South-Western Legal Studies in Business

Company, Officers and Employees Liable for Fraud in Promoting Commodity Trading
Description Appeals court held that under the Commodity Exchange Act, a commodity trading company and its employees could be held liable for fraud for promoting commodity trading in ads and seminars that focused on high profits and ignored the fact that most investors lose money.
Topic Consumer Protection
Key Words Investments, Commodities, Fraud, Advertisements
C A S E   S U M M A R Y
Facts The Commodity Futures Trading Commission (CFTC) sued the brokerage firm R.J. Fitzgerald, its principal, and some of its employees, under the Commodity Exchange Act CEA), for fraud for failing to disclose the risks involved in connection with promotions of futures and options contracts. Fitzgerald had ads on television stating that trading in grain contracts could product "profits as high as 200 to 300 percent." The company also hosted seminars for investors. Risk was mentioned, but the focus was on the potential for high profits. The district court dismissed the suit; the CTFC appealed.
Decision

Reversed. The anti-fraud provision of the CEA depends on the overall message and common understanding of the information conveyed. The Act is designed to protect the innocent individual investor who may know little about the complexities of commodities trading. The ads and seminars here focused on high profits and downplayed the risk of loss. It was reckless to present only boilerplate risk-disclosure language. Since 95 percent of Fitzgerald's clients lost money, it was misleading to focus on profit potential. The company's principal is liable as a "control person" under the CEA, which holds such persons responsible for business decisions.

Citation Commodity Futures Trading Comm. v. R.J. Fitzgerald & Co., 310 F.3d 1321 (11th Cir., 2002)

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