U.S. Commodity Futures Trading Commission v. Southern Trust Metals, Inc.

Case: 16-16544 Date Filed: 07/12/2018 Page: 1 of 40

[PUBLISH]
IN THE UNITED STATES COURT OF APPEALS

FOR THE ELEVENTH CIRCUIT
________________________

No. 16-16544
________________________

D.C. Docket No. 1:14-cv-22739-JLK

U.S. COMMODITY FUTURES TRADING COMMISSION,

llllllllllllllllllllllllllllllllllllllllPlaintiff - Appellee,

versus

SOUTHERN TRUST METALS, Inc.,
LORELEY OVERSEAS CORPORATION,
ROBERT ESCOBIO,

llllllllllllllllllllllllllllllllllllllllDefendants - Appellants.
________________________

Appeal from the United States District Court
for the Southern District of Florida
________________________

(July 12, 2018)

Before JORDAN, HULL, and GILMAN, ∗ Circuit Judges.

∗
Honorable Ronald Lee Gilman, United States Circuit Judge for the Sixth Circuit, sitting
by designation.
 Case: 16-16544 Date Filed: 07/12/2018 Page: 2 of 40

GILMAN, Circuit Judge:

After reviewing the Defendants’ Petition to Rehear, and having considered

supplemental briefing by the parties, we vacate the original opinion in this case,

U.S. Commodity Futures Trading Comm’n v. Southern Trust Metals, Inc., 880 F.3d

1252 (11th Cir. 2018), and issue the following opinion in its place. The Petition to

Rehear is otherwise denied.

****

This is a commodities-fraud case. The U.S. Commodity Futures Trading

Commission (CFTC) began investigating Southern Trust Metals, Inc., Loreley

Overseas Corporation, and Robert Escobio (collectively, the Defendants) in

response to a customer’s complaint. That complaint also prompted the National

Futures Association (NFA)—a private, self-regulatory organization for the futures

industry—to open an investigation, which proceeded in tandem with the CFTC’s.

The NFA’s investigation ended in a settlement. Afterwards, the CFTC filed

this lawsuit, alleging that the Defendants violated the Commodities Exchange Act

(CEA) when they failed to register as futures commission merchants, transacted

the purchase and sale of contracts for the future delivery of a commodity (futures)

outside of a registered exchange, and promised to invest customers’ money in

precious metals (metals) but instead invested the funds in so-called “off-exchange

2
 Case: 16-16544 Date Filed: 07/12/2018 Page: 3 of 40

margined metals derivatives” (metals derivatives). The district court, after a bench

trial, entered judgment for the CFTC on all claims.

For the reasons set forth below, we AFFIRM the judgment of the district

court except as to the restitution award for the group of investors whose losses

were associated solely with the registration violations. As to that portion of the

restitution award, we VACATE the judgment and REMAND with instructions to

consider other equitable remedies.

I. BACKGROUND

A. Factual background

Escobio is the Chief Executive Officer (CEO) and largest shareholder of the

Southern Trust Securities Holding Corporation (Holding Corporation). The

Holding Corporation owns Loreley, a British Virgin Islands corporation, which in

turn owns Southern Trust, a Florida corporation. Escobio formed Southern Trust

to provide commodities investment services, and he serves as its director and CEO.

Southern Trust represented that it was able to facilitate customers’

investment in precious metals. Its website and brochure stated that customers “can

take physical possession of [their] metals in New York or London.” The

company’s brokers told customers much the same story—that the customers were

purchasing metals stored in places like New York, London, and Hong Kong. At

least one of Southern Trust’s brokers told customers that Southern Trust charged

3
 Case: 16-16544 Date Filed: 07/12/2018 Page: 4 of 40

“storage fees” for the metals. To open a trading account at Southern Trust,

customers completed an account-opening form containing language that

“[p]hysical precious metals can either be delivered directly to the customer’s

designated point of delivery or to a recognized depository, which provides insured

non-segregated storage.” Southern Trust also represented that it could loan

customers money to purchase metals.

But Southern Trust did not in fact deal in metals; it dealt in metals

derivatives. Such contracts are a type of derivative investment. Southern Trust,

however, was not registered with the CFTC as a futures commission merchant and

thus could not trade metals derivatives on registered exchanges. So Escobio,

through Loreley, engaged two foreign brokerages—Berkeley Futures Limited and

Hantec Markets Limited—to handle the transactions.

Escobio opened trading accounts at Berkeley and Hantec in Loreley’s name,

not in the names of Southern Trust’s customers. The accounts were numbered, and

Southern Trust maintained records linking its customers to the specific numbered

accounts.

Opening these accounts required Escobio to review documents describing

Berkeley’s and Hantec’s investment products. One of Hantec’s account-opening

documents, the “Product Disclosure Statement,” explains that “bullion trading”

“operates in the same manner as foreign exchange trading” in that “[w]hat you are

4
 Case: 16-16544 Date Filed: 07/12/2018 Page: 5 of 40

actually buying is a [c]ontract” that “derives its value from” a “physical underlying

asset” such as “Loco London Gold.” That document’s “Glossary” defines “Loco

London Gold” to “mean[] not only that the gold is held in London but also that the

price quoted is for delivery there.” Elsewhere, the document explains that in

“bullion trading,” “[Hantec] do[es] not deliver the physical underlying assets (i.e.

gold or silver) to you, and you have no legal right to it.” The Berkeley documents

similarly confirm that the account holder intends “to speculate in derivative

products.” None of the account-opening documents mention making loans for the

purchase of metals.

After setting up the trading accounts at Berkeley and Hantec, Southern Trust

sent its customers’ money to Loreley, which in turn invested the funds, through

Berkeley and Hantec, in metals derivatives. Escobio received monthly account

statements showing that all investments were in metals derivatives, not metals.

Those statements do not reflect any loans to Southern Trust’s customers.

Southern Trust never informed its customers that their money was being

transferred to Loreley, Berkeley, or Hantec. Nor did it inform customers who

wished to invest in metals (the group comprising the vast majority of its customers)

that their money was instead being invested in metals derivatives. Southern Trust

still charged those customers interest on fictitious loans, which it falsely told them

were made in order to facilitate their investment in metals.

5
 Case: 16-16544 Date Filed: 07/12/2018 Page: 6 of 40

After receiving a complaint from one of Southern Trust’s customers, the

NFA opened an investigation. Around the same time, Escobio asked Berkeley and

Hantec about the nature of Loreley’s investments. Escobio contended at trial that

he did so simply to confirm his understanding that Loreley was investing in metals.

The CFTC maintained, however, and the district court ultimately concluded, that

Escobio had done so in anticipation of litigation, and that he had carefully framed

his inquiries to elicit responses that would support the defense he later asserted—

that he did not know that his customers’ money was being invested in metals

derivatives.

In response to Escobio’s inquiry, Hantec’s CEO said: “I can confirm that

you hold accounts with us that only trade Silver Bullion.” Hantec’s CEO clarified

at his deposition, however, that “Silver Bullion” is industry lingo for derivatives

and that he could not have intended any other meaning because trading in

“physical metals is not something that Hantec does.”

A Berkeley employee similarly responded to Escobio’s inquiry, writing that

“all Loreley accounts with the prefix XILOR were silver bullion accounts” that

“only traded in OTC [off-exchange] silver bullion and never traded any futures

contracts.” But Berkeley’s CEO testified at his deposition that Berkeley had never

delivered metals to any of its customers, including Loreley, nor stored any metals

on their behalf. He also testified that, despite Escobio’s contrary assertion, he

6
 Case: 16-16544 Date Filed: 07/12/2018 Page: 7 of 40

never told Escobio that the trades Berkeley handled for Loreley would lead to the

storage of metals.

None of Southern Trust’s investments led to the delivery of metals.

Hantec’s CEO testified that he told Escobio that Hantec could arrange for the

delivery of metals, but that he did so only in response to a question about a

hypothetical situation. According to Hantec’s CEO, Escobio inquired in the

abstract about Hantec’s ability to arrange delivery: “It’s an inquiry from a client.

Robert [Escobio] did not tell me, ‘I would like to deliver metal.’ He asked me, ‘If

I wanted to deliver a metal, can you arrange it?’ and I said, ‘Let me go find out.’”

Hantec’s CEO continued: “I talked to . . . one of my contacts at Standard Chartered

bank who gave me information and I went back to Robert and explained” that

Hantec could arrange delivery. This response was memorialized in a letter to

Escobio, stating that “any Gold or Silver you purchase from us is held for your

account and upon full payment we are able to arrange delivery for you when

requested.” But the Defendants never asked Hantec to arrange delivery, and no

delivery ever occurred.

The NFA’s investigation ended in a settlement. Although the NFA’s and the

CFTC’s investigators had cooperated with each other, their investigations were

independent. The Defendants’ settlement agreement with the NFA therefore does

not mention the CFTC or the CFTC’s investigation.

7
 Case: 16-16544 Date Filed: 07/12/2018 Page: 8 of 40

As the CFTC’s investigation moved forward, the Defendants continued to

produce documents in response to its requests. The Defendants’ lawyers knew at

the time of the NFA settlement that the CFTC might bring its own enforcement

action, but they did not suggest to the CFTC or to anyone else that such an action

would violate their settlement agreement with the NFA.

B. Procedural background

In July 2014, the CFTC filed its complaint, seeking equitable relief and

penalties under the CEA. The complaint alleges that the Defendants engaged in

two illegal schemes, which we will refer to as the “unregistered-futures scheme”

and the “metals-derivatives scheme.”

As to the unregistered-futures scheme, the complaint alleges that, even

though the Defendants were not registered as futures commission merchants, they

accepted money from customers who wished to invest in futures. Because the

Defendants were unregistered, moreover, they could not trade futures on a

registered exchange. They therefore sought to trade indirectly, through

intermediaries. To that end, the Defendants funneled the customers’ money

through Loreley to foreign brokerage firms—Berkeley and Hantec—licensed to

trade futures. Those brokerage firms made the actual investments.

As to the metals-derivatives scheme, the complaint alleges that the

Defendants accepted money from customers who wished to invest in metals with

8
 Case: 16-16544 Date Filed: 07/12/2018 Page: 9 of 40

borrowed money. But instead of issuing loans to those customers and investing

their money in metals, the Defendants took the customers’ money and invested it

in metals derivatives. No loans existed, but the Defendants charged loan interest

anyway.

At the summary-judgment stage of the case, the parties filed dueling

motions. The district court granted the CFTC’s motion in part, holding that the

Defendants had conducted off-exchange transactions and had failed to register as

futures commission merchants. It denied the Defendants’ motion in full, rejecting

their affirmative defenses that (1) their settlement with the FTA equitably estopped

the CFTC from bringing suit, and (2) they actually delivered metals so as to bring

their transactions within an exception to the CEA’s registration requirements.

The CFTC’s fraud claim then proceeded to trial. After a bench trial, the

district court found that the Defendants had engaged in fraud, ordered them to pay

restitution in the full amount of the customers’ losses, and imposed fines. The

court also permanently enjoined the Defendants from employment in the

commodities-trading industry. On appeal, the Defendants challenge the court’s

rulings both on summary judgment and at trial.

9
 Case: 16-16544 Date Filed: 07/12/2018 Page: 10 of 40

II. ANALYSIS

A. Standard of review

On an appeal from a judgment in a bench trial, we review the district court’s

conclusions of law de novo. HGI Assocs., Inc. v. Wetmore Printing Co., 427 F.3d

867, 873 (11th Cir. 2005). We also review de novo the district court’s application

of the law to the facts. United States v. Frank, 599 F.3d 1221, 1228 (11th Cir.

2010). The district court’s findings of fact, on the other hand, are evaluated under

the clear-error standard. HGI, 427 F.3d at 873. “We will not find clear error

unless our review of the record leaves us ‘with the definite and firm conviction that

a mistake has been committed.’” Coggin v. Comm’r of Internal Revenue, 71 F.3d

855, 860 (11th Cir. 1996) (quoting United States v. Gypsum Co., 333 U.S. 364, 395

(1948)). Finally, when the district court has issued a permanent injunction, we

review the scope of the injunction under the abuse-of-discretion standard.

Commodity Futures Trading Comm’n v. Wilshire Inv. Mgmt. Corp., 531 F.3d

1339, 1343 (11th Cir. 2008).

B. Equitable estoppel does not bar the CFTC’s claims.

To start with, the Defendants challenge the district court’s summary-

judgment ruling that their settlement with the NFA does not preclude the CFTC’s

claims. The district court held that equitable estoppel does not apply because

(1) the Defendants do not dispute that the NFA is a private, nongovernmental

10
 Case: 16-16544 Date Filed: 07/12/2018 Page: 11 of 40

organization through which the commodities-trading industry regulates itself;

(2) the CFTC was not a party to the settlement; and (3) settlements with private,

nongovernmental organizations do not preclude subsequent claims by government

regulators.

Although this circuit has not yet addressed whether a settlement between a

nongovernmental regulator and a regulated company may preclude subsequent

claims by the governmental regulator, the circuits that have addressed the issue

have uniformly answered in the negative. See, e.g., Graham v. S.E.C., 222 F.3d

994, 1007 n.25 (D.C. Cir. 2000) (“Of course, even if the NASD had done

something to bind itself, that would not have bound the SEC.”); Jones v. S.E.C.,

115 F.3d 1173, 1179–81 (4th Cir. 1997) (“We have found no statutory, regulatory,

or historical reference to support [the] argument that NASD discipline of its

members was intended to preclude this disciplinary action by the SEC itself against

a securities professional.”).

In Jones, the Securities and Exchange Commission (SEC) brought

administrative claims against a securities trader after the trader settled a claim by

the National Association of Securities Dealers (NASD). 115 F.3d at 1180. The

Fourth Circuit rejected the trader’s argument that the settlement precluded the

SEC’s claims, reasoning that private and public regulators “represent distinct

11
 Case: 16-16544 Date Filed: 07/12/2018 Page: 12 of 40

interests” and “bring two separate vantage points to enforcement efforts—one from

the industry itself and the other from the regulator.” Id.

This outcome accords with the courts’ general reluctance to apply principles

of equitable estoppel to the government. “The Supreme Court has never

established that the doctrine of equitable estoppel can be applied against the

government and, in fact, has implied that it can not be.” Tovar-Alvarez v. U.S.

Atty. Gen., 427 F.3d 1350, 1353–54 (11th Cir. 2005) (citing Office of Pers. Mgmt.

v. Richmond, 496 U.S. 414, 422 (1990)). “[I]t is well settled that the [g]overnment

may not be estopped on the same terms as any other litigant.” Heckler v. Cmty.

Health Servs. of Crawford Cty., 467 U.S. 51, 60 (1984).

This circuit has repeatedly opined that, even assuming that equitable

estoppel could apply against the government, “it would require a showing of

affirmative misconduct on the government’s part.” Tovar-Alvarez, 427 F.3d at

1354; see also Sanz v. U.S. Sec. Ins. Co., 328 F.3d 1314, 1319–20 (11th Cir. 2003)

(“[E]ven if estoppel is available against the Government, it is warranted only if

affirmative and egregious misconduct by government agents exists.”).

The present case is analogous to Jones. Here, the uncontradicted evidence

shows that the NFA, like the NASD, is a private, nongovernmental organization

and that the CFTC was not a party to the Defendants’ settlement with the NFA.

The record, moreover, contains no evidence of affirmative misconduct by the

12
 Case: 16-16544 Date Filed: 07/12/2018 Page: 13 of 40

government. So even if equitable estoppel theoretically could apply to the

government, it does not apply here.

A second, independent ground also exists for affirming the district court’s

denial of summary judgment based on the Defendants’ estoppel defense: the

record reflects a genuine dispute of material fact regarding the element of

reasonable reliance. See Heckler, 467 U.S. at 59 (noting that “the party claiming

the estoppel must have relied on its adversary’s conduct” and that the “reliance

must have been reasonable”). Especially noteworthy is the fact that the settlement

agreement makes no mention of the CFTC or its investigation, so the Defendants’

purported reliance lacks a textual basis. The only language in the agreement that

even arguably suggests reliance is a clause providing that the agreement “shall

resolve and terminate all complaints, investigations and audits relating to [the

Defendants].”

But interpreting this language to embrace the CFTC’s investigation is

unreasonable. For one thing, the notion that the NFA would agree to terminate

investigations outside of its control—and that the Defendants would accept such an

unfulfillable obligation as consideration for their own concessions—defies

common sense. Further, a literal interpretation of “all complaints, investigations

and audits relating to [the Defendants]” would impose on the Defendants

obligations that they surely did not intend, such as the obligation to terminate their

13
 Case: 16-16544 Date Filed: 07/12/2018 Page: 14 of 40

own routine, internal accounting audits. Such audits would, after all, be “audits

relating to [the Defendants].”

The lack of textual support for the Defendants’ estoppel argument creates a

genuine dispute concerning the reasonableness of their reliance. At the same time,

other evidence creates a genuine dispute about whether there was any reliance at

all. First, the Defendants continued to produce documents in response to requests

from the CFTC’s investigators after the settlement. This fact tends to negate any

reliance because the Defendants presumably would not have continued cooperating

with the CFTC if they had truly believed that their settlement with the NFA had

terminated the CFTC’s investigation. Second, the Defendants’ lawyers, while

preparing to defend against the present action, never suggested to the CFTC or

anyone else that an action brought by the CFTC might violate the Defendants’

settlement agreement with the NFA. For these reasons, we find no error in the

district court’s denial of the Defendants’ motion for summary judgment based on

the affirmative defense of equitable estoppel.

C. Summary judgment in favor of the CFTC on its claims for registration
violations was appropriate.

We now turn to the merits of this case. The CEA imposes registration

requirements on commodities traders and the exchanges where they trade.

Section 6d of the CEA makes it “unlawful for any person to be a futures

commission merchant unless . . . such person shall have registered [as such] . . .
14
 Case: 16-16544 Date Filed: 07/12/2018 Page: 15 of 40

with the [CFTC].” 7 U.S.C. § 6d(a)(1). The statute also requires that all

transactions be “conducted on or subject to the rules of a board of trade which has

been designated or registered by the [CFTC].” Id. § 6(a). Together, these

provisions require that only registered traders handle transactions and that they do

so on a registered exchange.

An exception exists, however, for transactions that result in “actual delivery

within 28 days.” Id. § 2(c)(2)(D)(ii)(III)(aa). Actual delivery means “giving real

and immediate possession” of the commodity “to the buyer or the buyer’s agent.”

U.S. Commodity Futures Trading Comm’n v. Hunter Wise Commodities, LLC, 749

F.3d 967, 979 (11th Cir. 2014) (internal quotation marks omitted). “‘Actual’ is

that which ‘exist[s] in fact’ and is ‘real,’ rather than constructive.” Id. (quoting

Black’s Law Dictionary 494 (9th ed. 2009)).

This exception is an affirmative defense on which the commodities trader

bears the burden of proof. See Schlemmer v. Buffalo, R & P R Co, 205 U.S. 1, 10

(1907) (explaining that the “general rule of law is[] that a proviso carves special

exceptions only out of the body of the act; and those who set up any such

exception must establish it”); see also Corning Glass Works v. Brennan, 417 U.S.

188, 196–97 (1974) (“[T]he application of an exemption under the Fair Labor

Standards Act is a matter of affirmative defense on which the employer has the

burden of proof.”); Mulhall v. Advance Sec., Inc., 19 F.3d 586, 590 (11th Cir.

15
 Case: 16-16544 Date Filed: 07/12/2018 Page: 16 of 40

1994) (“[T]he exceptions granted within the EPA constitute affirmative

defenses.”).

The Defendants concede that they were not registered as futures commission

merchants and that the trades at issue did not occur on a registered exchange. But

they seek refuge in the exception for transactions resulting in actual delivery.

As set forth in the factual background of this opinion, however, there is no

basis in the record for the Defendants’ contention that actual delivery ever

occurred. The record instead supports the holding of the district court that the

Defendants failed to establish their affirmative defense of “actual delivery.” See

Hunter Wise Commodities, 749 F.3d at 979. We therefore find no error in the

court’s grant of summary judgment in favor of the CFTC on its claims that the

Defendants engaged in off-exchange transactions and failed to register as futures

commission merchants.

D. The district court did not err in concluding that the Defendants
committed fraud under 7 U.S.C. §§ 6b(a) and 9, and under 17 C.F.R.
§ 180.1.

We next turn to the issue of fraud. For our purposes, 7 U.S.C. § 6b(a),

7 U.S.C. § 9, and 17 C.F.R. § 180.1 are redundant. Section 6b(a) makes it

“unlawful . . . for any person . . . in connection with . . . any contract of sale of any

commodity . . . for future delivery . . . to cheat or defraud or attempt to cheat or

defraud the other person . . . [or] willfully to make . . . any false report or statement

16
 Case: 16-16544 Date Filed: 07/12/2018 Page: 17 of 40

. . . [or] willfully to deceive or attempt to deceive the other person by any means

whatsoever.” 7 U.S.C. §§ 6b(a). Section 9 of the same chapter is similar,

providing that “[i]t shall be unlawful for any person . . . to use . . . in connection

with any . . . contract of sale of any commodity . . . for future delivery . . . any

manipulative or deceptive device or contrivance.” Id. § 9(1). Finally, 17 C.F.R.

§ 180.1(a) declares it “unlawful for any person . . . in connection with any . . .

contract of sale of any commodity . . . or contract for future delivery . . . to

intentionally or recklessly . . . use . . . any manipulative device, scheme, or artifice

to defraud; . . . [or] [m]ake . . . any untrue or misleading statement of a material

fact or to omit to state a material fact necessary . . . to make the statements made

not untrue or misleading; . . . [or] [e]ngage . . . in any act . . . which operates . . . as

a fraud or deceit upon any person.”

The CFTC must prove the same three elements to establish liability under

each of the above provisions: “(1) the making of a misrepresentation, misleading

statement, or a deceptive omission; (2) scienter; and (3) materiality.” Commodity

Futures Trading Comm’n v. R.J. Fitzgerald & Co., Inc., 310 F.3d 1321, 1328 (11th

Cir. 2002). “Unlike a cause of action for fraud under the common law of [t]orts,

‘reliance’ on the representations is not a requisite element . . . .” Id. at n.6.

17
 Case: 16-16544 Date Filed: 07/12/2018 Page: 18 of 40

1. Misrepresentation, misleading statement, or deceptive omission

The district court’s factual findings on the “misrepresentation” element

reflect no clear error. With the many references to “physical metals,” “physical

possession,” and “storage,” Southern Trust’s brochure, website, brokers, and

account-opening documents collectively represented that the company offered

investments in metals. Abundant evidence shows, however, that after accepting

the customers’ money, Southern Trust sent the funds to Loreley, which in turn sent

them to Berkeley and Hantec for investment in metals derivatives. The Defendants

do not dispute that the accounts at Berkeley and Hantec were in Loreley’s name,

not in the names of Southern Trust’s customers. Moreover, the evidence shows

that Southern Trust never informed its customers that their money was being

transferred to Loreley, Berkeley, or Hantec and, consequently, that the customers

did not know that those firms held their money.

The district court correctly applied the law to these facts. “Whether a

misrepresentation has been made depends on the ‘overall message’ and the

‘common understanding of the information conveyed.’” R.J. Fitzgerald, 310 F.3d

at 1328 (quoting Hammond v. Smith Barney Harris Upham & Co., Comm. Fut. L.

Rep. (CCH) 36,657 & n.12 (CFTC Mar. 1, 1990)). We find the case of U.S.

Commodity Futures Trading Commission v. Hunter Wise Commodities, LLC,

21 F. Supp. 3d 1317 (S.D. Fla. 2014), squarely on point. The district court in

18
 Case: 16-16544 Date Filed: 07/12/2018 Page: 19 of 40

Hunter Wise concluded, after a bench trial, that the defendant “misrepresented

facts about the precious metals transactions it oversaw” and provided a deceptive

“‘overall message’” when it “led the retail customers to believe metals were stored

on their behalf.” Id. at 1338 (quoting R.J. Fitzgerald, 310 F.3d at 1328).

Moreover, the court found that the defendant “failed to inform [the retail

customers] that the metals it purchased were on a financed basis, it did not own the

metals, and the metals, if there were any at all, were not in the retail customers’

names.” Id.; see also U.S. Commodity Futures Trading Comm’n v. Hunter Wise

Commodities, LLC, 749 F.3d 967, 980–82 (11th Cir. 2014) (affirming the district

court’s issuance of a preliminary injunction because the CFTC presented a prima

facie case of fraud under 7 U.S.C. § 6b).

Southern Trust orchestrated a nearly identical scheme in the present case. It

misrepresented to customers the fundamental nature of their investments, telling

them that they were investing in metals when in fact they were investing in metals

derivatives, and charging a fictitious storage fee despite the customers having no

metals to store. Finally, Southern Trust failed to tell the customers that it passed

their money through Loreley to Berkeley and Hantec, with the customers having

no knowledge of or relationship with these entities. The district court therefore did

not err in concluding that the CFTC satisfied its burden, under the preponderance-

of-the-evidence standard, to prove the first element necessary to establish fraud.

19
 Case: 16-16544 Date Filed: 07/12/2018 Page: 20 of 40

2. Scienter

Regarding the element of scienter, Escobio does not dispute that he was the

CEO of both Southern Trust and the Holding Corporation, and that he had

substantial prior experience in commodities trading. He also does not dispute that

he signed the account-opening documents for Loreley’s trading accounts at both

Berkeley and Hantec. Those documents, as well as the monthly account

statements that Escobio received, make clear that Loreley was investing the

customers’ money in metals derivatives, not metals. Further, Escobio knew that

the accounts at Hantec and Berkeley bore Loreley’s name, not the names of

Southern Trust’s customers. Based on these facts, the district court did not clearly

err in finding that Escobio knew that he was investing his customers’ money in

metals derivatives.

Nor did the district court clearly err in finding that Escobio knew that

Berkeley and Hantec did not make any loans to Southern Trust’s customers, even

though Southern Trust charged its customers interest on the purported loans.

Neither the account-opening documents nor the monthly statements from Berkeley

or Hantec reflect any loans from those companies. Moreover, the Defendants point

to no evidence—other than Escobio’s uncorroborated testimony—of any loans

from Berkeley or Hantec, and the district court discounted Escobio’s testimony on

that point, as on others, because it determined that he lacked credibility. This

20
 Case: 16-16544 Date Filed: 07/12/2018 Page: 21 of 40

circuit applies a “strong rule of deference” in reviewing a district court’s

determination of a witness’s credibility at a bench trial. Childrey v. Bennett, 997

F.2d 830, 834 n.5 (11th Cir. 1993). Given this standard, as well as the numerous

conflicts between Escobio’s testimony and the documentary evidence, the court

was entitled to find that Escobio lacked credibility and to discount his testimony

accordingly.

The district court also correctly applied the law to these facts. “[S]cienter is

established if Defendant intended to defraud, manipulate, or deceive, or if

Defendant’s conduct represents an extreme departure from the standards of

ordinary care.” Commodity Futures Trading Comm’n v. R.J. Fitzgerald & Co.,

Inc., 310 F.3d 1321, 1328 (11th Cir. 2002). Adapting “federal securities law” to

the commodities-fraud context, this circuit has stated that scienter is shown “when

Defendant’s conduct involves ‘highly unreasonable omissions or

misrepresentations . . . that present a danger of misleading [customers] which is

either known to the Defendant or so obvious that Defendant must have been aware

of it.’” Id. (quoting Ziemba v. Cascade Int’l, Inc., 256 F.3d 1194, 1202 (11th Cir.

2001)).

The evidence shows that the Defendants either intended to mislead Southern

Trust’s customers or made highly unreasonable misrepresentations that posed an

obvious danger of misleading them. Escobio’s deep involvement in managing

21
 Case: 16-16544 Date Filed: 07/12/2018 Page: 22 of 40

Loreley’s accounts at Berkeley and Hantec, as well as his extensive industry

experience, support the inference that he knew that he was investing his customers’

money in metals derivatives. Hantec’s CEO, at his deposition, put it this way:

“Under no circumstance is [it] plausible” that Escobio believed that he was trading

in metals. Escobio also surely knew that Berkeley and Hantec had made no loans

to Southern Trust’s customers and, therefore, that the customers were being

charged interest on loans that did not exist. The district court thus did not err in

concluding that the CFTC had proved scienter.

3. Materiality

This brings us to the third and final element—materiality. “A representation

or omission is ‘material’ if a reasonable investor would consider it important in

deciding whether to make an investment.” Fitzgerald, 310 F.3d at 1328–29. The

Defendants’ briefing on this element addresses only the materiality of their

omission that the customers’ money would pass through Loreley to Berkeley and

Hantec. If that were the only omission or misrepresentation in this case, we might

need to examine the materiality element more closely. But other

misrepresentations found by the district court easily qualify as material. The

Defendants, for example, represented that they were investing customers’ money

in metals when in fact they were investing it in metals derivatives. Moreover, the

Defendants represented that customers owed interest on loans used to purchase

22
 Case: 16-16544 Date Filed: 07/12/2018 Page: 23 of 40

metals, but no such loans existed. A reasonable investor would consider each of

these misrepresentations important in deciding whether to invest. Accordingly, the

district court did not err in concluding that these misrepresentations were material.

We therefore agree with the district court’s overall conclusion that fraud was

established under 7 U.S.C. §§ 6b(a) and 9, and under 17 C.F.R. § 180.1.

E. The district court did not err in permanently enjoining the Defendants
from employment in the commodities-trading industry.

Turning now to the propriety of the injunction issued against the Defendants,

we note that a district court’s issuance of an injunction is reviewed under the

abuse-of-discretion standard. Commodity Futures Trading Comm’n v. Wilshire

Inv. Mgmt. Corp., 531 F.3d 1339, 1347 (11th Cir. 2008) (applying this standard to

a permanent injunction issued under the CEA). “[S]o long as [the district court’s]

decision does not amount to a clear error of judgment[,] we will not reverse even if

we would have gone the other way had the choice been ours to make.” S.E.C. v.

ETS Payphones, Inc., 408 F.3d 727, 733 (11th Cir. 2005).

“[U]pon a proper showing,” the CEA allows a district court to grant “a

permanent or temporary injunction.” 7 U.S.C. § 13a-1(b). “‘[T]he ultimate test

[for an injunction] is whether the defendant’s past conduct indicates that there is a

reasonable likelihood of further violations in the future.’” Wilshire, 531 F.3d at

1346 (quoting SEC v. Caterinicchia, 613 F.2d 102, 105 (5th Cir. 1980)). This test

entails weighing the following six factors:
23
 Case: 16-16544 Date Filed: 07/12/2018 Page: 24 of 40

the egregiousness of the defendant’s actions, the isolated or recurrent
nature of the infraction, the degree of scienter involved, the sincerity
of the defendant’s assurances against future violations, the
defendant’s recognition of the wrongful nature of his conduct, and the
likelihood that the defendant’s occupation will present opportunities
for future violations.

SEC v. Carriba Air, Inc., 681 F.2d 1318, 1322 (11th Cir. 1982). A court need not

make a finding on every factor. See Wilshire, 531 F.3d at 1346–47 (holding that a

district court that considered only three of the six factors did not abuse its

discretion in issuing an injunction).

Escobio argues that the injunction should be vacated because the district

court, in weighing the Carriba Air factors, erred in not concluding that his

cooperation with the NFA’s investigation resolved the last three factors in his

favor. But the court had discretion in how to interpret Escobio’s cooperation with

the NFA. This discretion would have allowed the court, for example, to interpret

Escobio’s cooperation not as contrition, but as a self-interested effort to strike a

favorable deal with the NFA and, perhaps, to avoid criminal prosecution.

Escobio’s denial of wrongdoing at his deposition, at trial, and throughout the

NFA’s and the CFTC’s investigations further belies his acceptance of

responsibility. The same is true of his attempt to deflect blame onto Berkeley and

Hantec, which he claims duped him into trading metals derivatives. In sum, the

court applied the correct legal standard, and its factual findings contain no clear

error. We therefore find no fault in its issuance of a permanent injunction.
24
 Case: 16-16544 Date Filed: 07/12/2018 Page: 25 of 40

F. Restitution is proper only for losses sustained in the metals-derivatives
scheme, not for losses sustained in the unregistered-futures scheme.

This brings us to the final issue in this case—restitution. The district court

awarded restitution for losses arising from both schemes. First, it awarded

$1,543,892 for losses sustained in the metals-derivatives scheme, in which the

Defendants accepted customers’ money for investment in metals but instead

invested the funds in metals derivatives. Second, the court awarded $559,725 for

losses sustained in the unregistered-futures scheme, in which the Defendants

accepted customers’ money for investment in futures—and actually invested the

funds in futures through Loreley’s accounts at Berkeley and Hantec—but failed to

register as futures commission merchants or to conduct the transactions on a

registered exchange. The Defendants challenge both awards, arguing that the

CFTC failed to prove, as required by the CEA, that the Defendants’ violations of

the CEA proximately caused the customers’ losses.

1. The district court relied on a definition of proximate cause
subsequently rejected by the Supreme Court.

Under the CEA, a “court may impose . . . on any person found in the action

to have committed any violation[] equitable remedies including . . . restitution to

persons who have sustained losses proximately caused by such violation (in the

amount of such losses).” 7 U.S.C. § 13a-1(d)(3). This statutory language, by its

terms, permits restitution only for losses proximately caused by a violation.

25
 Case: 16-16544 Date Filed: 07/12/2018 Page: 26 of 40

In its restitution analysis, the district court concluded that the “Defendants’

violations proximately caused their customers’ losses” because those losses “were

a reasonably foreseeable result of the Defendants’ violations.” The court derived

this foreseeability-based formulation of proximate cause from a relatively recent

decision of this court holding that, for proximate cause to exist under the Fair

Housing Act (FHA), “[t]he defendant must have been reasonably able to foresee

the kind of harm that was actually suffered.” See City of Miami v. Bank of Am.

Corp., 800 F.3d 1262, 1282 (11th Cir. 2015).

That decision, however, was subsequently reversed by the Supreme Court in

Bank of America Corp. v. City of Miami, 137 S. Ct. 1296 (2017). The Court

concluded that, “[i]n the context of the FHA, foreseeability alone does not ensure

the close connection that proximate cause requires” between the complained-of

conduct and the alleged harm. Id. at 1306. As the Court explained, the FHA

incorporates the concept of proximate cause developed at common law, where

“directness principles” apply. Id. Proximate cause under the FHA thus “requires

‘some direct relation between the injury asserted and the injurious conduct

alleged.’” Id. (quoting Holmes v. Sec. Inv’r Protection Corp., 503 U.S. 258, 268

(1992)). Such a “direct relation” usually does not exist “beyond the first step” in a

causal chain. Id. (quoting Hemi Group, LLC v. City of New York, N.Y., 559 U.S. 1,

10 (2010)).

26
 Case: 16-16544 Date Filed: 07/12/2018 Page: 27 of 40

We have found no circuit court opinion examining proximate cause under

the CEA, but the statute surely demands more than foreseeability alone. Section

13a-1(d)(3) of the CEA, like the FHA provision examined in Bank of America,

“sounds basically in tort” because it defines a new legal duty and authorizes the

courts to award compensation for injuries caused by a defendant’s wrongful

breach. See Curtis v. Loether, 415 U.S. 189, 195 (1974) (explaining why a

damages action under the Civil Rights Act of 1964 “is analogous to a number of

tort actions recognized at common law”).

Congress, moreover, has given no indication, either in the CEA’s text or

otherwise, that it intended to depart from the common-law conception of proximate

cause. See Bank of America, 137 S. Ct. at 1305 (“We assume Congress ‘is familiar

with the common-law rule and does not mean to displace it sub silentio’ in federal

causes of action.” (quoting Lexmark Int’l, Inc. v. Static Control Components, Inc.,

134 S. Ct. 1377, 1390 (2014))). We thus conclude that the common-law rules

governing proximate cause apply here.

Those rules begin with the notion that proximate cause necessarily

encompasses cause in fact, requiring proof of “but-for” causation. W. Page Keeton

et al., Prosser and Keeton on the Law of Torts § 30 (5th ed. 1984). Establishing

proximate cause requires more. See Ray v. Spirit Airlines, Inc., 836 F.3d 1340,

1350 (11th Cir. 2016) (“Unable to establish even but-for causation, such a plaintiff

27
 Case: 16-16544 Date Filed: 07/12/2018 Page: 28 of 40

necessarily would be unable to meet the higher burden of showing that the

racketeering activity proximately caused the plaintiff’s injuries.”); Hemi Grp., 559

U.S. at 12 (“Our precedents make clear that in the RICO context, the focus [when

assessing proximate cause] is on the directness of the relationship between the

conduct and the harm.”).

This does not mean, however, that the fraud must be the “sole and exclusive

cause” of the loss; it means only that the fraud must be a “substantial” or

“significant contributing cause.” FindWhat Inv’r Grp. v. FindWhat.com, 658 F.3d

1282, 1309 (11th Cir. 2011) (citing Robbins v. Koger Props., Inc., 116 F.3d 1441,

1447 (11th Cir. 1997)). The wrongdoer, in other words, can be held liable to the

plaintiff even if the wrongful act was not the sole cause of the loss. See, e.g., Staub

v. Proctor Hosp., 562 U.S. 411, 420 (2011) (recognizing that “it is common for

injuries to have multiple proximate causes”).

Concepts such as “directness” and “foreseeability,” moreover, should not

distract us from the fact that “[p]roximate cause is bottomed on public policy as a

limitation on how far society is willing to extend liability for a defendant’s

actions.” See Ashley County v. Pfizer, Inc., 552 F.3d 659, 671 (8th Cir. 2009). As

the Supreme Court has explained, “[t]he term ‘proximate cause’ is shorthand for a

concept: Injuries have countless causes, and not all should give rise to legal

liability.” CSX Transp., Inc. v. McBride, 564 U.S. 685, 692 (2011) (emphasis

28
 Case: 16-16544 Date Filed: 07/12/2018 Page: 29 of 40

omitted). “‘What we . . . mean by the word “proximate[]”’ . . . is simply this:

‘[B]ecause of convenience, of public policy, of a rough sense of justice, the law

arbitrarily declines to trace a series of events beyond a certain point.’” Id. at 692–

93 (quoting Palsgraf v. Long Island R. Co., 162 N.E. 99, 103 (N.Y. 1928)

(Andrews, J., dissenting)). Accordingly, “the question whether a court will sustain

a finding of proximate cause under a given set of circumstances is as much a

question of public policy as it is of direct causality.” Gathercrest, Ltd. State Bank

of India v. First Am. Bank & Tr., 805 F.2d 995, 997 (11th Cir. 1986) (citing Blue

Shield of Virginia v. McCready, 457 U.S. 465 (1982)).

2. The district court erred in finding that the registration violation
alone proximately caused any loss.

With regard to the unregistered-futures scheme, the district court’s finding of

proximate cause rested on the premise that the Defendants’ “business was illegal

from the outset” and that the Defendants “never should have accepted customer

funds for the purpose of trading futures transactions without first registering as a

futures commission merchant with the CFTC.” The court reasoned that because

the transactions were illegal, the losses were foreseeable.

But such reasoning, without more, conflates correlation with causation. As a

general matter, losing money is a foreseeable result of investing with an

unregistered trader, but this is not because a trader’s failure to register will itself

inevitably cause a loss. More likely, any loss will result from some other factor,
29
 Case: 16-16544 Date Filed: 07/12/2018 Page: 30 of 40

such as the trader’s incompetence or dishonesty, which the failure to register might

correlate with but not cause. The intrinsic qualities of the trader—not his or her

failure to register—would be the likely cause of the loss, to say nothing of market

fluctuations.

Consider the analogous circumstance of a client being represented by an

unlicensed lawyer. The lawyer’s lack of a license might indicate incompetence or

a lack of integrity, but normally it will not in and of itself cause a client’s loss in

court. Indeed, a client might well prevail in court despite the lawyer’s unlicensed

status. Or, if there is a loss, the loss might flow from factors wholly unrelated to

the lawyer’s status, such as an unfavorable precedent, a judicial error, or a jury’s

caprice.

A recent decision from this court illustrates the point that a fraudster’s

failure to observe registration requirements does not necessarily cause his victim’s

loss. In Alvarez v. United States, 862 F.3d 1297, 1300 (11th Cir. 2017), a group of

federal employees sued the defendant for negligence per se after he sold them

fraudulent, unregistered securities. The court rejected the plaintiffs’ argument that

the seller’s failure to register the securities had caused the plaintiffs’ losses,

concluding instead that their losses had occurred because the securities were

fraudulent. This point was made in the following passage:

As the district court correctly explained, “had the FEBG Bond Fund
been legitimate, the fact of its being unregistered would have had no
30
 Case: 16-16544 Date Filed: 07/12/2018 Page: 31 of 40

effect on plaintiffs. And conversely, if McLeod had registered the
fraudulent securities (lying about them to do so since they didn’t
exist), plaintiffs would still have suffered the same harm. Plaintiffs’
injuries flow from the securities and McLeod’s representations which
underlay them being fraudulent, not because they were unregistered.”

Id. at 1302 (quoting the district court’s opinion).

The same logic applies here. In the unregistered-futures scheme, the

Defendants invested their customers’ money in futures through Loreley’s accounts

at Berkeley and Hantec. The customers who lost money in this scheme intended to

invest in futures, and the CFTC does not dispute that the Defendants in fact

facilitated the investments that those customers wished to make. According to the

district court, the Defendants’ only CEA violations in the unregistered-futures

scheme were their failure to register as futures commission traders and their failure

to disclose the roles of Berkeley, Hantec, and Loreley in making the investments.

The record contains no evidence, however, that the customers who lost

money in the unregistered-futures scheme did so because of these violations. As in

Alvarez, there has been no showing that the registration violations caused the

losses. Nor has the CFTC pointed to any evidence that the losses flowed from the

Defendants’ omissions regarding the roles of Berkeley, Hantec, or Loreley. The

CFTC has not shown, for instance, that the customers who intended to invest in

futures would have refrained from doing so if they had known of Berkeley’s,

Hantec’s, or Loreley’s involvement. Nor has the CFTC shown that those entities’

31
 Case: 16-16544 Date Filed: 07/12/2018 Page: 32 of 40

involvement delayed the execution of trades or otherwise caused the investors to

receive anything less than what they had bargained for. Finally, the record does

not show that any of the futures investors lost money as a result of the NFA

requiring the Defendants to liquidate the accounts at Berkeley and Hantec.

Because the CFTC did not prove that the Defendants’ violations in the

unregistered-futures scheme caused any loss, we vacate the restitution award

related to that scheme and remand the issue to the district court with instructions to

consider whether any other equitable remedy is appropriate. We particularly note

the statutory subsection under which the court may order the disgorgement of

gains, in appropriate circumstances, without regard to proximate cause.

See 7 U.S.C. § 13a-1(d)(3) (“[T]he court may impose . . . on any person found . . .

to have committed any violation[] equitable remedies including . . . disgorgement

of gains received in connection with such violation.”). The district court may, but

need not, consider on remand whether disgorgement is appropriate in the present

case.

3. Sufficient evidence supports the award of restitution for losses
sustained in the metals-derivatives scheme.

The district court did not err, however, in awarding restitution for customer

losses in the metals-derivatives scheme, in which the Defendants promised to

invest their customers’ money in metals but instead invested it in metals

derivatives. Several victims of this scheme testified at trial that they would not
32
 Case: 16-16544 Date Filed: 07/12/2018 Page: 33 of 40

have invested with Southern Trust if they had known that their money would be

passed through Loreley and invested in metals derivatives rather than in actual

metals. Moreover, victims of this scheme lost substantial sums when the NFA,

having determined that the Defendants were violating commodities-trading laws,

forced Loreley’s accounts at Berkeley and Hantec (which corresponded to

customer accounts at Southern Trust) to be liquidated.

The Defendants fault the NFA for forcing them to liquidate the accounts at

an inopportune moment, when the metals markets were down. Accordingly, the

Defendants argue that the NFA’s action, along with market conditions, are

intervening causes that broke the chain of proximate causation.

Without question, intervening causes must be considered in assessing

proximate cause. The Supreme Court has recognized that “changed economic

circumstances” are among the “intervening causes” that can limit a wrongdoer’s

responsibility. Erica P. John Fund, Inc. v. Halliburton Co., 563 U.S. 804, 812–13

(2011). Similarly, the Court has recognized that a third party’s actions can

“break[] the chain of causation.” Bridge v. Phoenix Bond & Indem. Co., 553 U.S.

639, 659 (2008). This court has applied these principles as well. See, e.g., United

States v. Stein, 846 F.3d 1135, 1155–56 (11th Cir. 2017) (ordering the district court

to consider, in assessing proximate cause on remand, whether widespread “short

selling” of a company’s stock and “the across-the-board stock market decline of

33
 Case: 16-16544 Date Filed: 07/12/2018 Page: 34 of 40

2008” “affected [the company]’s stock price during the fraudulent period and, if

so, whether [those occurrences] nonetheless were reasonably foreseeable” to the

defendant).

But in a relatively recent case analogous to the one before us, the Supreme

Court rejected the argument that the Defendants make here. In Robers v. United

States, 134 S. Ct. 1854 (2014), the Court considered the effect of a declining

market on the proximate-cause analysis used to determine a fraudster’s restitution

obligation. The defendant in that case was convicted of submitting fraudulent loan

applications to two banks, which extended him mortgage-backed loans based on

the fraudulent applications. Id. at 1856. When the defendant failed to make the

required mortgage payments, the banks foreclosed on the mortgages and took title

to two houses, which they subsequently sold in a falling real estate market. Id.

Both banks suffered a loss. Id. The district court ordered the defendant to pay

restitution in the full amount of the banks’ losses, even though the value of the

houses when the mortgages were created more than covered the loan balances. Id.

On appeal, the defendant argued that “where, as here, a victim receives less

money from a later sale than the collateral was worth when received, the market

and not the offender is the proximate cause of the deficiency.” Id. at 1859. A

unanimous Supreme Court was “not convinced.” Id. It reasoned as follows:

The basic question that a proximate cause requirement presents is
“whether the harm alleged has a sufficiently close connection to the
34
 Case: 16-16544 Date Filed: 07/12/2018 Page: 35 of 40

conduct” at issue. Here, it does. Fluctuations in property values are
common. Their existence (though not direction or amount) is
foreseeable. And losses in part incurred through a decline in the value
of collateral sold are directly related to an offender’s having obtained
collateralized property through fraud. That is not to say that an
offender is responsible for everything that reduces the amount of
money a victim receives for collateral. Market fluctuations are
normally unlike, say, an unexpected natural disaster that destroys
collateral or a victim’s donation of collateral or its sale to a friend for
a nominal sum—any of which . . . could break the causal chain.

Id. (quoting Lexmark Int’l, Inc. v. Static Control Components, Inc., 134 S. Ct.

1377, 1390 (2014)). Based on this reasoning, the Court concluded that the

defendant’s fraudulent loan applications proximately caused the banks’ losses. Id.

The Court therefore affirmed the judgment imposing restitution in the full amount

of the deficiency. Id.

We find Robers applicable here because it involved an analogous situation:

A defendant—in Robers, the loan applicant; here, Southern Trust—fraudulently

obtained investments. (From a bank’s perspective, a loan is a kind of investment.

See American Bank & Trust Co. v. Wallace, 702 F.2d 93, 97 (6th Cir. 1983) (“In

one sense every lender of money is an investor since he places his money at risk in

anticipation of a profit in the form of interest.” (quoting C.N.S. Enters., Inc. v.

G & G Enters., Inc., 508 F.2d 1354, 1359 (7th Cir. 1975))).) Upon the fraud’s

discovery, what remained of the investments—in Robers, the collateral; here, the

metals derivatives—was sold. The sales took place in a declining market, so the

investors lost money.
35
 Case: 16-16544 Date Filed: 07/12/2018 Page: 36 of 40

In the present case, the fraud is even more closely connected to the

investors’ losses than in Robers because the customers here had no choice, upon

the fraud’s discovery, about when or even whether to divest. The NFA required

the metals-derivatives accounts to be liquidated, and the customers’ losses were

then “locked in.” That the customers here were individuals, not sophisticated

commercial entities as in Robers, makes the case for proximate cause even

stronger.

We see no conflict between the Supreme Court’s reasoning in Robers and

the well-established principle in certain securities-fraud cases that market

conditions must be considered in determining whether a fraudster has proximately

caused a loss. Although the Defendants argue that the CFTC must show “loss

causation” in this case, all of the authorities cited by the Defendants involve “fraud

on the market,” which is a kind of fraud that is materially different from the fraud

here.

In a typical fraud-on-the-market case, the defendant is alleged to have

artificially inflated the price of a security with misrepresentations or omissions

that, when later revealed, caused the price of the security to drop. An important

hurdle for the plaintiff in such cases is the element of loss causation, which

numerous courts have likened to proximate cause. See, e.g., FindWhat Inv’r Grp.

v. FindWhat.com, 658 F.3d 1282, 1309 (11th Cir. 2011) (explaining that “loss

36
 Case: 16-16544 Date Filed: 07/12/2018 Page: 37 of 40

causation” requires proof that the fraud is the “proximate cause of the plaintiff’s

later losses”); Schaaf v. Residential Funding Corp., 517 F.3d 544, 550 (8th Cir.

2008) (“Loss causation . . . corresponds to the common law’s requirement of

proximate causation.”); AUSA Life Ins. Co. v. Ernst & Young, 206 F.3d 202, 209

(2d Cir. 2000) (“Loss causation is causation in the traditional ‘proximate cause’

sense . . . .”).

The loss-causation concept deals with whether a security’s price drop is

attributable to the fraud rather than to some extraneous factor. In the fraud-on-the-

market context, the Supreme Court has recognized that, rather than being the result

of fraud, a security’s price drop

could instead be the result of other intervening causes, such as
“changed economic circumstances, changed investor expectations,
new industry-specific or firm-specific facts, conditions, or other
events.” If one of those factors were responsible for the loss or part of
it, a plaintiff would not be able to prove loss causation to that extent.
This is true even if the investor purchased the stock at a distorted
price, and thereby presumptively relied on the misrepresentation
reflected in that price.

Erica P. John Fund, Inc. v. Halliburton Co., 563 U.S. 804, 812–13 (2011) (quoting

Dura Pharm., Inc. v. Broudo, 544 U.S. 336, 342–43 (2005)).

Teasing out the effect of market conditions in fraud-on-the-market cases is

essential because the fraud alleged involves a manipulation of stock price. The

effect of the fraud must therefore be distinguished from the effects of independent

market forces in order to determine how much of the price drop should be
37
 Case: 16-16544 Date Filed: 07/12/2018 Page: 38 of 40

attributed to the defendant. Here, in contrast, the fraud at issue is not a fraud on

the market, but rather a fraud on individual consumers who wished to invest in

metals and instead had their funds placed in metals derivatives. The present case

involves no allegation, in other words, that the Defendants manipulated the price of

a commodity. So there is no need to ask, as we would in a fraud-on-the-market

case, whether the Defendants’ fraud, rather than independent market forces, caused

the victims’ losses.

The factual question of whether fluctuations in the value of metals

derivatives mirror fluctuations in the value of the underlying commodities is

therefore beside the point. In Robers, the Supreme Court concluded that the

fraudster proximately caused the banks’ losses even though the banks received

precisely the collateral that they had bargained for. Presumably, the banks would

have suffered the same losses if they had foreclosed on the loans for a reason other

than the fraud. Yet this did not negate proximate cause. By the same token, even

if the value of the metals derivatives in this case precisely tracked the value of the

underlying commodities—a fact that, in any event, is not established by the

record—the Defendants’ fraud would still be a proximate cause of the victims’

losses.

Returning to the indicia of proximate cause, we conclude that the fraud here

is directly related to the customers’ losses because Southern Trust took their

38
 Case: 16-16544 Date Filed: 07/12/2018 Page: 39 of 40

money and, contrary to their wishes, invested it in metals derivatives.

Furthermore, the Defendants’ fraud is what prompted the NFA to intervene and, in

an effort to prevent further losses, to require that Loreley’s accounts at Berkeley

and Hantec be liquidated.

As in Robers, the market conditions that contributed to the customers’ losses

were foreseeable. See Robers, 134 S. Ct. at 1859. Those conditions, therefore, do

not constitute an intervening cause. See Staub v. Proctor Hosp., 562 U.S. 411, 420

(2011) (“A cause can be thought ‘superseding’ only if it is a ‘cause of independent

origin that was not foreseeable.’” (quoting Exxon Co., U.S.A. v. Sofec, Inc., 517

U.S. 830, 837 (1996))). Nor does the NFA’s action constitute an intervening cause

under the facts of this case. See id.

This brings us back to a bedrock policy question: Who should be

responsible for the customers’ losses? See supra at 28–29. The Defendants’

argument that their fraud was not a proximate cause of their customers’ losses is

untenable not only as a matter of law and fact, but also as a matter of public policy.

See United States v. Turk, 626 F.3d 743, 750 (2d Cir. 2010) (rejecting a similar

argument because it would “encourage would-be fraudsters to roll the dice on the

chips of others, assuming all of the upside benefit and little of the downside risk”).

Adopting such an argument would create perverse incentives for commodities

traders and undermine the purpose of the CEA. We thus find no error in the

39
 Case: 16-16544 Date Filed: 07/12/2018 Page: 40 of 40

district court’s restitution award for losses sustained in the metals-derivatives

scheme.

III. CONCLUSION

For all of the reasons set forth above, we AFFIRM the judgment of the

district court except as to the restitution award for the group of investors whose

losses were associated solely with the registration violations. As to that portion of

the restitution award, we VACATE the judgment and REMAND with instructions

to consider other equitable remedies.

40