UNITED STATES DISTRICT COURT FOR
COMPLAINT FOR DECLARATORY RELIEF (Violation of First Amendment Rights)
INTRODUCTION AND NATURE OF THE ACTION 1. The First Amendment to the United States Constitution declares that "Congress shall make no law . . . abridging the freedom of speech, or of the press. . . ." The Commodity Futures Trading Commission ("CFTC") violates this fundamental constitutional right by its demand that anyone who publishes information about commodity or futures trading for compensation be registered as a "commodity trading advisor" ("CTA") even if the person neither manages customer funds nor offers personalized investment advice. Application of the registration requirements of the Commodity Exchange Act, 7 U.S.C. § 6m, and the criminal penalties attached to publishing commodity information without being registered, constitute a prior restraint on speech and violate the First Amendment. 2. Plaintiffs are publishers of impersonal investment information, analysis, and recommendations, and the readers of these publications. This action for declaratory relief seeks to protect the First Amendment right of publishers, either through traditional publications, computer software, or over the Internet, to publish--and the concomitant right of readers to receive information about commodity trading--without government-compelled registration. JURISDICTION AND VENUE 3. Plaintiffs bring this action pursuant to the First Amendment to the United States Constitution. This Court has jurisdiction over this action pursuant to 28 U.S.C. § 1331. Relief is authorized by 28 U.S.C. §§ 2201-2202. Plaintiffs seek declaratory relief against section 4m of the Commodity Exchange Act, 7 U.S.C. § 6m, its implementing rules and regulations, and the practices and policies of the CFTC, as applied to require registration of plaintiff publishers. 4. Venue lies in this Court pursuant to 28 U.S.C. § 1391(e). PARTIES 5. Plaintiff Frank Taucher publishes books, newsletters, and other publications concerning commodity and futures trading, including The Supertrader's Almanac, the Spread Investment Letter, the Seasonal Trade Portfolio, and the Supertrader's Book of Linear Time Cycles. He also has an Internet site that advertises its products and services. Taucher does not have discretionary control over customer accounts nor does he manage money. He does not purport in any of its services to exercise judgment on behalf of any particular individual with whose circumstances he is directly acquainted. Taucher is not registered as a CTA. 6. Plaintiff Stephen Briese publishes Bullish Review available by postal mail, e-mail, fax and a website that analyzes the CFTC's Commitments of Traders report and highlights futures markets that may be due for a trend change based on several different indicators. Bullish Review also monitors the Commitments of Traders reports for errors, and relays suspected errors to both subscribers and the CFTC itself. He also operates a website that provides the following services: price charts together with indicators based on the Commitments of Traders reports and a complete historical data base of Bullish Review commentary; current issues of Bullish Review; current Commitments of Traders reports indexed by market; Pitpoints, a computer generated listing of short-term trading signals; and a Subscriber's Guide and additional background materials. Briese does not have discretionary control over customer accounts, nor does he manage money. He does not purport in any of his services to exercise judgment on behalf of any particular individual with whose circumstances he is directly acquainted. Briese is not registered as a CTA. 7. Plaintiff B.A. Thunman publishes and manages Club 3000, a "users group" for commodity and futures traders. Club 3000 is written by members and the discussion is moderated by Thunman. Thunman also contributes occasional articles to the publication. He does not have discretionary control over customer accounts nor does he manage money. Neither he nor the participants in Club 3000 purport to exercise judgment on behalf of any particular individual with whose circumstances they are directly acquainted. Thunman is not registered as a CTA. 8. Plaintiff Bruce Babcock, Jr. has written eight books on commodity trading and has designed trading systems and computer software related to commodity trading. He owns a mail order business that sells these products. He also has an Internet site that contains educational articles about commodity trading and a weekly trading recommendation. He is the former publisher and editor of Commodity Traders Consumer Report, where he currently serves as Editor Emeritus and contributes occasional reviews. Babcock does not have discretionary control over customer accounts, nor does he manage money. He does not purport in any of his services to exercise judgment on behalf of any particular individual with whose circumstances he is directly acquainted. Babcock is registered as a CTA. 9. Plaintiff Robert Miner is the president and co-owner of Dynamic Traders Group, Inc. Miner has published an advisory report, Dynamic Trader Analysis Report, since 1986. Currently, a monthly report is mailed and a weekly report is faxed to customers throughout the U.S. and 12 countries overseas. The advisory reports provide analysis and occasional trading recommendations for the major financial and commodity markets. Miner also has developed and markets a software program that performs technical analysis of the financial and commodity markets, and, within certain routines, provides buy and sell signal set-ups. In 1997, Dynamic Trader Group, Inc. began a website which provides information on the products and technical services offered by the company, as well as occasional technical analysis and trade recommendations. Neither Miner nor his employees have any discretionary control over customer accounts, nor do they manage money. He does not purport in any of his services to exercise judgment on behalf of any particular individual with whose circumstances he is directly acquainted. Miner is registered as a CTA. 10. Plaintiff Galen Cawley is a subscriber to the Bullish Review, among other publications that provide commodity and futures information. He wishes to continue to receive these publications free of government interference and regardless of whether the publishers are registered as CTAs. 11. Plaintiff Arthur Hayner has purchased the Supertrader's Almanac among other publications that provide commodity and futures information. He wishes to continue to receive these publications free of government interference and regardless of whether the publishers are registered as CTAs. 12. Plaintiff Edward W. Hearne III is a subscriber to both the publications of Briese and Taucher among other publications that provide commodity and futures information. He wishes to continue to receive these publications free of government interference and regardless of whether the publishers are registered as CTAs. 13. Plaintiff Roemer McPhee is a subscriber to the Bullish Review among other publications that provide commodity and futures information. He wishes to continue to receive these publications free of government interference and regardless of whether the publishers are registered as CTAs. 14. Plaintiff Roger Rines is the research director of Commodity Traders Consumer Report, and is a subscriber to plaintiffs' publications, in addition to several other publications that provide commodity and futures information. He wishes to continue to receive these publications free of government interference and regardless of whether the publishers are registered as CTAs. 15. Defendant Brooksley E. Born is chairperson of the CFTC. She is sued in her official capacity. 16. Defendant Joseph B. Dial is a commissioner of the CFTC. He is sued in his official capacity. 17. Defendant Barbara Pedersen Holum is a commissioner of the CFTC. She is sued in her official capacity. 18. Defendant David D. Spears is a commissioner of the CFTC. He is sued in his official capacity. 19. Defendant John E. Tull, Jr. is a commissioner of the CFTC. He is used in his official capacity. 20. Defendant Commodity Futures Trading Commission is a federal agency charged with administering and enforcing the Commodity Exchange Act, 7 U.S.C. § 1 et seq. and the regulations promulgated thereunder, 17 C.F.R. 1.1 et seq.. STATEMENT OF FACTS The Commodity Exchange Act And Registration 21. The Commodity Exchange Act of 1974, 7 U.S.C. § 1 et seq., ("CEA") authorizes the CFTC to regulate, inter alia, commodity trading advisors, commodity pool operators, and their associated persons. The law and the CFTC's rules contain a comprehensive set of requirements for those who engage in commodity and futures trading. 22. Section 1a5 of the CEA defines a "commodity trading advisor" ("CTA") as any person who-- (i) for compensation or profit, engages in the business of advising others, either directly or through publications, writings, or electronic media, as to the value of or advisability of trading in-- (I) any contract of sale of a commodity for future delivery made or to be made on or subject to the rules of a contract market; (II) any commodity option authorized under section 6c of this title; or (III) any leverage transaction authorized under section 23 of this title; or (ii) for compensation or profit, and as part of a regular business, issues or promulgates analyses or reports concerning any of the activities referred to in clause (i). A CTA is a registration category that includes both those who manage client accounts and those who only advise others on futures trading. 23. Section 4m of the CEA, 7 U.S.C. § 6m, makes it unlawful for any CTA, unless registered with the CFTC, to make use of the mails or any means or instrumentality of interstate commerce in connection with his business as a commodity trading advisor. Plaintiff publishers use the mails and other instrumentalities of interstate commerce in the course of their advisory services, and plaintiff subscribers receive publications through these means. 24. Violation of section 4m is a felony punishable by a fine of up to $500,000 (for individual defendants) and/or imprisonment of up to five years, plus the costs of prosecution. 7 U.S.C. § 13(a). 25. Section 4m of the CEA contains an exemption from CTA registration for individuals who offer commodity trading advice to 15 or fewer people or who provide advice for a non-profit, voluntary membership farm organization. The exemption in section 4m does not apply to the plaintiff publishers in this action. 26. The CEA establishes a discretionary licensing scheme for CTAs. The CFTC screens all registration applicants for their fitness to engage in business as a CTA. The CFTC has extremely broad authority and discretion to grant or deny registration on a variety of grounds: "The [CFTC] may specify by rules and regulations appropriate standards with regard to training, experience and such other qualification as the Commission finds necessary or desirable to insure the fitness of persons required to be registered with the Commission. . . ." 7 U.S.C. § 6p.
27. In order to register as a CTA under the CEA, a registrant must file: an application for registration (corporate entities must attach a copy of the firm's articles of incorporation and by-laws to the application); two sets of fingerprint cards for the conducting of an FBI/Interpol history search; and the payment of the required registration fees. 28. Once an individual is registered as a CTA, he must "maintain books and records and file such reports in such form and manner as may be prescribed by the Commission." 7 U.S.C. § 6n(3)(A); 17 C.F.R. § 4.33. All the books and records of a CTA are subject to inspection on demand of the CFTC. 29. Also upon demand of the CFTC, a registered CTA must turn over the name and address of each client or subscriber, and any report, publication or letter issued by the CTA. 30. A CTA's registration can be revoked or suspended after hearing if the revocation or suspension is "in the public interest" and, inter alia, if the CTA causes "sudden or unreasonable fluctuations or unwarranted changes in the price of commodities . . . ." 7 U.S.C. § 6n(6)(A). The Supreme Court's Lowe Decision 31. In Lowe v. Securities and Exchange Commission, 472 U.S. 181 (1985), the U.S. Supreme Court analyzed an exemption from registration for publishers in the definition of "investment adviser" set forth in the Investment Advisers Act of 1940 ("IAA"), 15 U.S.C. § 80b-2(a)(ii). The IAA defined investment adviser as follows: (ii) "Investment adviser" means any person who, for compensation, engages in the business of advising others, either directly or through publication or writings, as to the value of securities or as to the advisability of investing in, purchasing, or selling securities, or who for compensation and as part of a regular business, issues or promulgates analyses or reports concerning securities. . . .
32. The IAA also specifically excluded certain activities and persons, including the publisher of any bona fide newspaper, news magazine or business or financial publication of general and regular circulation. The Supreme Court reviewed the legislative history of the IAA and concluded that the "legislative history plainly demonstrates that Congress was primarily interested in regulating the business of rendering personalized investment advice, including publishing activities that are a normal incident thereto. On the other hand, Congress, plainly sensitive to First Amendment concerns, wanted to make clear that it did not seek to regulate the press through the licensing of nonpersonalized publishing activities." Lowe, 472 U.S. at 204. (emphasis added). 33. The Lowe Court concluded that publishers of investment newsletters that give extensive advice about securities were not investment advisers under the Act. The majority opinion held that the publishers fell into the statutory exclusion for newspapers and publications of general and regular circulation. Three concurring justices would have decided the case on First Amendment grounds exclusively--that the First Amendment does not permit the government to require registration of those who publish impersonal investment advice. 34. The CEA provisions regulating CTAs were closely modeled on the IAA. CTAs became subject to the CEA and brought under the jurisdiction of the CFTC by virtue of the Commodity Futures Trading Commission Act of 1974 ("the 1974 Act"). This act substantially revised the original CEA. The CEA's definition of a "commodity trading advisor," set forth in the 1974 Act, is very similar to the IAA's definition of investment adviser. 35. Paralleling the IAA, the CEA also specifically excluded from the definition of a CTA "the publisher or producer of any print or electronic data of general and regular circulation, including its employees." 7 U.S.C. § 1a5(B)(iv). Defendants' Application of the CEA 36. In light of the Lowe decision and the striking similarities between the two laws, two administrative law judges at the CFTC in two separate administrative cases held that publishers of impersonal commodities information could not be classified as CTAs and thus could not be required to register under the CEA as CTAs. 37. In 1993, in In The Matter of Armstrong (February 8, 1993), the CFTC reversed the ALJs' opinions, holding that the definition of a CTA does not exclude publishers of impersonal information, recommendations, or advice about futures trading and that even the publisher of impersonal information must register as a CTA. 38. In Armstrong, the CFTC relied on subparagraph (C) of the CTA definition, which states that the exclusions listed in subparagraph (B) "shall only apply if the furnishing of such services by persons referred to subparagraph (B) is solely incidental to the conduct of their business or profession." 7 U.S.C. § 1(a)(5)(C). Because of subsection (C), the CFTC denies the relevancy of whether commodity information or advice is "personal" or "impersonal." Because plaintiffs' publications deal almost exclusively with commodity trading, the information is not "solely incidental" to the publication. 39. After the CFTC's decision in Armstrong, even the publishers of impersonal investment information, advice, and recommendations must register as CTAs. Moreover, in a series of interpretative letters, the CFTC declared that impersonal publishers were required to register as CTAs. 40. In addition to the interpretative letters, starting in 1995 the CFTC began to aggressively enforce the CTA registration requirement based on its interpretation of the CEA. The CFTC sent letters to publishers reminding them of the registration requirement, and demanding documents and information from the publishers. The CFTC also undertook several investigations of unregistered publishers. 41. The CFTC furthered its expansive application of the CTA registration requirements in areas outside of traditional newsletter publications. In a series of interpretative letters, the CFTC required developers and distributors of computer software to register as CTAs. 42. Also, the CFTC has filed lawsuits against the developers of impersonal software and investment advice claiming, inter alia, that the publishers were acting as unregistered CTAs in violation of section 4m of the CEA. 43. In 1996, the CFTC issued interpretative guidance in the Federal Register aimed at requiring CTA registration of those who use the electronic media, specifically, the Internet. 61 Fed. Reg. 42146 (Aug. 14, 1996). The CFTC proposed that anyone who provided information, recommendations, or advice on commodity trading for compensation in electronic media must register as a CTA. The proposed rule included regulation of websites, hyperlinks, directories, e-mail, and usergroups. The rule was scheduled to become effective in December 1996, but on December 16, 1996, the CFTC suspended but did not withdraw it pending further review of the public comments it received. 44. The text of the CEA, the CFTC's 1993 Armstrong opinion, the interpretive letters issued by the agency, and its aggressive enforcement and application of the CTA registration requirements demonstrate an intent to require CTA registration of publishers of impersonal commodities information, recommendations, and advice, and a campaign to investigate, threaten, and prosecute those publishers under section 4(m) of the CEA who are not registered. An actual controversy has thus arisen and exists between the parties relating to application of section 4(m) to impersonal publishers of commodity information. Plaintiffs Have Been Harmed And Will Continue To Be Harmed By Defendants' Actions
Registered Plaintiff Publishers: 45. Plaintiff Robert Miner registered as a CTA in 1986. He took the necessary steps for becoming a CTA, including fingerprinting, subjecting himself to a background check, and paying fees. 46. Because Miner publishes only impersonal investment advice, and in light of the Supreme Court's Lowe decision, Miner concluded in 1992 or 1993 that he was not required to register as a CTA. In 1993, Miner declined to submit the CFTC's annual renewal form and fee that were required for him to maintain his registration as a CTA. 47. After Miner's renewal deadline had passed, a CFTC official informed him by telephone that he was required to renew his registration because he issued an advisory publication that was distributed to more than 15 people, thus disqualifying him from the section 4m exemption from registration. The CFTC official warned him that he would be in violation of the law if he did not renew his registration. 48. Due to the threat of investigation and possible prosecution, Miner renewed his CTA registration. 49. Plaintiff Bruce Babcock has been registered as a CTA since 1985. He managed money for others briefly between September, 1986 and June, 1987. Now semi-retired, Babcock publishes exclusively impersonal commodity information and advice through a mail order business and an Internet site that sells his publications, trading systems and computer software. 50. Babcock no longer trades commodity accounts, manages money or gives personal commodity advice. He wishes to resign his CTA registration with the CFTC, but fears investigation and prosecution if he does so. 51. Plaintiffs Babcock and Miner risk investigation and punishment, including fines and imprisonment, if they do not renew their CTA registrations. They seek a declaration from this Court that their activities are protected First Amendment speech and that section 4m of the CEA cannot be constitutionally applied to them. Unregistered Plaintiff Publishers: 52. Plaintiffs Stephen Briese and Frank Taucher publish traditional impersonal publications in addition to developing computer software. Under the defendants' application of the CEA, Briese and Taucher are allegedly violating federal law and fear investigation and/or prosecution for providing impersonal commodity advice without registration. They wish to ensure their right to continue publication of their advisory publications without government-compelled registration. 53. The application of section 4m to the publishers of impersonal information has chilled the First Amendment rights of Briese and Taucher and has caused them to restrict the content, development, and marketing of their publications. For fear of violating the CEA and raising the attention of the CFTC, Taucher has refrained from offering additional publications and has curtailed advertising of his current publications to new subscribers. For fear of violating the CEA, Briese does not offer specific trading advice or recommendations and instead couches his commentary in more nebulous terms. Both Briese and Taucher are seriously considering changing their commentary from futures markets to securities, where impersonal publishers receive the full protection of the First Amendment. 54. Plaintiffs Briese and Taucher have also developed and wish to continue to develop computer software used to analyze the futures markets and to generate trading analysis and recommendations based on real or hypothetical market data. 55. The CFTC requires that software designers and distributors be registered as CTAs--and has prosecuted publishers for violating section 4m for offering software without being registered as a CTA. Taucher has written computer programs in the field of commodity trading that he wishes to publish and market, and the sole reason he has not published such programs is because of the threatened application and enforcement of the registration requirement. 56. Likewise, Briese offers his software only on an extremely limited basis and will not develop or market more software due to defendants' application of the CEA. 57. Plaintiff B.A. Thunman, publisher of Club 3000--an open forum for commodity traders that he moderates and to which he occasionally provides commentary--is particularly concerned about the defendants' application of the CTA registration requirements because his entire publication relies on the impersonal opinions and commentary of individuals who are not registered as CTAs, and who are not even involved in publishing. These individuals receive "compensation" in the form of reduced subscription prices. Thus, under both the wording of the statute and the CFTC's application of the CEA, they are CTAs. 58. As a direct result of defendants' representations and application of section 4m, Thunman and his subscribers have become apprehensive about publishing and exchanging information and opinions about futures trading. 59. If Thunman and each person who contributed to Club 3000 were required to register and thereby submit to the CFTC's registration requirements, it would effectively end the publication. 60. By reason of the CFTC's application of the CEA, unregistered plaintiff publishers cannot continue their otherwise lawful activities as described above. Nor can plaintiffs expand their publishing enterprises, as they fear CFTC investigation and prosecution. The chilling effect on plaintiffs' First Amendment rights results directly from the defendants' application and enforcement of section 4m even if the threat of civil and criminal prosecution is never carried out or ultimately is held to be illegitimate. 61. Unless the CFTC's application of the CEA is declared unconstitutional, unregistered plaintiff publishers risk criminal and civil punishment, including fines and imprisonment, for publishing without registration. 62. The CTA registration requirements, including the investigation, fee system, and CFTC oversight powers, unconstitutionally condition the exercise of First Amendment freedoms on the surrender of privacy rights. 63. As a result of the CFTC's application of the CEA, plaintiff unregistered publishers also suffer economic losses in addition to the loss of First Amendment freedoms. 64. The CTA registration requirement applied to impersonal publishers further constitutes an impermissible prior restraint on speech, irreparably injuring plaintiff unregistered publishers, in violation of the First Amendment. Plaintiff subscribers: 65. Plaintiff subscribers Galen Cawley, Arthur Hayner, Edward W. Hearne III, Roemer McPhee, and Roger Rines subscribe to publications published by unregistered publishers. They value greatly the information they receive from these publications. Plaintiffs are aware of the CFTC's threats and actions against unregistered publishers of commodity information, analysis, and recommendations. 66. The CFTC's current application of the CEA and its campaign against unregistered publishers interferes with plaintiff subscribers' First Amendment right to receive information from willing publishers. The CFTC's threats and campaign against unregistered publishers also hinders subscribers from receiving the most specific and valuable information, analysis, and recommendations that they desire in guiding their investment decisions. Plaintiffs wish to continue to receive products from these publishers without interference from the CFTC. COUNT DEFENDANTS' APPLICATION OF THE COMMODITY EXCHANGE ACT VIOLATES THE FIRST AMENDMENT OF THE UNITED STATES CONSTITUTION 67. Plaintiffs incorporate and reallege each and every allegation contained in Paragraphs 1 through 66 of this Complaint as if set forth fully herein. 68. The activities of and the ideas expressed by plaintiff publishers are fully within the protection of the First Amendment to the United States Constitution and reflect the exercise of fundamental rights to freedom of speech and of the press. 69. Defendants' application of section 4m of the CEA to the publishers of impersonal commodity and futures investment information, analysis, and recommendations has harmed and will continue to irreparably harm plaintiffs. 70. Defendants' application of the registration requirements to plaintiffs violates their First Amendment rights to publish freely without prior restraint or compelled registration. WHEREFORE, plaintiffs pray this Court grant plaintiffs the following relief:
(A) Declare that the defendants' application of section 4m of the CEA to the plaintiff publishers violates the guarantee of freedom of speech and of the press contained in the First Amendment of the United States Constitution; (B) Grant plaintiffs such additional relief as the Court may deem just and proper. Respectfully submitted,
_________________________ INSTITUTE FOR JUSTICE William H. Mellor Clint Bolick (Bar No. 25013) Scott G. Bullock Donna G. Matias Suite 200 1717 Pennsylvania Avenue, NW Washington, DC 20006 (202) 955-1300
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