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Illustrated by a satellite photograph of a hurricane, the television commercial told viewers how they might cash in on the weather phenomenon known as El Ni�o. “Droughts, floods and other adverse conditions could drastically alter the supply and demand dynamics of the corn market,” a narrator said in the ad, which ran on CNBC during March 1998. “Find out how as little as $5,000 could translate into profits as high as 200 to 300 percent,” the narrator concluded. “Call R.J. Fitzgerald today.” Federal regulators called the company — now-defunct R.J. Fitzgerald & Co. Inc. — and hauled it before a federal court to face accusations of fraud and other violations of the Commodity Exchange Act. But a U.S. magistrate judge in Tampa, Fla., last year ruled in favor of the brokerage, saying the ad and other actions by the company were not misleading or deceptive. Late last month, however, a panel of the 11th U.S. Circuit Court of Appeals voted 2-1 to reverse. Among other things, the majority held that the company was obligated to disclose the proportion of its customers who had won and lost money — a requirement that the dissenter and a former commodities regulator say is an extension of current law. The case spawned three separate opinions in which the judges engaged in a passionate debate over the risks of commodities trading and the responsibilities brokers have to their clients. “This case serves as a pungent reminder that caveat emptor has no place in the realm of federal commodities fraud,” visiting Senior Judge Robert E. Cowen of the 3rd Circuit wrote in the majority decision. Congress, the courts and federal regulators, he added, “have determined that customers must be zealously protected from deceptive statements by brokers who deal in these highly complex and inherently risky financial instruments.” The dissenter, Judge Charles R. Wilson, noted that for 45 seconds of the one-minute commercial, the bottom one-fourth of the screen displayed a bold-type message above the firm’s telephone number that read, “OPTIONS INVESTING INVOLVES A RISK OF LOSS.” “The fact of the matter is, in options, you are either going to lose big or win big,” wrote Wilson. “[T]hat is why brokerage firms like RJFCO can advertise potential profits of up to 200 to 300 percent and must also warn that this type of investment involved a high risk of loss (only risk capital should be used).” Wilson’s dissent prompted the other member of the majority, Judge Gerald B. Tjoflat, to author a concurring opinion. Tjoflat called the commercial “lopsided advertising” that emphasized enormous profits that failed to convey the magnitude of the risk involved, adding that 95 percent of the firm’s clientele lost money on the advertised investments. Commodity Futures Trading Commission v. R.J. Fitzgerald & Co., No. 01-14780 (11th Cir. Oct. 29, 2002). TAKING A GAMBLE Curiously, the 95 percent loss rate described by Tjoflat is not far off the average in a business that appears to make blackjack and craps bets look safe. A U.S. State Department description of the American economy states, “While professional traders who are well versed in the futures market are most likely to gain in futures trading, it is estimated that as many as 90 percent of small futures traders lose money in this volatile market.” Another report by two University of Georgia agricultural economists, John C. McKissick and Steven C. Turner, declares that almost 90 percent of speculators in commodities futures lose money. Mary S. Scriven, the Tampa, Fla., U.S. magistrate judge who exonerated R.J. Fitzgerald & Co., emphasized the business’s inherent risks in her decision. “It was not proven that the firm’s win/loss record was any worse than that experienced by other firms in the industry,” she wrote, adding that the trial established that the firm’s success rate was “consistent with or higher than that achieved industry-wide.” Scriven reported that Fitzgerald operated from 1992 until at least 1998 “as a legitimate business whose primary market focus was to serve small accounts with relatively little experience in the commodities market.” The owner and operator of the company, Raymond James Fitzgerald Jr., personally reviewed all new client packets to make sure they included the booklets that disclosed the risks of the business, she added. The Commodity Futures Trading Commission, which oversees the business for the federal government and brought the accusations against R.J. Fitzgerald & Co., cited the commercial and a seminar for potential clients as examples of the company’s violations of the law. But Scriven was unpersuaded, noting that of the firm’s 1,200 customers, the commission cited only seven alleged fraud victims, whose testimony, she said, “was not compelling in quantity or quality.” Scriven was unmoved by a witness who lost $25,000, noting that the witness went to casinos more than 20 times a year and had a tax write-off of $27,000 in gambling losses the year he was a Fitzgerald client. Another witness said he didn’t understand the trades but part of his marketing job at a food company involved monitoring commodity futures prices from the Chicago Board of Trade. Commodity Futures Trading Commission v. R.J. Fitzgerald & Co., 173 F. Supp. 2d 1295 (M.D. Fla. 2001). RISK-REWARD BALANCE On appeal to the 11th Circuit, the commission found sympathizers in Cowen, a 1987 Reagan appointee, and Tjoflat, a 1975 Ford appointee. Cowen’s decision agreed with the commission that, among other things, the commercial was misleading because the overall message overemphasized profit potential and downplayed the risk of loss. Cowen said statements such as “The potential of the corn market may never be greater” in the commercial were not balanced by “boilerplate risk disclosure language.” He pointed to previous cases in which a general risk disclosure statement in a commercial “does not automatically preclude liability” under the Commodity Exchange Act if the overall message is misleading and deceptive. Cowen said the firm should have disclosed its investment record because “a reasonable investor surely would want to know — before committing money to a broker — that 95 percent or more of RJFCO investors lost money.” Cowen was also unimpressed that other investment firms had worse records than the Fitzgerald firm’s, echoing the commission’s argument that the law should not foster a “‘race to the bottom’ where liability for unquestionably deceptive activity is based in part on whether your competitors are not doing any better than you are.” Wilson, a 1999 Clinton appointee and a former U.S. attorney in Tampa, declared in dissent that the majority holding “provides no useful guidance to commodities brokerage firms as to how to bring their solicitation and advertising activities into compliance with the law.” He added that the firm did not falsely misrepresent profit potential or downplay the risk, noting that in the commercial “nothing is guaranteed.” He pointed to conditional statements such as El Ni�o’s effects “could mean huge profits” and that “conditions may exist” for 200 percent to 300 percent profits. Wilson added that in the middle of the commercial, the narrator changes his voice and says, “Option investing involves a high risk of loss and only risk capital should be used.” “How much more warning is required than a disclosure that the investment is a ‘high risk’?” Wilson asked. Wilson concluded, “Commodities brokerage firms should be on the alert — this decision may make it difficult to advertise and solicit business in the future. It is uncertain what subsequent advertising language may ‘overemphasize profit and downplay risk of loss.’” In his concurrence, Tjoflat responded to Wilson’s arguments and concluded with his own admonishment: “Don’t make an active attempt to instill in the investor a grossly inaccurate picture of the risk-to-reward ratio. “That is the rule in this case — a rule I find to be abundantly clear,” he added. Philip McBride Johnson, a former chairman of the commodity commission, said he agreed with Wilson that the majority’s requirement that firms disclose their customers’ success rates was an extension of law. In the past, he added, this duty was imposed only when a promotion boasted about a firm’s record. Johnson, now practicing law at the Washington, D.C., office of New York’s Skadden, Arps, Slate, Meagher & Flom, added that the idea of setting rigid boundaries for crossing over from lawful to illegal speech might raise First Amendment issues. “Today, the courts look at the effect — and intent — of the speech to determine its legality,” he said. “Anything dictating how to articulate a point may have constitutional implications.” Fitzgerald and other employees were represented by Constantine J. “Chris” Gekas of Chicago’s Gekas & Associates and Montgomery N. Kosma of the Washington office of Los Angeles-based Gibson, Dunn & Crutcher. Kosma is now with Jones, Day, Reavis & Pogue. Gekas declined to discuss the case. Stephen M. Humenik and David A. Reed of the commission represented the government. A commission spokesman declined comment. A spokesman for the National Futures Association, the private body that regulates the industry, said the association officials were “currently reviewing the decision to see how it might impact our enforcement efforts.”

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