“A two-letter conjunction and a two-word phrase decide this case. At stake are hundreds of millions of dollars.” 
So begins the Ninth Circuit Court of Appeals’ opinion issued today in a long-awaited decision in the CFTC’s appeal of the district court’s dismissal of its case against Monex. The appellate panel disagreed with Monex’s proposed interpretations of the two letters and the two words and sent the case back to the district court to proceed to discovery.
At issue are the CFTC’s allegations that (i) Monex’s “Atlas Program” illegally offered retail customers margined commodity trades and (ii) in promoting that trading program, 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.
The Two Words: “Actual Delivery”
The Dodd-Frank Act added Section 2(c)(2)(D) to the Commodity Exchange Act (the “CEA”). That section prohibits the offer or sale of commodities to retail customers on margin unless those transactions result in “actual delivery within 28 days.” The prohibition was designed to give the CFTC jurisdiction over previously unregulated leveraged, off-exchange trading in commodities. After the CFTC was given jurisdiction over the retail, off-exchange foreign exchange market through amendments made to the CEA in the 2008 Farm Bill, many fraudsters had moved to similar leveraged trading in precious metals among other commodities.
Monex argued that by transferring title to the full amount of gold to the customer held at an independent depository, that it had achieved “actual delivery” within 28 days and thus the Atlas Program was not prohibited by Section 2(c)(2)(D). The Court disagreed:
Thus, the plain language tells us that actual delivery requires at least some meaningful degree of possession or control by the customer. It is possible for this exception to be satisfied when the commodity sits in a third-party depository, but not when, as here, metals are in the broker’s chosen depository, never exchange hands, and are subject to the broker’s exclusive control, and customers have no substantial, non-contingent interests.[5
Accordingly, the Court concluded 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.”
The Two Letters: "Or"
Section 753 of the Dodd-Frank Act added Section 6(c)(1) to the CEA. That provision makes it unlawful to use “any manipulative or deceptive device” in connection with the sale of a commodity in interstate commerce. Monex argued that the statutory language was meant to prohibit only fraudulent manipulations so that Congress had really intended an “and” instead of the “or.” Afterall, the legislative history of Section 753 indicated that the intent behind the provision was to strengthen the CFTC’s anti-manipulation powers – not its anti-fraud authority. Senator Maria Cantwell in introducing Section 753 stated:
My amendment strengthens the Commodity Futures Trading Commission’s authority to go after manipulation and attempted manipulation in the swaps and commodities markets. . . . Some people might be thinking: Why do we need legislation like that? Don’t we already have something in place? Unfortunately, current law does not have enough protections for our consumers, and we have found in other areas that it is very important to have a strong bright line, a law on the books against manipulation. . . . [T]he federal courts have recognized that with the CFTC’s weaker anti-manipulation standard, market “manipulation cases generally have not fared so well.” In fact, the law is so weak that in the CFTC’s 35-year history, it has only had one successfully prosecuted case of market manipulation. . . .
The Court disagreed with Monex: “When the word ‘or’ joins two terms, we apply a disjunctive reading.” The Court continued: “While there are exceptions, this is not an instance where a disjunctive meaning would produce absurd results [so that the] statutory context compels us to treat ‘or’ as if it were ‘and’.”
Accordingly, the Court concluded:
In bill drafting, as in life, little things often make big differences. Here, three words stand between dismissal and discovery. Although Monex contends that no fraud occurred, we must, at this point accept as true the CFTC’s well-pleaded complaint to the contrary. And because the CFTC’s claims are plausible, this lawsuit should continue.
 CFTC v Monex Credit Company, et al., Dkt. No. 18-55815, slip opinion at 4 (9th Cir. July 25, 2019) (“Slip. Op.”).
 During floor debate on the Dodd-Frank Act, Senator Blanche Lincoln of Arkansas explained that Section 742 was intended to give the CFTC jurisdiction over commodity contracts with certain terms that the United States Court of Appeals for the Seventh Circuit had ruled to be outside the CFTC’s regulatory authority in its decision in CFTC v. Zelener, 373 F.3d 861 (7th Cir. 2004), rehearing en banc denied, 387 F.3d 624 (7th Cir. 2004). See 156 Cong. Rec. S5,924 (daily ed. July 15, 2010) (statement of Sen. Lincoln).
 Food, Conservation and Energy Act of 2008, Pub. Law 110-246, 122 Stat. 1651 (2008).
 See Testimony of CFTC Acting Director of Enforcement, Stephen J. Obie and NFA President and Chief Executive Officer Daniel Roth, Hearing to Review Implications of the CFTC v. Zelener Case Before the Subcomm. on General Farm Commodities and Risk Management of the H. Comm. on Agriculture, 111th Cong. 52-664 (2009).
 Slip op. at 14.
 156 Cong. Rec., 111th Cong., No. 67 S3348 (May 6, 2010) (emphasis added).
 Slip op. at 18.
 Slip op. at 21.
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