On January 8, 2024, the Fifth Circuit Court of Appeals reversed a $6.5 million jury verdict, holding that the U.S. Commodity Futures Trading Commission (CFTC) failed to provide fair notice of its interpretation of a decades-old rule preventing commodities traders from “taking the other side of orders” without clients’ consent.1 The Fifth Circuit noted that this was a case of first impression and agreed with EOX Holdings LLC (EOX) and its commodities broker, Andrew Gizienski, that the CFTC rule at issue regarding “taking the other side of customer orders” was ambiguous; that for 39 years the CFTC did not issue any guidance to indicate that the defendants’ conduct was prohibited; and the CFTC did not take “steps to advise the public that it believed the practice was questionable.” Therefore, the Fifth Circuit held that EOX and Gizienski did not have fair notice of the potential violation.
The EOX case is a continuation of the fair notice doctrine in administrative law and provides further context on what steps may be necessary for an agency to provide sufficient guidance about the scope of agency rules. The EOX case may have significant implications for agencies’ abilities to expand the scope of existing rules in novel ways without first issuing guidance or identifying prior enforcement actions alleging the conduct is a violation. Notably, the CFTC did not seek judicial deference to its interpretation because of its view that the regulation plainly supported liability. Notwithstanding that, the Fifth Circuit noted that such deference would not apply in instances where there was not “fair notice” of the agency’s interpretation of the regulation.
EOX is a commodities broker registered with the CFTC. In 2018, the CFTC filed a civil enforcement action against EOX and Gizienski for insider trading and for violating Rule 155.4 (Rule) for “knowingly taking the other side of customer orders without the customers’ prior consent.” One of Gizienski’s clients granted him a power of attorney allowing Gizienski to act on the client’s behalf and to enter into block trade transactions at Gizienski’s discretion. EOX waived its policy prohibiting discretionary trading and received approval from a futures exchange and from two clearing registered futures commissions merchants, and Gizienski conducted authorized discretionary trading on behalf the client in energy futures. Neither Gizienski nor EOX disclosed to other EOX customers that Gizienski was conducting discretionary trading on behalf of the client in the same markets in which he served as a broker for other EOX customers.
During the trial, the defendants and the CFTC argued over whether Gizienski’s conduct was “taking the other side of customer orders” under Rule 155.4. The CFTC argued that “taking the other side of customer orders” under the Rule meant “making the decision to trade opposite the order and executing the trade opposite the order.” The defendants argued that taking the other side of customer orders meant “becoming a counterparty with a financial interest and the possibility of profit and loss.” The district court agreed with the CFTC’s interpretation and instructed the jury that “an individual takes the other side of an order if he makes the decision to trade opposite the order and executes the trade opposite the order.” It was not necessary for Gizienski to own or have a financial interest in the account he was trading from in order to take the other side of a customer order. The jury found that the defendants knowingly took the other side of customers’ orders without prior consent in violation of Rule 155.4, resulting in a penalty of $6.5 million.2 The defendants appealed to the Fifth Circuit, arguing that the jury instruction used the wrong definition of the Rule.3
Fifth Circuit Ruling
The Fifth Circuit reversed the penalty judgment, finding that the CFTC failed to give fair notice that the conduct was prohibited because the text of Rule 155.4 was ambiguous and the CFTC did not provide guidance even though the Rule had existed for decades.
The court determined that the text of the Rule was ambiguous because under a plain reading the text itself was silent on whether the Rule was limited to or broader than individuals with a financial interest in the trading as narrowly defined by the defendants. Trial testimony strengthened this conclusion, as statements by witnesses did not signal a clear understanding of what “taking the other side” of trades meant.
Given that the Rule was ambiguous, the court analyzed whether the CFTC gave fair notice that the conduct was prohibited. The court reasoned that fair notice had not been given because the CFTC (a) had failed to “publicly state” that the conduct was prohibited for years and (b) had not brought prior enforcement actions for the specific conduct. Last, the court determined that it would not have been “extraordinarily clear” to the defendants that such conduct was prohibited under the Rule.
The court rejected the CFTC’s arguments that the agency had issued public guidance that would have put the defendants on notice because the examples cited by the agency suggested that an ownership interest in the account trading was an important component of “taking the other side” of trades. Furthermore, the prior enforcement actions cited by the CFTC involved brokers who had financial or ownership interest in the accounts, and the Fifth Circuit found that Gizienski did not own or have an interest in the account at issue. It appears the Fifth Circuit viewed an interest in the account to equate to an ownership interest and not a financial interest in the sense that Gizienksi and EOX may have made money from the trading in the account; however, the decision does not appear to fully address that and relies mainly on the lack of fair notice in reaching its result.
The decision serves as a rebuke of regulators engaging in rulemaking through enforcement. The CFTC was already unsuccessful in pursuing an insider trading violation for the conduct when the jury found for the defendants on that count. This decision now reverses the $6.5 million judgment for not providing fair notice of the agency’s interpretation of the Rule.
Notably, the Fifth Circuit did not take a position on whether the CFTC had the authority to interpret the Rule or whether the CFTC’s interpretation would be reasonable if fair notice had been given. Instead, the court limited its decision to finding that the CFTC did not give sufficient notice of its interpretation regardless of its validity.
While parts of the decision indicate that the court may have upheld the judgment if the CFTC could have pointed to (a) public guidance or statements that made sufficiently clear how the CFTC was interpreting the Rule or (b) prior enforcement matters that involved similar conduct, other parts suggest the court found the CFTC’s interpretation “thoroughly unpersuasive” and may agree with the defendants’ definition that financial interest means an ownership interest with the potential for profit and loss. What is meant by a financial interest for the Rule is an aspect to monitor for further developments.
The decision reinforces the importance of defense strategies when agencies act where there is no, or little, guidance to provide reasonable notice to litigants. In part, the lack of enforcement of this rule for decades may have played an integral part of the Fifth Circuit’s decision. Notwithstanding, even rules issued by agencies where some enforcement or guidance has occurred can provide opportunities for litigants to assess whether fair notice was provided for the conduct at issue.
1 Commodity Futures Trading Commission v. EOX Holdings, L.L.C. & Andrew Gizienski, No. 22-20622 (5th Cir. Jan. 8, 2024) (available here).
2 The jury did not find that the defendants had committed insider trading as the CFTC had alleged.
3 The defendants appealed other aspects of the case including the injunction that was issued related to their conduct.
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