U.S. Commodity Futures Trading Commission v. Robert Escobio

• Court: Court of Appeals for the Eleventh Circuit
• Decided: October 27, 2020
• Docket: 19-12509
• Status: Unpublished

Opinion

USCA11 Case: 19-12509 Date Filed: 10/27/2020 Page: 1 of 9

[DO NOT PUBLISH]

IN THE UNITED STATES COURT OF APPEALS

FOR THE ELEVENTH CIRCUIT ________________________

No. 19-12509 ________________________

D.C. Docket No. 1:14-cv-22739-JLK

U.S. COMMODITY FUTURES TRADING COMMISSION,

Plaintiff-Appellee,

versus

ROBERT ESCOBIO,

Defendant-Appellant.

________________________

Appeal from the United States District Court for the Southern District of Florida ________________________

(October 27, 2020)

Before WILSON, NEWSOM, and ANDERSON, Circuit Judges. USCA11 Case: 19-12509 Date Filed: 10/27/2020 Page: 2 of 9

PER CURIAM:

Robert Escobio appeals the district court’s disgorgement award imposed

after remand from this Court. He first argues that the Commodities Futures

Trading Commission (“CTFC”) waived disgorgement by not properly raising it

before the first appeal and then argues that it was improperly proved and violated

the Excessive Fines Clause.

Because we write for the parties, we assume familiarity with the facts and

set out only those necessary for the resolution of this appeal. The CFTC began

investigating Southern Trust Metals, Inc., Loreley Overseas Corporation, and

Robert Escobio (“Defendants”) in response to a customer’s complaint. Pursuant to

that complaint, the National Futures Association (“NFA”)—a private, self-

regulatory organization for the futures industry—also began an investigation,

which ended in a settlement. Afterwards, the CFTC filed this lawsuit, alleging that

the Defendants violated the Commodities Exchange Act (“CEA”) when they failed

to register as futures commission merchants, transacted the purchase and sale of

contracts for the future delivery of a commodity (futures) outside of a registered

exchange (“unregistered futures scheme”), and promised to invest customers’

money in precious metals but instead invested the funds in so-called “off-exchange

margined metals derivatives”(“fraudulent metals scheme”).

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Both parties filed motions for summary judgment. The district court granted

the CFTC’s motion in part, holding that the Defendants had conducted off-

exchange transactions and had failed to register as futures commission merchants.

It denied the Defendants’ motion in full. The CFTC’s fraudulent metals scheme

claim then proceeded to trial. After a bench trial, the district court found that the

Defendants had engaged in fraud, ordered them to pay restitution in the full

amount of the customers’ losses, and imposed fines. The court also permanently

enjoined the Defendants from employment in the commodities-trading industry.

Specifically, the court ordered Defendants pay $1,543,892 as restitution to the

investors for the metals derivative scheme and $559,725 as restitution for

unregistered futures scheme transactions.

On appeal, we affirmed the judgment but vacated the restitution amount for

the unregistered futures scheme because there was insufficient proof of loss. U.S.

Commodities Futures Trading Commission v. Escobio, 894 F.3d 1313, 1331 (11th

Cir. 2018). The Court remanded with instructions:

“[t]he court may order disgorgement of gains, in appropriate circumstances, without regard to proximate cause. See 7 U.S.C. § 13a 1(d)(3) (“[T]he court may impose . . . on any person found . . . to have committed any violation[] equitable remedies including . . . disgorgement of gains received in connection with such violation.”). The district court may, but need not, consider on remand whether disgorgement is appropriate in the present case.”

Id. at 1331-1332.

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On remand, the CFTC sought disgorgement via a motion and relied on the

existing record. The CFTC pointed to the district court’s findings at summary

judgment and trial that $360,337 was the amount of commissions Southern Trust

Metals and its broker charged to its futures and options customers, and argued this

was the appropriate amount for disgorgement. The district court agreed and

awarded the amount the CFTC sought.

Escobio argues on appeal (1) that the CFTC had abandoned this claim; (2)

that there was insufficient proof of the commissions; (3) that he could not be held

personally responsible for the disgorgement; (4) that CFTC failed to show that the

commissions were proximately caused by the futures violations; (5) that the district

court erred by using the same commissions both as a basis for disgorgement and a

civil penalty; and (6) that the disgorgement at issue would cause a violation of the

Excessive Fines Clause. We address each argument in turn, and affirm.

I. WAIVER

First, we reject Escobio’s argument that the CFTC did not preserve its

request for disgorgement. Escobio acknowledges that the CFTC requested

disgorgement in the amount of $360,334 1 during its closing argument at the bench

trial. He points to no law that supports his claim that this was insufficient to

1 The CFTC concedes that it misspoke at closing argument when it asked for $360,334 and not $360,337. 4 USCA11 Case: 19-12509 Date Filed: 10/27/2020 Page: 5 of 9

preserve the issue. Further, that there was no waiver when the CFTC failed to

pursue disgorgement on appeal is especially understandable in this case, where the

CFTC sought and the district court awarded a larger sum in restitution, and this

Court in the first appeal – when vacating the larger restitution amount – suggested

that disgorgement might be appropriate on remand. Cf. Mosher v. Speedstar Div.

of AMCA Int’l, Inc., 52 F.3d 913 (11th Cir. 1995) (rejecting waiver argument

when issue was initially rejected at summary judgment, not raised on first appeal,

and then decided on remand).

II. SUFFICIENT PROOF OF COMMISSIONS

Turning to Escobio’s argument that the CFTC failed to prove the amount

ultimately awarded was appropriate, we note that Escobio waived this argument.

On summary judgment, before the first appeal, the district court found that

Southern Trust Metals charged $360,337 in commissions for its futures customers.

On remand, Escobio cited that fact without contesting it; his argument below was

merely that he did not personally benefit. Thus, he waived his ability to contest

that determination on appeal.

III. PERSONAL RESPONSIBILITY FOR THE DISGORGEMENT

Escobio argues that there was no proof that he personally benefitted from the

commissions and so should bear no responsibility for the disgorgement. Like the

district court, we reject this argument because Escobio was the controlling person

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of Southern Trust Metals. In order to demonstrate control person liability, the

Commission must show that Escobio: (1) had “general control” over the primary

violator; and (2) lacked good faith, or knowingly induced the acts constituting the

violation. CFFC v. RJ Fitzgerald & Co., Inc., 310 F.3d 1321, 1334 (11th Cir.

2002). Escobio was the CEO and largest shareholder of Southern Trust Securities

Holding Corporation (“Holding Corporation”). The Holding Corporation owns

Loreley, which in turn owns Southern Trust Metals; Escobio created Southern

Trust Metals and served as its director and CEO. According to the district court,

Escobio was “a signatory to ST Metals and Loreley’s bank accounts, and had

authority to transfer money to and from those accounts.” Further, the evidence at

trial showed that Escobio opened Loreley’s accounts at Hantec and Berkeley, and

was aware of Southern Trust’s representations to customers. This Court, in the

earlier appeal, affirmed the district court’s findings regarding scienter that Escobio

knew he was participating in fraud. 894 F.3d at 1327.2

2 Additionally, for two reasons, Escobio has waived any argument that the commissions should be reduced by expenses so that disgorgement would extend only to net ill-gotten gain. First, although raised and addressed in the district court, and although suggested in the language of a heading in his initial brief on appeal, no such argument was made in the text following that heading, and no authority was cited. Second, Escobio failed to provide any evidence of what such expenses were or how the amount should be calculated.

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IV. PROXIMATE CAUSE

Escobio argues that the CFTC failed to show the commissions were

proximately related to the futures violation. The CEA codifies the equitable

remedies that may be imposed for violations of the statute. It reads:

In any action brought under this section, the Commission may seek, and the court may impose, on a proper showing, on any person found in the action to have committed any violation, equitable remedies including—

(B) disgorgement of gains received in connection with such violation.

7 U.S.C. § 13a-1(d)(3)(B). Relying on a case that interprets instead the Securities

Exchange Act, Escobio argues that the evidence must show the amount of gains

must be causally related to the wrongdoing. However, § 13a-1(d)(3)(B)’s “in

connection” is a more flexible standard. The district court found that the

commissions were charged for its futures transactions; this clearly satisfies the “in

connection” standard.

V. DISGORGEMENT AND PENALTY

Escobio’s argument that the district court erred by awarding both

disgorgement of the full amount of the commissions and a civil penalty of one

third of the same commissions ignores the plain language of the statute. The

statute permits the award of both disgorgement in the amount of the ill-gotten gains

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and a civil penalty in up to three times the monetary gain for each violation. See 7

U.S.C. §§ 13a-1(d)(1)(A) & (d)(3)(B).

VI. EXCESSIVE FINES CLAUSE

We also reject as wholly without merit Escobio’s argument that the

disgorgement at issue in this appeal would cause the total punishments imposed

upon him to violate the Excessive Fines Clause of the Eighth Amendment. This

argument is wholly without merit for numerous reasons of which we need mention

only two. First, the vast majority of the amounts which Escobio asserts are

“punishments” for the purposes of the Excessive Fines Clause are comprised of

either restitution amounts or the instant disgorgement amount. We doubt that

either of those should be considered a punishment for purposes of the Excessive

Fines Clause. However, we need not decide that because, even assuming they

should thus count, they are directly correlated to the scope of the wrongdoing. In

other words, both restitution and disgorgement seek to recover only money to

which Southern Trust Metals and/or Escobio were never entitled. See Fla. Med.

Center of Clearwater, Inc. v. Sebelius, 614 F.3d 1276, 1282 (11th Cir. 2010).

Thus, the third factor in the traditional excessive fines analysis – the harm caused

by the defendant – points strongly against a violation of the Excessive Fines

Clause. Similarly, the second factor – other penalties authorized by the legislature

– points strongly against such a violation. The applicable statute here authorized

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civil penalties in the amount of triple the losses suffered by the customers.

Whether one considers only the losses suffered by the customers of the futures

trades ($559,000+) or whether one also considers Escobio’s violations in

connection with the fraudulent metals derivatives scheme or violations (an

additional $779,000+), the amounts Escobio has been ordered to pay, even

assuming all should count as punishments for purposes of the excessive fines

clause, total far less than the trebled losses for customers, an amount specifically

authorized by the relevant statute.

For the foregoing reasons, the opinion of the district court is

AFFIRMED.