Chazon QTA Quantitative Tradin v. CFTR

• Court: Court of Appeals for the Third Circuit
• Decided: December 13, 2018
• Docket: 17-2408
• Status: Unpublished

Opinion

NOT PRECEDENTIAL

UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT _____________

No. 17-2408 _____________

CHAZON QTA QUANTITATIVE TRADING ARTISTS, L.L.C., and LAWRENCE I. FEJOKWU, Petitioners

v.

COMMODITY FUTURES TRADING COMMISSION

____________

On Petition for Review from the Commodity Futures Trading Commission (CFTC Docket No. CRAA 16-01)

Submitted under Third Circuit L.A.R. 34.1(a) October 29, 2018

Before: CHAGARES, JORDAN, and VANASKIE, Circuit Judges.

(Filed: December 13, 2018)

OPINION * ____________

CHAGARES, Circuit Judge.

Lawrence Fejokwu and his company Chazon QTA Quantitative Trading Artists,

L.L.C. (“Chazon”) were permanently barred from membership in the National Futures

* This disposition is not an opinion of the full Court and under I.O.P. 5.7 does not constitute binding precedent. Association (NFA) for failing to cooperate promptly and fully with an NFA investigation.

They appealed to the Commodity Futures Trading Commission (CFTC), which upheld

the NFA’s finding and sanction. Now they petition this Court to review that decision

under 7 U.S.C. § 21(i)(4). We will deny the petition.

I.

Because we write only for the parties, we recite just those facts necessary to our

decision.

Fejokwu is the founder of two foundations, the Vision Foundations, that focus on

pan-African socioeconomic development. In April 2011, Chazoneering, S.A., an entity

solely owned and operated by Fejokwu, transferred $1.6 million to the Vision

Foundations. The Vision Foundations used that money to fund the Maria Funds, a pair of

commodity pools operated by Chazon. Fejokwu registered Chazon with the NFA as a

commodities pool operator, with himself as its principal.

From the beginning, the Maria Funds suffered significant losses. The funds had

only $125,000 remaining by March 2014.

At that point, Fejokwu applied to withdraw Chazon from the NFA to save costs.

Fejokwu argued that he and Chazon were exempt from NFA registration under the so-

called small-pool exemption, 17 C.F.R. § 4.13(a)(2). That exemption provides that a

commodities pool operator need not register with the NFA if none of its pools has more

than 15 participants and the total gross capitalization of all of its pools does not exceed

$400,000, excluding the operator’s and principal’s own money.

2 Fejokwu’s withdrawal request triggered an NFA investigation. Fejokwu at first

cooperated with the investigation, providing on request the Vision Foundations’

organizational documents, balance sheets, and ledgers, the Maria Funds’ 2013 bank

statements, and Chazon’s bank and broker statements. On further request, Fejokwu also

provided the Maria Funds’ and the Vision Foundations’ bank statements from 2011.

The NFA then asked for Chazoneering’s bank statements. Fejokwu balked at this

request. He felt that he had already provided sufficient evidence that the small-pool

exemption applied and that the NFA was not entitled to Chazoneering’s documents since

that entity was not an NFA member and did not trade futures. He ultimately provided the

LLC agreement and 2013 and 2014 bank statements for Chazoneering, LLC — a

different entity than the one that indirectly capitalized the Maria Funds. 1 But he refused

to provide any Chazoneering bank statements from 2011, when the Vision Foundations

were funded. He then added the Vision Foundations as listed principals of Chazon,

which arguably made review of Chazoneering’s bank statements unnecessary — because

listing the Visions Foundations as Chazon principals made clear that all the Maria Funds’

money came from Chazon principals. When the NFA still insisted, Fejokwu asked to

discuss the request with NFA lawyers or supervisors. Rather than give him that

opportunity, the NFA concluded its investigation with a finding that Fejokwu had failed

to cooperate.

1 In this opinion, we differentiate between the Chazoneering entities only when the distinction is relevant. 3 The NFA then filed a formal complaint charging Fejokwu and Chazon with

violating NFA Compliance Rule 2-5. That rule requires each NFA member and associate

to cooperate promptly and fully with the NFA in any NFA investigation, inquiry, audit,

examination, or proceeding regarding compliance with NFA requirements or any NFA

disciplinary or arbitration proceeding. Fejokwu and Chazon filed an answer, and the

NFA held a hearing, at which Fejokwu and an NFA examiner testified.

The NFA hearing panel issued a decision finding that Fejokwu and Chazon had

willfully violated Rule 2-5. The panel determined that the NFA legitimately requested

Chazoneering’s bank statements from the time it funded the Vision Foundations because

the NFA questioned the ultimate source of Chazon’s capital contributions and thus its

eligibility for the small-pool exemption, among other reasons. The panel found that

Fejokwu was “very vague” about where Chazoneering got the money and that he

“actually appeared to be trying to deceive NFA” about the different Chazoneering

entities, which raised issues about his credibility. Appendix (“App.”) 39. “Moreover,”

the panel explained, “the sudden listing of the Vision Foundations . . . appeared to have

been an attempt by Fejokwu to find a reason not to provide the Chazoneering

statements,” which “gave NFA legitimate concerns as to the funding of Chazoneering.”

App. 40. Since the NFA’s request for the Chazoneering bank statements was legitimate,

the panel found that Fejokwu and Chazon willfully violated Rule 2-5 by refusing to

provide them. As a sanction, the panel permanently barred Fejokwu and Chazon from

NFA membership.

4 Fejokwu and Chazon appealed to the NFA Appeals Committee, which upheld the

panel’s conclusion and declined to modify its sanction. On the sanction, the appeals

committee emphasized the importance of member cooperation to the NFA’s

effectiveness. It also rejected Fejokwu’s argument that the violations were not willful,

finding them to be “a conscious decision” and pointing out that Fejokwu “knowingly

misled” the examination team about the different Chazoneering entities. App. 21–22.

While there was no evidence that Fejokwu harmed customers or committed fraud, the

committee explained, “that may simply be because the documents [Fejokwu and Chazon]

refused to produce contained or led to such evidence.” App. 22. Given this “very grave

violation” and the “significance of” Rule 2-5, the appeals committee found the sanction

“completely appropriate.” App. 22.

Fejokwu and Chazon appealed this decision to the CFTC, which summarily

affirmed. They then timely petitioned for review.

II.

The NFA and CFTC had jurisdiction over the underlying disciplinary proceeding

under 7 U.S.C. § 21(b), (h). We have appellate jurisdiction to review the CFTC’s order

upholding the NFA’s decision under 7 U.S.C. § 21(i)(4). We are satisfied that

jurisdiction is proper in this Court rather than in the Court of Appeals for the Second

Circuit despite Chazon’s New York post-office box since the record suggests that

Fejokwu carried out Chazon’s business out of his home office in Guttenberg, New Jersey.

See 7 U.S.C. §§ 9(11)(B)(ii)(I), 21(i)(4). We are also satisfied — and the CFTC does

5 not contest — that we have jurisdiction over the now-represented corporate appellant

Chazon.

We review the factual determinations of an administrative agency “to determine

whether there is substantial evidence to support [its] decision.” Plummer v. Apfel, 186

F.3d 422, 427 (3d Cir. 1999). We review the agency’s decision to uphold sanctions for

abuse of discretion. See, e.g., Butz v. Glover Livestock Comm’n Co., Inc., 411 U.S. 182,

185–86 (1973).

III.

Fejokwu and Chazon argue that substantial evidence does not show that they

willfully violated Rule 2-5 and that a permanent bar was unwarranted and unjustified.

We disagree.

A.

There is no dispute that Fejokwu and Chazon could have provided Chazoneering’s

2011 bank statements but refused. Fejokwu instead argues that his refusal to cooperate

did not violate Rule 2-5 because the NFA had no legitimate regulatory reason for

requesting those statements. The NFA found that there was a legitimate regulatory need

to confirm Chazon’s eligibility for the small-pool exemption. We conclude that

substantial evidence supported that finding.

Fejokwu relied on the small-pool exemption to withdraw from the NFA, giving it

a legitimate reason to investigate Chazon’s eligibility for this exemption. Since the

exemption requires aggregate nonproprietary capital contributions to be under $400,000,

the NFA had legitimate grounds to confirm that Chazoneering’s $1.6 million investment

6 was in fact proprietary — that is, legitimate business income of Chazoneering (and thus

of Fejokwu) and not merely customer contributions funneled through Chazoneering to

invest in the Maria Funds without proper registration. Inquiring where Chazoneering got

the $1.6 million was fair game. And Fejokwu gave the NFA reason to be suspicious of

its source. He was cagey about the different Chazoneering entities, vague on

Chazoneering’s actual business, and protective of only the bank statements that showed

where Chazoneering got these funds. The NFA thus legitimately insisted on reviewing

Chazoneering’s 2011 bank statements to confirm Chazon’s eligibility for the small-pool

exemption. 2 Fejokwu’s refusal may not have been in bad faith, but no doubt it was

voluntary and intentional — which makes it “willful” in the civil context. See, e.g.,

Safeco Ins. Co. of Am. v. Burr, 551 U.S. 47, 57 & n.9 (2007); Vineland Fireworks Co. v.

Bureau of Alcohol, Tobacco, Firearms & Explosives, 544 F.3d 509, 517 (3d Cir. 2008)

(“[T]he legal definition of ‘willful’ . . . is ‘[v]oluntary and intentional, but not necessarily

malicious.’” (quoting Black’s Law Dictionary 1630 (8th ed. 2004)) (alteration in

original)). Thus, substantial evidence shows that Fejokwu and Chazon willfully violated

Rule 2-5.

2 The NFA hearing panel also concluded that the NFA had legitimately asked for Chazoneering’s 2011 bank statements to determine whether Chazon had any unlisted principals. Fejokwu argues that Chazoneering’s bank statements would not show anyone’s direct contributions to Chazon or direct or indirect ownership interests in Chazon, and so could not show unlisted principals. Since we conclude that confirming eligibility for the small-pool exemption was a legitimate regulatory reason to review the 2011 statements, we do not reach this alternative justification. 7 B.

Fejokwu also argues that the CFTC abused its discretion by upholding the NFA’s

permanent membership ban. We will overturn an agency’s decision to uphold sanctions

as an abuse of discretion only if the sanctions are “unwarranted in law or . . . without

justification in fact.” Butz, 411 U.S. at 185–86 (alteration in original). “Typically, such

an abuse of discretion will involve either a sanction palpably disproportionate to the

violation or a failure to support the sanction chosen with a meaningful statement of

‘findings and conclusions, and the reasons or basis therefor, on all the material issues of

fact, law, or discretion presented on the record.’” Reddy v. Commodity Futures Trading

Comm’n, 191 F.3d 109, 124 (2d Cir. 1999) (quoting 5 U.S.C. § 557(c)(3)(A)).

Fejokwu first argues that a permanent ban was palpably disproportionate to the

violation. In comparison to other cases, he argues, his would be “the only instance where

the NFA has permanently banned a first-time offender for violating Rule 2-5 without any

additional aggravating” circumstances. Fejokwu Br. 46. But, on the contrary, there were

aggravating circumstances here. Fejokwu was not merely intransigent; the NFA found

him deceptive, misleading, and intentionally vague. No doubt the sanction is severe, but

given these circumstances we cannot say that it is unwarranted in law or without

justification in fact. Thus the CFTC did not abuse its discretion by upholding it.

Fejokwu next argues that the CFTC’s summary decision fails to provide a

meaningful statement of the reason for the sanction. We disagree. Both the NFA panel

and appeals committee discussed the reasons for the sanction at some length. These

decisions emphasized the importance of Rule 2-5, but also Fejokwu’s misleading conduct

8 in the investigation and hearing. The CFTC expressly adopted these findings and

conclusions, and it also held that “the choice of sanction is neither excessive nor

oppressive in light of the violation and the public interest.” App. 7. No doubt Fejokwu

wishes that the NFA had credited other, mitigating factors, but he still received a

meaningful statement of the findings, conclusions, and reasons underpinning the chosen

sanction. We cannot conclude that the CFTC abused its discretion by adopting the

NFA’s reasons and upholding its sanction.

IV.

For these reasons, we will deny the petition for review.