Who Patrols the Money? the Regulation of Off-Exchange Foreign Currency Options: Dunn V. Commodity Futures Trading Commission

By Baumgarten, Julie | Houston Journal of International Law, Fall 1998 | Go to article overview

Who Patrols the Money? the Regulation of Off-Exchange Foreign Currency Options: Dunn V. Commodity Futures Trading Commission


Baumgarten, Julie, Houston Journal of International Law


I. INTRODUCTION

Money drives the world, and investing money provides the opportunity to increase one's financial position on the road. As hybrid forms of financial investing instruments are created, and as the methods of investing in these instruments increase, more funds are being driven into the markets. But at what cost?

Originally, the stock exchange provided a medium for investors and sellers to trade their assets and hope for profitable results.(1) As increased profits were realized, speculators derived additional investing schemes hoping for financial success.(2) Today these schemes have evolved into highly sophisticated trading opportunities, derivative instruments, and markets of exchange.(3) In short, the unsophisticated and naive investor needs help negotiating the highway of financial investing.

The government began regulating these trades soon after their inception to promote price and supply stability, broker accountability, and risk control.(4) These regulations reflected the public policy of protecting the investor and his investments.(5) As investment opportunities expanded,(6) the government found several investment areas which could be exempted from regulations(7) and passed legislation protecting these transactions from regulatory controls.(8) Thus evolved questions of which transactions were originally intended to be unregulated, and whether marketplace changes created a need to regulate some transactions previously exempted from regulation.(9) For example, the Commodity Exchange Act (CEA)(10) generally requires that options be traded on designated exchanges.(11) However, certain types of options are excluded from CEA regulation by the Treasury Amendment.(12)

In two recent Courts of Appeals decisions, the Second and Fourth Circuits rendered conflicting opinions as to whether off-exchange options in foreign currency are within the Treasury Amendment exception to CEA regulation.(13) In Dunn v. Commodity Futures Trading Commission,(14) the U.S. Supreme Court granted certiorari to resolve the conflict among the Circuits(15) and held the Treasury Amendment includes off-exchange foreign currency trading as transactions exempt from the CEA regulation.(16)

II. STATEMENT OF THE CASE

This action was brought by the Commodity Futures Trading Commission against four defendants: (1) William C. Dunn, the president and sole shareholder of Delta consultants; (2) Delta Consultants, a New Jersey corporation formed by Dunn; (3) Delta Options, Ltd., an investment company incorporated in the Bahamas in which Dunn was an advisor and managing director; and (4) Nopkine Co., Ltd., an investment company incorporated in the British Virgin Islands in which Dunn was an advisor.(17) For purposes of this Casenote, the defendants will collectively be called "Dunn."

Beginning in 1992, Dunn solicited investments from individuals, partnerships, and companies.(18) These investors were told their funds would be invested using complex strategies involving call and put options(19) to purchase or sell various foreign currencies in over-the-counter (OTC) markets.(20)

Dunn apparently did engage in many such transactions by trading in exotic positions such as strangles,(21) by "contract[ing] directly with international banks and others without making use of any regulated exchange or board of trade."(22) In other words, Dunn engaged in foreign currency options in the off-exchange or OTC markets.(23) Dunn made these trades using the names "of [the] defendants, and no participations or options were sold directly to investors."(24)

The investors' positions were tracked through internal accounts and weekly reports showing the status of the investors' various holdings.(25) By submitting misleading weekly reports to show impressive returns,(26) Dunn convinced the customers to roll-over their accounts, thus allowing the defendants to continue holding the funds.(27) For a time, the continued stream of roll-over and new investment money provided the necessary funds to compensate for the heavy losses, but by November 1993, the losses became too great and much of the money had disappeared. …

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