Commodity Futures Trading Commission v. Aurifex Commodities Research Company et al

Filing 215

OPINION ; signed by Chief Judge Robert Holmes Bell (Chief Judge Robert Holmes Bell, kcb)

C o m m o d i t y Futures Trading Commission v. Aurifex Commodities Research Company et al

D o c . 215

U N IT E D STATES DISTRICT COURT F O R THE WESTERN DISTRICT OF MICHIGAN S O U T H E R N DIVISION

C O M M O D IT Y FUTURES TRADING C O M M IS S IO N , P la in tif f , F ile No. 1:06-CV-166 v. H O N . ROBERT HOLMES BELL A U R IF E X COMMODITIES RESEARCH C O M P A N Y , et al., D e f e n d a n ts . / OPINION P la in tif f Commodity Futures Training Commission ("CFTC") filed a complaint a ga in st Defendants Aurifex Commodities Research Company, Aurifex Research, L.L.C., Ty K lo tz and Monette Klotz ("M. Klotz") on March 7, 2006, alleging violations of the C o m m o dity Exchange Act ("CEA"), 7 U.S.C. §§ 1-27f, and the regulations promulgated th e re u n d e r, 17 C.F.R. §§ 1.1-.70. This matter is currently before the Court on Plaintiff C F T C 's motion for summary judgment against Defendants Ty Klotz and M. Klotz. (Dkt. N o . 188, Pl.'s Mot. for Summ. J. ) In its motion CFTC requests a declaratory judgment that Defendants Ty Klotz and M . Klotz have violated various sections of the CEA and its regulations;1 an injunction

Specifically CFTC seeks a declaration that that Defendants Ty Klotz and M. Klotz vio la te d 7 U.S.C. §§ 6b(a)(2)(i) and (iii), 6c(b), 6m(1), 6n(4), and 6o(1) and Commission

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p ro h ib itin g Ty Klotz and M. Klotz from engaging in conduct in violation of those sections o f the CEA and the CFTC's regulations; an injunction prohibiting Ty Klotz and M. Klotz f ro m engaging in any activity related to trading in any commodity; an order directing Ty K lo tz and M. Klotz to pay restitution, jointly and severally, in the amount of $1,826,708.16, p lu s pre-judgment and post-judgment interest; an order directing Ty Klotz to pay a civil m o n e ta ry penalty of $120,000.00 for each of the eight counts of the Complaint where he is c h a rge d with violations of the CEA or Regulations, for a total of $960,000.00; and an order d irec ting M. Klotz to pay a civil monetary penalty of $120,000 for each of the seven counts o f the Complaint where she is charged with violations of the CEA or Regulations, for a total o f $840,000.00. For the reasons that follow Plaintiff CFTC's motion for summary judgment will be gra n te d , except as to the amount of the monetary penalty against M. Klotz. I. U n d e r Rule 56(c) of the Federal Rules of Civil Procedure, summary judgment is p ro p e r if there is no genuine issue as to any material fact and the moving party is entitled to j u d gm e n t as a matter of law. In evaluating a motion for summary judgment the Court must lo ok beyond the pleadings and assess the proof to determine whether there is a genuine need f o r trial. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986). If th e moving party also bears the burden of persuasion at trial, the moving party's initial Regulations found at 17 C.F.R. §§ 4.20(c), 4.21, 4.22. and 33.10 as alleged in Counts 1, 38 , and that Ty Klotz violated 7 U.S.C. § 6b(a)(2)(ii) as alleged in Count 2.
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s u m m a ry judgment burden is to "show that the record contains evidence satisfying the b u rd e n of persuasion and that the evidence is so powerful that no reasonable jury would be f re e to disbelieve it." Cockrel v. Shelby County School Dist., 270 F.3d 1036, 1056 (6th Cir. 2 0 0 1 ) (quoting James William Moore et al., Moore's Federal Practice § 56.13[1], at 56-138 (3 d ed. 2000)). See also Hunt v. Cromartie, 526 U.S. 541, 553 (1999) ("Summary judgment in favor of the party with the burden of persuasion . . . is inappropriate when the evidence is susceptible of different interpretations or inferences by the trier of fact."). If the moving p a r ty carries its burden then the non-moving party must demonstrate by affidavits, d e p o s itio n s , answers to interrogatories, and admissions on file, that there is a genuine issue o f material fact for trial. Celotex Corp. v. Catrett, 477 U.S. 317, 324-25 (1986). The mere e x is te n c e of a scintilla of evidence in support of the non-moving party's position is not s u f f ic ie n t to create a genuine issue of material fact. Anderson v. Liberty Lobby, Inc., 477 U .S . 242, 252 (1986). The proper inquiry is "whether the evidence presents a sufficient d isa gre e m e n t to require submission to a jury or whether it is so one-sided that one party m u st prevail as a matter of law." Id. at 251-52. II. D e f e n d a n t Ty Klotz does not oppose the entry of an order granting Plaintiff's request f o r summary judgment. Neither does he oppose the amount of restitution, except that he re q u e s ts that he be credited for the amounts held by the Receiver. (Dkt. No. 206, Def. Ty K lo tz Resp. 1-2.) He does, however, object to the requested civil monetary penalty on the

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gro u n d s that it is well beyond his ability to repay. (Id. at 3-4.) He has attached an affidavit in d ic a tin g that he has run out of money and that a large fine gives him no chance of re p a ym e n t during his lifetime. (Id., Ex. A, Aff. of Ty Klotz ¶¶ 3-4.) Defendant M. Klotz similarly does not object to entry of summary judgment against h e r. (Dkt. No. 210, M. Klotz Resp. 1.) However, she requests that the Court consider her c o o pe ra tio n in setting the amount of restitution and that no monetary penalty be assessed a ga in s t her because Ty Klotz was the perpetrator of this fraud. (Id. at 2-3.) N e ith e r of the Klotz Defendants has come forward with any evidence to rebut the e vid e n c e presented by CFTC. There is accordingly no genuine issue of material fact for tria l. Accordingly, the unopposed evidence contained in the exhibits to CFTC's motion for s u m m a ry judgment and the Second Supplemental Report of Thomas J. Koprowski forms the b a s is for this Court's opinion.2 I I I. P la in ti f f CFTC is an independent federal regulatory agency charged with re s p o n s ib ility for administering and enforcing the provisions of the CEA. 7 U.S.C. § 2 (a )(2 ). The CEA authorizes the CFTC to bring a civil action in federal court to enjoin any a c t or practice constituting a violation of any provision of the CEA, to enforce compliance

The exhibits referenced in this opinion are the exhibits attached to Plaintiff CFTC's m o tio n for summary judgment. (Dkt. Nos. 190-98). Because there is no dispute as to the re le va n t facts in this case, this opinion will not cite every supporting fact in the record. The C o u rt refers the reader to Plaintiff's motion for summary judgment (Dkt. No. 188) for more c o m p re h e n s ive citations to the record.
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w ith the CEA, and to seek civil penalties. 7 U.S.C. § 13a-1(a), (b), (d). Venue properly lies w ith this Court pursuant to 7 U.S.C. § 13a-1(e), because during most of the relevant time p e rio d the Klotz Defendants resided in and transacted business in Mason, Michigan. D u ring the relevant time period Ty Klotz and M. Klotz were married to each other. (Ex. 7, M. Klotz Dep. 14.) They lived in Mason, Michigan until December 2005 when Ty K lo tz moved to Carbondale, Illinois. In June 2004, Ty Klotz and M. Klotz filed an assumed name registration in Ingham C o un ty, Michigan to operate under the name "Aurifex Investment." (Ex. 18.) In September 2 0 0 4 M. Klotz opened a bank account in the name of M. Kltoz/Aurifex Investment (the "126 a c c o u n t " ) . The signature card for the 126 account identifies M. Klotz as the president of A u rife x Investment. (Ex. 26.) In April 2004 M. Klotz opened an individual commodity futures trading account in h e r name at Xpresstrade, LLC, a futures commission merchant. Her application falsely s ta te d that she had $121,070 in liquid assets, that she had a net worth of $151,000 , and that s h e had experience trading commodities, futures, options, and foreign currencies after living in Europe for many years. (Ex. 17, M. Klotz Dep. 72-75.) In June 2004 M. Klotz filed an application with the Michigan Department of C o ns u m e r & Industry Services for a limited liability company under the name "Aurifex R e se a rc h L.L.C." (Ex. 14.) The registration was completed in November 2004. In March

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2 0 0 5 M. Klotz opened a bank account in the name of Aurifex Research (the "626 account"). (Ex. 28.) In June 2005 Aurifex Commodities Research Company ("ACRC") was incorporated b y Richard Robbins. Ty Klotz deposited the initial $30,000 into the ACRC account with a c h e c k from the 126 account signed by M. Klotz. (Ex. 65, Robbins Dep. 73; Ex. 64, Check; E x . 61, Summary of 126 Acc't.) ACRC's Articles of Incorporation and bank account used the Aurifex business address. Aurifex Investments, Aurifex Research, L.L.C. and ACRC a re collectively referred to as "Aurifex". Ty Klotz was involved in the day to day operations of Aurifex and had no other ga in f u l employment. (Ex. 8, Ty Klotz Dep. 184; Ex. 17, M. Klotz Dep. 38.) In 2004 M. K lo tz was employed as a manager at the Traverse City Pie Company where she had an a n n u a l income of $27,083. (Ex. 7, M. Klotz Dep. 22; Ex. 22.) M. Klotz did not work in the A u rife x office, but she bought the gold and silver on behalf of Aurifex. (Ex. 17, M. Klotz D e p . 51.) Neither Ty Klotz nor M. Klotz was ever registered with the CFTC in any capacity. (E x . 8, Ty Klotz Dep. 132; Ex. 17, M. Klotz Dep. 11-12.) Ty Klotz described Aurifex to participants and potential participants as a private in ve s tm e n t partnership that was engaged in commodity futures trading activity. Participants a n d potential participants were informed that their funds would be pooled and that Aurifex w o u ld make investments on their behalf. "All of you are invested in a private hedge fund. I lump everyone's money into one big pile and go after profitable investments with that

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m o ne y." (Ex. 43 at 2.)

"We are a private hedge fund. Once again, all of our combined

m o n e y trades in one lump sum." (Ex. 43 at 3.) Ty Klotz described M. Klotz as Aurifex's go ld and silver buyer. (Ex. 43 at 3.) T y Klotz told Aurifex participant Mary Sherwood that he had been getting about 20 p e rc e n t a month for people, and that it was insured. "[W]hat would happen is he'd put my m o ne y into a bank account, and then he would use his money to trade. Therefore, if I ever w a n te d to get out of it, I would have my money there." (Ex. 36, Sherwood Dep. 33.) Ty K lo tz told Michelle Mullins that the money was insured with Lloyd's of London and that th e re was no risk. (Ex. 38, Prelim. Inj. Hr'g 20.) While soliciting participants to invest in Aurifex, Ty Klotz made statements that he k n e w were false, or recklessly disregarded the fact that they were false, including the f o llo w in g: a. that the Aurifex pool had been averaging a return of 20% per month f o r participants (Ex. 34, Carter Test. 9; Ex. 35, Sprenkel Dep. 48; Ex. 36, S h e rw o o d Dep. 33; Ex. 37, Robbins Dep. 116); b. th a t participants had no risk of loss of principal, as the participant's p rin c ip a l was insured with a Lloyd's of London insurance policy (Ex. 38, M u llin s Test. 20, 22; Ex. 39; Ex. 40, J. Seiler Test. 43; Ex. 44); c. th a t Aurifex would trade commodity futures only with Klotz's personal f u n d s , and that participants' funds would remain on deposit in Klotz's p e rs o n a l bank account (Ex. 33, Ty Klotz Dep. 31; Ex. 37, Robbins Dep. 119; E x . 38, Mullins Test. 23; Ex. 40, J. Seiler Test. 43; Ex 41, S. Seiler Test. 58; E x . 43, Aurifex Nov. 2005 Newsletter); d. th a t Aurifex would not charge a per transaction or yearly fee, but w o u ld instead be compensated by retaining 10% of the amount of a
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p a rtic ip a n t's principal once the investment had doubled (Ex. 44, Aurifex C o n tra c t); e. th a t participants could withdraw their investments, plus any earnings, a t any time (Ex. 33, Ty Klotz Dep. 31; Ex. 40, J. Seiler Test. 43-44); and f. th a t Ty Klotz was registered as a commodity pool operator (Ex. 35, S p re n k e l Test. 137-38; Ex. 37, Robbins Dep. 82-83; Ex. 41, S. Seiler Test. 5 7 -5 8 ; Ex. 45, Ty Klotz CFTC Licence; Ex. 46, Cloar Dep. 63-64). T y Klotz's introductory "Who We Are" brochure indicated that "futures trading re q u ire s superior intelligence, a dedication to learning and years of hard work and e x p e rien c e ," (Ex. 21), falsely implying that Aurifex had such experience. Ty Klotz sent newsletters to Aurifex participants which contained false statements in an effort to assure them that their current and future investments would be safe and p rof ita b le. The false statements included the following: a. th a t Aurifex was comprised of nine foreign corporations and four A m e ric a n corporations (Ex. 47); b. th a t Aurifex had $18,000,000.00 to work with in November 2005 (Ex. 4 3 , Newsletter at 2); and c. th a t profits for September 2005 were 21.8% (Ex. 48).

T y Klotz sent monthly statements to Aurifex participants that falsely stated what was tra d e d , when it was traded, the quantities traded, beginning and ending balances, and the p ro f it earned. (Koprowski Report ¶¶ 26-57; Ty Klotz Dep. 48, 56-57.) T y Klotz solicited individuals to invest in Aurifex from May 2004 to December 2005. D u rin g this time period 352 participants invested at least $2,226,267.59 in Aurifex. Of that

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a m o u n t, at least $2,051,703.10 was deposited into one of the three bank accounts controlled b y M. Klotz. An additional $174,564.49 was received from participants, but was not d e p o s ited into any known bank account and is unaccounted for. (Koprowski Report ¶ 64.) A f te r setting up the Aurifex Investment and Aurifex Research L.L.C. accounts and d e p o s itin g participant funds into those accounts, M. Klotz wrote checks to herself from th os e accounts for the personal use of M. Klotz and Ty Klotz. The Klotz Defendants used A u rif e x funds to purchase personal items including his and her Rolex watches for $35,000, a house, home renovations, medical treatment, and automobiles, including a Jaguar that Ty K lo tz drove. (Ex. 17, M. Klotz Dep. 57, 70; Ex. 8, Ty Klotz Dep. 227-28; Ex. 33, Ty Klotz D e p . 70.) After Ty Klotz moved in with Robin Bushur, Aurifex's bookkeeper, in

C a rbo n d a le, Illinois, Bushur, with Ty Klotz's knowledge and approval, purchased a large s c re e n television with Aurifex participant funds. (Ex. 85, Bushur Dep. 172-73; Ex. 86, C h e c k .) O f the more than two and a quarter million dollars participants invested in Aurifex, $ 4 9 7 ,6 8 7 .3 1 was distributed back to Aurifex participants; $80,405.70 was lost in commodity f u tu re s trading; $184,043.62 was paid to Aurifex employees; $34,826.11 was paid to credit c a rd companies; $146,102.10 was used to purchase gold and silver; and $313,851.10 was u se d for the Klotz Defendants' personal expenses such as cars, personal residence, Rolex w a tc h e s , and medical expenses. A total of $226,059.39 in cash withdrawals cannot be

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accounted for. Aurifex still owes its participants $1,826,708.16. (Koprowski Report ¶¶ 63-66.) M . Klotz's trading account at Xpresstrade was funded with $150,078.45 from A u rif ex participant funds funneled through M. Klotz's personal bank account or the Aurifex In ve s tm e n t account (126 account). The funds were invested in commodity futures and o p tio n s . Of the 24 months the account was traded, sixteen months were losing months and o nly eight months were profitable. From April 2004 through July 2006 the account incurred c u m u la tive trading losses of $67,497.16. From April through December 2004 the annual ra te of return was negative 95%. From January 2005 through December 2005, the annual ra te of return was negative 88%. From January 2006 through July 2006, the annual rate of re tu rn was negative 21%. Ty Klotz sent monthly pool statements by mail to Aurifex pool participants p u rp o rtin g to show their beginning of month balance, commodities futures trades that had o c c u rred during the month, and their end of month account balance. The monthly

s ta te m e n ts falsely reported trade activity and falsely reported earnings. (Koprowski Report ¶¶ 26-57.) Moreover, the statements did not reflect that the futures account was opened u n d e r the name "Monette Klotz" rather than the pool name, did not report the participants' re sp e c tive percentage share of the pool's funds, and almost always showed profits rather th a n losses.

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A u rif e x participants never received a Disclosure Document outlining risks, id e n tif yin g the pool's operator or manager, or describing the pool's policies, fees, c o m m iss io n s , expenses, or past performance. (Ex. 33, Ty Klotz Dep. 65-67.) IV . Plaintiff CFTC has alleged Ty Klotz and M. Klotz violated sections 4b(a)(i) and (iii), 4 c (b ) and 4o(1)(A) and (B) of the CEA, 7 U.S.C. §§ 6b(a)(i) & (iii), 6c(b), 6o(1)(A) & (B), b y misappropriating Aurifex participants' funds. Section 4b(a) of the CEA makes it unlawful for any person to deceive or defraud a n o th e r person "in or in connection with any order to make, or the making of, any contract o f sale of any commodity . . . for future delivery."
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Section 4c(b) of the CEA, 7 U.S.C.

The CEA provides in relevant part:

It shall be unlawful . . . (2) for any person, in or in connection with any order t o make, or the making of, any contract of sale of any commodity for future d e live ry made, or to be made, for or on behalf of any other person if such c o n tra c t for future delivery is or may be used for (A) hedging any transaction in interstate commerce in such commodity or the products or byproducts th e re o f , . . . (i) to cheat or defraud or attempt to cheat or defraud such other person; (ii) willfully to make or cause to be made to such other person any false report o r statement thereof, or willfully to enter or cause to be entered for such p e rs o n any false record thereof; [or to] (iii) willfully to deceive or attempt to deceive such other person by any means w h a ts o e ve r in regard to any such order or contract or the disposition or e x e c utio n of any such order or contract, or in regard to any act of agency p e rf o rm e d with respect to such order or contract for such person.

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§ 6c(b) prohibits fraud in connection with commodity options trading.4 Section 4o(1) makes it unlawful for a commodity pool operator to defraud a participant.5 M is a p p ro p ria tio n of customer funds for personal use violates the antifraud provisions o f section 4b(a)(2)(i) and (iii) of the CEA. CFTC v. Morse, 762 F.2d 60, 62 (8th Cir. 1985) (h o ld in g that defendant's use of customer funds for personal use violated section 4b of the C E A ); CFTC v. King, No. 3:06-CV-1583-M, 2007 WL 1321762, at *2 (N.D. Tex. May 7, 2 0 0 7 ); CFTC v. Int'l Berkshire Group Holdings, Inc., No. 05-CV-61588, 2007 WL

7 U.S.C. § 6b(a)(2). T h e ban on options fraud involves a two-step process: section 4c(b) of the CEA p ro h ib its option transactions "contrary to any rule, regulation, or order of the Commission," a n d the regulations promulgated thereunder make it unlawful for any person to deceive or d e f ra u d another "in or in connection with an offer to enter into, the entry into, the c o n f irm a tion of the execution of, or the maintenance of, any commodity option transaction." 1 7 C.F.R. § 33.10.
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S e c tion 4o(1) of the CEA provides in relevant part:

(1 ) It shall be unlawful for a commodity trading advisor, associated person of a commodity trading advisor, commodity pool operator, or associated person o f a commodity pool operator by use of the mails or any means or in s trum e n ta lity of interstate commerce, directly or indirectly-(A ) to employ any device, scheme, or artifice to defraud any client or p a rtic ip a n t or prospective client or participant; or (B ) to engage in any transaction, practice, or course of business which o p e rates as a fraud or deceit upon any client or participant or prospective c lien t or participant. 7 U.S.C. § 6o.
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3 0 8 7 5 0 8 , at *5 (S.D. Fla. Oct. 12, 2007). In order to prove fraud it is not necessary to show e vil motive or a subjective intent to cheat or steal: It is enough that he acted deliberately, knowing that his acts were u na u th o rize d and contrary to instructions. Such knowing, intentional conduct m a d e his acts wilful, and therefore his violations of the statutory prohibition a ga in s t cheating or defrauding the customer were wilful, in the accepted sense f or infractions of this type. M o r s e, 762 F.2d at 62 (quoting Haltmier v. CFTC, 554 F.2d 556, 562 (2d Cir.1977)). T h e evidence clearly establishes that Defendants Ty Klotz and M. Klotz deposited p a rtic ip a n ts ' funds in their own accounts, that they used significant portions of the p a rtic ip a n ts ' funds for their own personal expenditures, and that they knew that the funds th ey were spending were not their own. The evidence is sufficient to establish that

D e f e n d a n ts Ty Klotz and M. Klotz defrauded participants by misappropriating participant f un ds in violation of sections 4b(a)(i) and (iii) of the CEA. Ty Klotz and M. Klotz engaged in commodity options trading as well as commodity futures trading with participant funds o n deposit in the Xpresstrade account. The conduct of Ty Klotz and M. Klotz that violates s e c tio n 4b(a) of the CEA also constitutes a violation of section 4c(b) of the CEA and R e gu la tion 33.10. Plaintiff CFTC has alleged that Defendant Ty Klotz violated the antifraud sections o f the CEA identified above (sections 4b(a)(i) and (iii), 4c(b) and 4o(1)(A) and (b)) and s e c tio n 4b(a)(2)(ii) by making material misrepresentations to Aurifex participants and

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p ro s p e c tive Aurifex participants, by failing to report losses to participants, and by providing f a lse account statements to participants. "[T]o establish a claim for futures and options fraud under section 4b(a) and 4c(b) o f the CEA in an enforcement action, the CFTC must demonstrate that the defendant made a material misrepresentation of presently existing or past fact with scienter." CFTC v. R o s e n b e r g , 85 F. Supp. 2d 424, 447 (D. N.J. 2000). Actionable misrepresentations include th o s e made to investors when soliciting their funds. Id. at 447-48. There is no question that Ty Klotz made false representations. He made false re p re s e n ta tio n s concerning profit potential and the lack of risk to prospective participants, a n d he made false representations concerning profits earned to investors after they had in ve s te d . A misrepresentation is material "if there is a substantial likelihood that a

re a so na b le investor would consider it important in making an investment decision." Id. at 4 4 7 (quoting Saxe v. E.F. Hutton & Co., Inc., 789 F.2d 105, 109 (2d Cir. 1986)). " M isre p re s e n ta tion s regarding profit potential and risk go to the heart of a customer's in ve stm e n t decision and are therefore material as a matter of law." CFTC v. Marquis Fin. M g m t. Sys., Inc., No. Civ.A. 03-74206, 2005 WL 3752233, at *7 (E.D. Mich. June 8, 2005) (qu o tin g CFTC v. Noble Wealth Data Info. Servs., Inc., 90 F. Supp. 2d 676, 686 (D. Md. 2 0 0 0 )). The evidence also establishes that Ty Klotz made the false representations with the re q u is ite degree of scienter. "The term `scienter' refers to a mental state embracing an intent to deceive, manipulate, or defraud." Rosenberg, 85 F. Supp. 2d at 448. There is

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o ve rw h e lm in g evidence that Ty Klotz's misrepresentations were made intentionally and with k no w le d ge of their falsity. Ty Klotz admitted that the monthly statements contained m is re p re s e n ta tio n s as to the trade activity and the profits earned. (Ex. 33, Ty Klotz Dep. 5 7 .) Ty Klotz's affirmative false statements regarding his history of profits, insurance of the A u rif e x accounts by Lloyd's of London, and his registration as a commodity pool operator c a n n o t be the result of a mistake. The Court finds as a matter of law that Ty Klotz violated sections 4b(a)(i), (ii), and (iii), and 4c(b) of the CEA by making material misrepresentations to Aurifex participants a n d prospective Aurifex participants. V. P la in tif f CFTC has alleged that Ty Klotz and M. Klotz violated various sections of th e CEA and its regulations that apply specifically to commodity pool operators ("CPOs"). T h e term "commodity pool operator" is defined in the CEA to mean: a n y person engaged in a business that is of the nature of an investment trust, s y n d i c a te , or similar form of enterprise, and who, in connection therewith, s o lic its , accepts, or receives from others, funds, securities, or property, either d ire c tly or through capital contributions, the sale of stock or other forms of s e c u ritie s , or otherwise, for the purpose of trading in any commodity for f utu re delivery on or subject to the rules of any contract market or derivatives tran s a c tion execution facility. 7 U.S.C. § 1a(5). T y Klotz and M. Klotz operated as CPOs during the relevant time period because they

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e n ga ge d in a business that was in the nature of an investment trust, and solicited and re c e ive d funds from others for the purpose of trading commodity futures. Their transactions c o n s titu te d the operations of a commodity pool because the individual investments were c o m b in e d for investment in the futures market. The investments were deposited and c o m m in gle d in one of M. Klotz's bank accounts from which they were funneled into the M. K lo tz futures trading account. Plaintiff CFTC has alleged that Ty Klotz and M. Klotz violated section 4m(1) of the C E A , 7 U.S.C. § 6m(1), by acting as commodity pool operators ("CPOs") without benefit o f registration. Section 4m(1) makes it unlawful for a CPO to use the mails in connection with his b us in e s s as a CPO unless he is registered with the CFTC. 7 U.S.C. § 6m(1). The evidence c le a r ly establishes that neither Ty Klotz nor M. Klotz nor any of the Aurifex entities was re gis te re d as a CPO with the CFTC in any capacity. Accordingly, the Court finds as a matter o f law that Defendants Ty Klotz and M. Klotz violated section 4m(1) of the CEA. Plaintiff CFTC has alleged that Ty Klotz and M. Klotz violated section 4n(4) of the C E A , 7 U.S.C. § 6n(4), and Regulation 4.22, 17 C.F.R. § 4.22, by failing to provide a p p ro p ria te periodic account statements and certified annual reports to Aurifex participants. S ub se c tio n (4) requires every CPO to regularly furnish statements of account to each p a rtic ip a n t in the form prescribed by the CFTC and to include complete information as to the current status of all trading accounts in which such participant has an interest. 7 U.S.C.

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§ 6n(4). Regulation 4.22 details the required contents of the monthly account statement and th e annual report. Contrary to their obligations under the CEA and its regulations, Defendants Ty Klotz a n d M. Klotz did not furnish the Aurifex participants with any form of Annual Report. A lth ou gh Aurifex sent out monthly statements purporting to show activity on the individual p a rtic ip a n t's portion of the pooled funds, the statements did not detail the net asset value of th e pool at the beginning and end of the month, additions to and withdrawals from the pool, o r any information regarding brokerage commissions, fees or expenses. Accordingly, the C o u rt finds as a matter of law that Defendants Ty Klotz and M. Klotz violated section 4n(4) o f the CEA and Regulation 4.22. Plaintiff CFTC has alleged that Ty Klotz and M. Klotz violated section 4o(1)(A) and (B ) of the CEA, 7 U.S.C. § 40(1)(A) and (B), by committing fraud while acting as a CPO. Because Ty Klotz and M. Klotz were acting as CPOs, their misappropriation of c u s to m e r funds, as found in section IV above, also constitutes a violation of section 4o(1) o f the CEA. CFTC v. Skorupskas, 605 F. Supp. 923, 932 (E.D. Mich. 1985) (holding that c o m m o d ity pool operator misappropriated customer funds by disbursing investor funds to o th e r investors, herself and her family, thereby violating sections 4b(a) and 4o(1) of the C E A ). Accordingly, the Court finds as a matter of law that Defendants Ty Klotz and M. K lo tz violated section 4o(1) of the CEA.

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P la in tif f CFTC has alleged that Defendants Ty Klotz and M. Klotz violated CFTC R e gu la tio n 4.21 by failing to provide Disclosure Documents to prospective Aurifex p a rtic ip a n ts . R e gu la tio n 4.21 requires CPOs to deliver to prospective pool participants a D is c lo s u re Document prepared in accordance with §§ 4.24 and 4.25. 17 C.F.R. § 4.21. The re q u ired disclosures include a cautionary statement and a risk disclosure statement in la n gu a ge specified in the regulations, identification of key individuals and their business b a c k g ro u n d s , a discussion of the principal risk factors, a description of the investment p ro gra m and the use of the proceeds, and the past performance of the pool. 17 C.F.R. §§ 4 .2 4 and 4.25. Defendants Ty Klotz and M. Klotz never provided a Disclosure Document to p ro sp e c tive Aurifex pool participants. Accordingly, the Court finds as a matter of law that D e f e n d a n ts Ty Klotz and M. Klotz violated CFTC Regulation 4.21. Finally, Plaintiff CFTC has alleged that Ty Klotz and M. Klotz violated CFTC R e gu la tio n 4.20(c) by commingling the Aurifex participant funds with the funds of others. R e gu la tion 4.20(c) prohibits CPOs from commingling the property of any pool with th e property of any other person. 17 C.F.R. § 4.20(c). The evidence clearly establishes that f u n d s from participants were commingled with the funds of M. Klotz, including in her own p e rso n a l bank account, the various Aurifex bank accounts and her personal trading account. T h e evidence also clearly establishes that Defendants Ty Klotz and M. Klotz spent

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p a rticipa n t funds for their own personal use. (Ex. 62, 626 account summary.) Accordingly, th e Court finds as a matter of law that Defendant Ty Klotz and M. Klotz violated CFTC R e gu la tion 4.20(c). V I. In light of the Klotz Defendants' violations of the CEA Plaintiff CFTC has requested in ju n c tive relief pursuant to section 6c of the CEA, 7 U.S.C. § 13a-1. Section 6c authorizes the CFTC to bring an action to enforce compliance with the C E A "whenever it shall appear to the Commission that any contract market or other person h a s engaged, is engaging, or is about to engage in any act or practice constituting a violation o f any provision of this chapter or any rule, regulation, or order thereunder." 7 U.S.C. § 1 3a -1 . "Upon a proper showing, a permanent or temporary injunction or restraining order s h a ll be granted without bond." Id. "Actions for statutory injunctions need not meet the requirements for an injunction im p o s e d by traditional equity jurisprudence. Once a violation is demonstrated, the moving p a rty need show only that there is some reasonable likelihood of future violations." CFTC v . Hunt, 591 F.2d 1211, 1220 (7th Cir. 1979). See also CFTC v. Muller, 570 F.2d 1296, 1 3 0 0 (5th Cir. 1978) ("In actions for a statutory injunction, the agency need not prove irre p a ra b le injury or the inadequacy of other remedies as required in private injunctive suits. A prima facie case of illegality is sufficient." ).

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C o u rts look to a variety of factors in determining whether there is some reasonable lik e lih o o d of future violations. Factors to be considered include "the egregiousness of the d e f en da n t's actions, the isolated or recurrent nature of the infraction, the degree of scienter in vo lve d , the sincerity of the defendant's assurances against future violations, the d e f e n d a n t's recognition of the wrongful nature of his conduct, and the likelihood that the d e f en da n t's occupation will present opportunities for future violations." CFTC. v. Risk C a p ita l Trading Group, Inc., 452 F. Supp. 2d 1229, 1247 (N.D. Ga. 2006) (quoting SEC v . Ginsburg, 362 F.3d 1292, 1304 (11th Cir.2004)). "While past misconduct does not lead n e c e s s a rily to the conclusion that there is a likelihood of future misconduct, it is `highly s u gge stive of the likelihood of future violations.'" Hunt, 591 F.2d at 1220 (quoting SEC v. M g m t. Dynamics, Inc., 515 F.2d 801, 807 (2d Cir. 1975)). "When the violation has been f o u n d e d on systematic wrongdoing, rather than an isolated occurrence, a court should be m o re willing to enjoin future misconduct." Id. See also CFTC v. Am. Metals Exch. Corp., 6 93 F. Supp. 168, 191 (D. N.J. 1988) ("The likelihood of future violations may be inferred f ro m past infractions based upon consideration of the totality of the circumstances to d e te rm in e if the past infraction was an isolated occurrence as opposed to an indication of a s ys te m a tic and continuous pattern of wrongdoing."). T h e Klotz Defendants' fraudulent activities continued for approximately two years, in ju re d over 300 participants, and was directed at some of the most vulnerable people in th e ir community. The fraud involved significant planning and preparation, as evidenced by

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D e f e n d a n ts ' formation of companies, creation of new bank accounts, and preparation of n e w s le tters and monthly statements. The Klotz Defendants used the fruits of their fraud to p u rc h a s e substantial luxury items for themselves. Even after this case was initiated the Klotz D e f e n d a n ts were not forthcoming with information about their disposition of participants' f u n d s . The Court concludes that there is some reasonable likelihood of future violations if D e f e n d a n ts are not enjoined from further statutory violations and also from further business a c tivitie s related to soliciting and accepting money from commodity pool participants. A c c o rd in gly, the Court will enter an injunction according to the terms requested by Plaintiff C FTC . VII. P la in tif f CFTC has also requested the Court to issue an order requiring Ty Klotz and M . Klotz, jointly and severally, to $ 1 ,8 2 6 ,7 0 8 .1 6 . "As the Act expressly authorizes the Court to provide the equitable remedy of an in j u n c ti o n in 7 U.S.C. § 13a-1, the Court has the authority to award `ancillary equitable re lie f,' including restitution." CFTC v. Brockbank, 505 F. Supp.2d 1169, 1175 (D. Utah 2 0 0 7 ) (quoting Risk Capital Trading Group, 452 F. Supp. 2d at 1247-48). Although c u s to m e r reliance on the defendant's misrepresentation is not a necessary element of the C F T C 's case in an enforcement action, it is essential to restitution relief sought to c o m p e n s a te an injured party to the extent that it tends to prove or disprove a causal nexus pay restitution to the Receiver in the amount of

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b e tw e e n the fraudulent conduct and the injury suffered.

Indosuez Carr Futures, Inc. v.

C F T C , 27 F.3d 1260, 1264-65 (7th Cir. 1994); Rosenberg, 85 F. Supp. 2d at 447. In a case involving primarily a failure to disclose, reliance is presumed. Affiliated Ute C itiz e n s v. United States, 406 U.S. 128, 153 (1972).6 "All that is necessary is that the facts w ith he ld be material in the sense that a reasonable investor might have considered them im p orta n t in the making of th[e] decision [to buy or sell]." Id. at 153-54. See Waters v. Int'l P r e c io u s Metals Corp. 172 F.R.D. 479, 485 (S.D. Fla. 1996) (applying Affiliate Ute p re s u m p tion of alliance to CEA omissions case). T h is case involves both omissions and misrepresentations. The Klotz Defendants f a iled to tell investors that they had no past experience trading commodity futures, failed to d is c lo s e the actual trading losses, and failed to tell investors that they were using participant f un ds for their own personal expenses. From these omissions of material fact, reliance can b e presumed. However, the Court does not believe it is necessary to rely on a presumption. The C o u rt is satisfied that there is ample evidence in the record to support a finding that the A u rif ex participants relied on both the false statements and the omissions. For example, N a n c y Carter testified that Ty Klotz told her she could expect to make fifteen to twenty p e rc e n t per month, and after investing and receiving statements showing large profits and Although Affiliated Ute involved the Securities Exchange Act of 1934, courts have trad itio n a lly looked to case law developing similar provisions of the securities laws in in te rp re ting provisions of the CEA. Saxe, 789 F.2d at 109 (citing Merrill, Lynch, Pierce, F e n n e r & Smith v. Curran, 456 U.S. 353, 395 (1982)).
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n o losses, she opened additional accounts. (Ex. 34, Prelim. Inj. Hr'g Tr. 9, 12, 14.) Nick S p re n k le testified that based on Ty Klotz' representations, the profits shown on the monthly s ta te m e n ts and Ty Klotz's registration certificate, he encouraged other people to invest. (E x . 35, Sprenkle Dep. 48, 94, 138; Ex. 45.) Michelle Mullins decided to invest more m o ne y with Aurifex because her previous investments were doing so well, and because Ty K lo tz told them they could not lose the money because it was backed by gold and silver. (E x . 38, Prelim. Inj. Hr'g Tr. 24-25, 27; Ex. 44.) Sandy Seiler felt safe in investing because T y said her money would stay safe and secure in a separate bank account. (Ex. 41, Prelim. In j. Hr'g Tr. at 58). Ty Klotz and M. Klotz do not object to the entry of an order of restitution. They have o n ly requested the Court to take into consideration the assets that are in the control of the R e c e ive r. The Court will not reduce the restitution order by the value of the assets in the c o n trol of the Receiver because that amount is not yet certain and because there are still e x p e n s e s associated with the Receivership estate. The Court agrees, however, that after the a s s e ts are liquidated and all Receivership fees have been paid, the assets remaining in the R e c e ive rsh ip estate will be used to offset the Klotz Defendants' restitution obligations. Plaintiff CFTC also seeks an award of prejudgment and post-judgment interest. P o s t- j ud gm e n t interest on a money judgment in a civil case in a district court is mandated b y statute. 28 U.S.C. § 1961(a). "Under federal law, the rationale underlying an award of p re ju d gm e n t interest is to compensate the wronged party for being deprived of the monetary

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v a lu e of his loss from the time of the loss to the payment of [the] judgment." Suiter v. M itc h e ll Motor Coach Sales, Inc., 151 F.3d 1275, 1288-89 (10th Cir.1998). Prejudgment in te re s t is therefore "ordinarily awarded, absent some justification for withholding it." Id. If the district court determines that an award of prejudgment interest would serve to c o m p e n sa te the wronged party, it must then determine whether the equities preclude such a n award. CFTC v. Brockbank, 505 F. Supp. 2d 1169, 1175-76 (D. Utah 2007). The Court f in d s that an award of prejudgment interest is necessary to compensate the investors for their lo s s e s and is not precluded by the equities. Accordingly, an order will be entered requiring Defendants Ty Klotz and M. Klotz, j o in tly and severally, to pay $1,826,708.16 in restitution, together with prejudgment and post ju d gm e n t interest. V I I I. P la in tiff CFTC has requested the Court to enter a civil penalty against the Klotz D e fe n d a n ts in the amount of $120,000 for each of the counts of the Complaint in which they a re charged with violations of the Act or Regulations. Because Ty Klotz is charged in eight c o un ts, the CFTC proposes a $960,000 penalty for him. Because M. Klotz is charged in s e ve n counts, the CFTC proposes an $840,000 penalty for her. Defendant Ty Klotz objects to the penalty as being excessive. He contends that he w ill attempt to pay restitution, but that the addition of the penalty will defeat any chance of re p a ym e nt during his lifetime.

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D e fe n d a n t M. Klotz objects to any penalty because she contends that Ty Klotz was th e perpetrator of the fraud: the accounts were established at his direction, he solicited the f u n d s , and he published the fraudulent statements. The CEA authorizes the Court to impose a civil monetary penalty against a defendant f o r each violation of the Act or CFTC Regulations established by the record. 7 U.S.C. § 1 3 a -1 (d ). The CFTC's Regulations permit a civil monetary penalty of not more than

$ 1 2 0 ,0 0 0 for each violation or triple the monetary gain to the defendant, whichever is gre a te r, for each violation. 17 C.F.R. § 143.8. In determining the total amount of the monetary penalty to be imposed the Court is re q u ire d to "consider the appropriateness of such penalty to the gravity of the violation." 7 U .S .C . § 9a(1). In setting the amount of the penalty "the financial worth of the defendant o r the collectibility of any fine are no longer relevant considerations." Brenner v. CFTC, 3 3 8 F.3d 713, 723 (7th Cir. 2003). Accordingly, Ty Klotz's argument that he will not be a b le to repay the penalty is not a relevant consideration. The Court must consider instead the gravity of the violation. "Civil penalties should b e imposed to act as a deterrent, but should be proportional to the gravity of the offenses c o m m itte d ." Brockbank, 505 F. Supp. 2d at 1177 (quoting CFTC v. Gibraltar Monetary C o rp ., Inc., No. 04-80132-CIV, 2006 WL 1789018, at *27 (S. D. Fla. May 30, 2006)). In B r o c k b a n k the court determined that the imposition of the highest possible civil fine against t h e defendant was warranted because "[t]he seriousness of his violations goes to the heart

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o f the regulatory purpose-prevention of the type of fraud in which he repeatedly and c o n tin uo us ly engaged." Id. "The short list of aggravating factors for Brockbank include his f la gra n t, repeated, and systemic violations, his refusal to obey the preliminary injunction, h is violation of the asset freeze, his using large sums of investor money as his own, his re f u s a l to return or account for the large amount of investor money he moved offshore, his h id in g assets, his destroying evidence, and his total lack of cooperation with and actual o bs tru c tio n of the CFTC." Id. Ty Klotz's violations similarly go to the heart of the regulatory purpose of preventing the type of fraud in which he engaged. He set up a complicated scheme to take advantage o f vulnerable individuals, used his wife to assist him in that scheme, used the investors' m o n e y as his own, left the state when he ran into difficulties, hid money, and failed to c o o pe ra te with the CFTC even after multiple court orders. The Court is satisfied that given th e nature of his violations, the imposition of the highest civil penalty of $120,000 for each o f the eight violations is appropriate. As to M. Klotz, the Court disagrees with her suggestion that no penalty be imposed b e c a u s e Ty Klotz was the perpetrator of the fraud. Ty Klotz did not act alone. His fraud d e p e n d e d on the cooperation of M. Klotz. M. Klotz opened bank accounts and a trading a c c o u n t to enable the fraud to proceed, she deposited participants' money in her accounts a n d then proceeded to spend that money as if it were her own. She was more cooperative w ith the CFTC than was Ty Klotz, but M. Klotz has not accounted for all her expenditures

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a n d was less than forthright with the CFTC regarding the source of money for her home. S he was less involved in the overall scheme to defraud than was Ty Klotz and a smaller p e n a lty will be sufficient to act as a deterrent. Accordingly, the Court finds that a civil m o n e ta ry penalty of $50,000 for each of her seven violations is appropriate. An order and judgment consistent with this opinion will be entered.

Date:

February 1, 2008

/s/ Robert Holmes Bell ROBERT HOLMES BELL C H IE F UNITED STATES DISTRICT JUDGE

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