July 29, 2021
by Katherine Cooper

In its litigation of the CFTC’s enforcement action against it, Monex swings and misses a second time in the Ninth Circuit.  In a July 20, 2021 memorandum opinion, the Ninth Circuit rejected Monex’s appeal from the district court’s grant of a preliminary injunction.[1]

In its enforcement action, the CFTC alleges that (i) Monex’s “Atlas Program” illegally offered retail customers margined commodity trades and (ii) in promoting that trading program, Monex materially misrepresented the risk of loss and likelihood of profits.  Monex’s Atlas Program permitted customers to buy on margin precious metals which were held at independent depositories.  When a customer bought gold from Monex, Monex transferred title to the gold held in a depository to the customer.  However, only Monex had a contract with the depository, and only by paying off the margin loan would a customer have the right to take physical possession of the gold from the depository.  Moreover, if the price moved against the customer’s position, Monex had the right to call for additional margin and in some cases liquidate the position at the customer’s loss.  Section 2(c)(2)(D) of the Commodity Exchange Act (the “CEA”), which the Dodd Frank Act added to the CEA in 2010, prohibits the offer or sale of commodities to retail customers on margin unless those transactions result in “actual delivery within 28 days.”[2]

In a May 1, 2018 order, the United States District Court for the Central District of California granted Monex’s motion to dismiss.[3]  The district court reasoned that (i) the caselaw on actual delivery on which the CFTC relied predated Dodd Frank and thus was inapposite to the question of whether Monex achieved actual delivery and (ii) the legislative history of Section 2(c)(2)(D) supported that delivery of a commodity to a third party in a financed transaction satisfied the actual delivery requirement.[4]  In addition, the district court reasoned that Section 6c(1)’s prohibition of “any manipulative or deceptive device”[5] required that the CFTC demonstrate that a manipulation had occurred which the CFTC had not alleged.

The CFTC appealed the district court's order to dismiss.  On July 25, 2019, the Ninth Circuit reversed.[6]  Its reasoning turned in part on the procedural posture of the case.  The Ninth Circuit reasoned that “at the Federal Rule of Civil Procedure 12(b)(6), Motion to Dismiss, stage, the Court should ignore Monex’s challenges to the CFTC’s characterization of the workings of the Atlas Program and “accept as true the [CFTC’s] allegations in the complaint.”[7]  But it also seemed to comment to some degree on the merits by stating “the plain language tells us that actual delivery requires at least some meaningful degree of possession or control by the customer.”

The Ninth Circuit also rejected Monex’s argument that Section 6c(1)’s prohibition on “any manipulative or deceptive device” requires an allegation of manipulative activity.  Instead, mere allegations of deceptive conduct can constitute prohibited activity under the statute.  In sum, the Ninth Circuit reasoned that “or” means “or,” and “or” does not mean “and.”

Following the Ninth Circuit’s decision, Monex sought review by the United States Supreme Court by filing a petition for certiorari.[8]  The Supreme Court rejected the petition.[9]

After being remanded to the district court, the CFTC moved for a preliminary injunction, which the district court granted.[10]  Monex appealed.

The Ninth Circuit affirmed the district court’s grant of a preliminary injunction.  It rejected an argument advanced by Monex on the procedural ground that it had forfeited the argument by not raising the argument before the district court.  The Ninth Circuit also found that the district court’s factual findings regarding Monex’s failure to achieve “actual delivery” were “consistent with the evidence and not clearly erroneous.”  In addition, the Ninth Circuit denied Monex’s argument that the CFTC did not provide fair notice how Monex should comply with the statute’s requirements.  Finally, the Ninth Circuit rejected Monex’s argument that the preliminary injunction was overbroad.

Monex’s second swing and miss at the Ninth Circuit again is not clearly based on a substantive legal basis, but rather, at least in part, a procedural one: that Monex had not raised its argument before the district court.  With the two strikes against Monex in Ninth Circuit, to keep the baseball analogy going, does not meant that Monex cannot get a walk-off hit and win on the merits in a jury trial.  But as any baseball fan knows, a batter with a 0 and 2 count is not as likely to get a winning hit – but it’s not impossible.


[1] CFTC v. Monex Credit Co., 2021 WL 3057072 (9th Cir. 2021).

[2] 7 U.S.C. § 2(c)(2)(D).

[3] CFTC v. Monex Credit Co., 311 F. Supp.3d 1173 (C.D. Cal. 2018).

[4] Id. at 1182.

[5] 7 U.S.C. § 9(1) (emphasis added).

[6] CFTC v. Monex Credit Co., 931 F.3d 966 (9th Cir. 2019).

[7] Id. at 975.

[8] Monex Dep. Co. v. CFTC, 2020 WL 1043435, Case No. 19-933 (S.Ct. Jan. 23, 2020).

[9] Monex Dep. Co. v. CFTC, 141 S.Ct. 158 (2020).

[10] CFTC v. Monex Credit Co., 2020 WL 6811473 (C.D. Cal. Nov. 4, 2020).

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