosp. & Homes Soc. of Am., 

, 1251 (8th Cir.1987).
   23
    "Report for the CFTC: Trading at Leverage Contracts for Gold and Silver" Project 217
(April 18, 1975). The study and its findings have never been adopted by the CFTC, or used as
grounds for any ALJ or Commission decision.
demand deposits was prohibited by statute. 12 U.S.C.A. § 371(a) (West 1989). No such statutory

prohibition exists here. In fact, Congress has implicitly allowed LTM's to charge interest. See supra

note 2. In addition, the Commission's rules recognize interest charges in leverage contracts. See

supra note 12. Monex' interest charges were consistent with Congress' intentions prior to the

implementation of the CFTC rules, and they were in compliance with the rules when they came into

effect in 1984. Since Monex did not violate either Congressional intent or the Commission's rules,

the interest charges can not be a cause in fact of Purdy's damages.



                                               Bucketing

        Purdy alleges that Monex operated as a bucket shop. The Supreme Court in 1906 defined

a bucket shop as:



       an establishment, nominally for the transaction of a stock exchange business, or business of
       similar character, but really for the registration of bets, or wagers, usually for small amounts,
       on the rise or fall of the prices of stocks, grain, oil, etc., there being no transfer or delivery of
       the stock or commodities nominally dealt in.

Gatewood v. North Carolina, 

, 536, 

, 168, 

, 307 (1906).



       A more recent decision involving the Chicago Board of Trade defined a "bucket shop" as "a

place where bets [are] placed on the commodity prices. The bets are not executed as contracts on

any legitimate exchange, but rather, a bet is placed on the bucket shop's books." U.S. v. Sanders, 

, 330 (N.D.Ill.1988).



       In 1936, Senator Pope recited what is now the generally accepted definition of bucketing in

futures trading:



               [The] method of doing business wherein orders of customers for the purchase or sale
       of commodities for future delivery, instead of being executed by bonafide purchases and sales
       with other traders, are simply matched and offset in the soliciting firm's own office and the
       firm itself takes the opposite side of customers' orders.
80 Cong.Rec. 8,088 (May 27, 1936) (remarks of Senator Pope). Leverage contracts, as intended by

Congress when passing the Futures Trading Act of 1978, specify the LTM to be a principal to the

customer's contract. See supra note 5. Furthermore, the LTM is the market maker, and, as principal,

has no requirement to execute customer orders with other traders on any exchange.



          Purdy knew that Monex operated that way, or at least he should have. The Commodity

Account Agreements and Offering Statements outlined the characteristics of his leverage contracts

with Monex. His long prior dealings with Monex, and the clear wording of the account documents

he signed, are evidence that the terms of the margin contracts should have been clear to him.24



          Finally, bucketing is not listed as a prohibited conduct for an LTM. Bucketing is expressly

forbidden in commodity transactions, 17 C.F.R. § 30.02(d) (1986), but not in leverage transactions.

17 C.F.R. § 31.3 (1986). We hold the above evidence as substantial enough to support the ALJ's

findings that bucketing violations did not exist, and therefore could not be a cause in fact of Purdy's

losses.



                                                Fraud

          Purdy contends that Monex engaged in several fraudulent practices. He alleges Monex failed

to disclose material facts regarding the risk associated with leverage contracts and Trade Eagles.25

Purdy also alleges a failure to disclose Monex' existing litigation, and lapses in both Monex's and

Albrecht's registration status. Finally, Purdy claims Monex breached a fiduciary duty by failing to

disclose the above facts.



   24
     The Monex Offering Statement sent to all customers states in relevant part: "Monex acts as
a principal and as such sells to and buys from customers and dealers on its own behalf. It does
not have members, perform a clearing house function, or serve as an auction marketplace....
[P]rices ... are established by Monex...."
   25
      The Trade Eagle is a trading coin of solid gold or silver minted exclusively by Monex for sale
to it's customers. Customers who pay full price for Trade Eagles may sell them to a third party.
        Monex maintains it made all the appropriate disclosures in the Offering Statements required

by law current at the time. Disclosure literature accompanying the initiation of an account satisfies

a firm's disclosure obligations unless conduct which discounts or minimizes the importance of the

disclosures, Reed v. Sage Group, Inc., [1987–1990 Transfer Binder] Comm.Fut.L.Rep. (CCH) ¶

23,943 at 34,299 (CFTC Oct. 14, 1987); Clayton Brokerage Co. v. CFTC, 

, 580 (11th

Cir.1986), or any factual misrepresentations exist.



        Purdy testified that he only looked at the first page of the disclosure statements. This

admission precludes an easy road ahead for Purdy to show any misrepresentation or nondisclosure

to be the cause in fact of Purdy's losses. Nevertheless, we will review the evidence for substantiality.



                                          a. Enterprise Risk

        Purdy had been speculating in precious metals since 1972, had read at least two treatises on

investing by a recognized financial author, and read related periodicals at least once a week. Despite

Purdy's testimony to the contrary at the hearing, the ALJ, based on Purdy's 650+ page deposition

(and earlier pleadings), found him to be well versed in the nuances of margin and leverage contracts:

the risk involved, and the extent of his exposure to that risk.



        Furthermore, the promotional literature for the Trade Eagles explains that "relatively small

movements in price [of the gold or silver] will amplify the potential gain or loss on your investment."

(emphasis added) The promotional literature also stipulates any purchase as subject to the Monex

Offering Statement and Trade Eagle Disclosure Statement. These statements explicitly discuss risk.26



        The substantial testimonial and written evidence in the record leads us to support the ALJ's

   26
     The Offering Statements say, in LARGE BOLD PRINT under the heading "Margin
Transactions": "In credit transactions it is possible to gain or lose more than one's initial
investment." (emphasis added) The Trade Eagle Disclosure Statements states under "Terms of
Purchase": "It is possible to receive a margin call for additional funds and to lose more than
one's initial investment." (emphasis added)
and Commission's conclusion that Monex adequately represented and disclosed t he risks involved

with leverage contracts.



                                        b. Existing Litigation

        Purdy insists knowledge of pending litigation between Monex and the CFTC, and of a 1983

initial decision against Monex,27 would have forewarned him about investing with Monex. This

reasoning fails on several grounds. First, the CFTC has held that an initial decision pending

Commission review is not a "judgment" which must be disclosed since issues of law remain unsettled.

In re Luizzi, [1982–1984 Transfer Binder] Comm.Fut.L.Rep. (CCH) ¶ 21,833 (CFTC Jan. 27, 1981).

Secondly, the rules relating to reparation proceedings are clear that an initial decision pending review

is not a final order of the Commission,28 and thus are unenforceable.



        Although a ruling without the force of law may be material to a reasonable investor, the

record reveals Purdy received the May 1984 Offering Statement, disclosing the 1983 initial decision

against Monex. Purdy received it in a timely manner, yet continued to invest. The ALJ therefore

ruled the action pending review by the CFTC against Monex could not have been material to Purdy.



        Thirdly, a previous ruling by the Commission held Monex has no duty to disclose CFTC

complaints against it. Davis v. Monex Int'l, Ltd., [1988 Transfer Binder] Comm.Fut.L.Rep. (CCH)

¶ 24,279, at 35,225 (CFTC Jul. 7, 1988). Such disclosure is required only when the customer has

given discretionary authority to Monex. The record clearly indicates Purdy gave no such authority

to Monex.



   27
     This initial decision was pending Commission review, and was subsequently reversed. See In
re First Nat'l Monetary Corp., [1982–1984 Transfer Binder] Comm.Fut.L.Rep. (CCH) ¶ 21,707
(Apr. 29, 1983) reversed and dismissed [1984–1986 Transfer Binder] Comm.Fut.L.Rep. ¶ 22,698
(CFTC Aug. 7, 1985).
   28
     "The initial decision shall not become the final decision as to a party who shall have timely
filed and perfected an appeal thereof to the Commission...." 17 C.F.R. § 12.314(d)(1).
                                          c. Late Registration

        Registration of Monex and its account representatives became mandatory under the 1984

amendment to the CEA. 7 U.S.C.A. § 23 (West Supp 1992).29 Once the CFTC began enforcement

action against Monex for failure to apply for registration, Monex paid a fine to settle the action, and

filed registration papers in accordance with the settlement order.30 Monex disclosed the registration

action to customers in its December 1984 Offering Statement, which Purdy testified he received.

Disclosure of failure to register is only material if Monex was trying to solicit business from Purdy.

Hall v. Paine Webber Jackson & Curtis, Inc. [1986–1987 Transfer Binder] Comm.Fut.L.Rep. (CCH)

¶ 23,317, at 32,889 (CFTC Oct. 8, 1986). However, Monex was not soliciting Purdy's business when

the registration rules became enforceable. Nor did Monex fail to register; it failed to apply for

registration. Purdy had dealt with Monex for twelve years prior to any registration requirement. He

suffered the bulk of his losses in 1983, before the CFTC required registration. The ample evidence

supports the ALJ's conclusion Monex' tardy registration application could not be construed as a cause

in fact of Purdy's losses.



        Albrecht's late registration filing could not be a cause in fact either. Purdy testified that he

only relied on Albrecht's suggestions once, during the rumored Brazil default. That occurred after

the December 1984 disclosure.



                                           d. Fiduciary Duty

        Purdy contends, and Monex admits, that a fiduciary relationship existed between them.

However, Purdy avers Monex violated its duty by not disclosing material facts regarding interest

charged, margin risks, and existing litigation. As we have stated above, these were adequately

disclosed (if only Purdy had read them), and therefore no violation of fiduciary duty exists in this case.

   29
    The CFTC subsequently amended their rules to reflect the requirement, and outlined
procedures therein. See 17 C.F.R. § 31.5.
   30
    See In re Monex Int'l, Ltd., [1984–1986 Transfer Binder] Comm.Fut.L.Rep. (CCH) ¶ 22,413
(CFTC Nov. 8, 1984).
        In sum, the record reveals Purdy felt the tardy registration applications were "no big deal."

In fact, he testified he would invest with the Hunt brothers, even if he knew they were under

investigation by the Government. His previous pleadings and testimony indicate his understanding

of margin contracts and their risk. Furthermore, he signed the Offering Statements, which disclosed

what was required by law, without reading them. We find substantial evidence to support the ALJ's

and Commission's findings that no fraud existed and therefore could not have been the cause in fact

of his losses.



                                             Conclusion

        While we sympathize with Mr. Purdy's extensive losses so late in his life, the evidence here

compels us to agree with the Commission's accept ance of the ALJ's actions and findings. To do

otherwise might encourage other market bulls to seek refuge in the courts for judicial licking of their

wounds after suffering at the claws of a bear market. We therefore hold the order of the CFTC was

correct. AFFIRMED.