U.S. COMMODITY FUTURES TRADING COMMISSION, Plaintiff - Appellee,
SOUTHERN TRUST METALS, Inc., LORELEY OVERSEAS CORPORATION, ROBERT ESCOBIO, Defendants - Appellants.
from the United States District Court for the Southern
District of Florida D.C. Docket No. 1:14-cv-22739-JLK
JORDAN, HULL, and GILMAN, [*] Circuit Judges.
GILMAN, CIRCUIT JUDGE
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.
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.
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 margined metals derivatives" (metals
derivatives). The district court, after a bench trial,
entered judgment for the CFTC on all claims.
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.
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.
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 "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.
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
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
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 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.
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.
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.
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
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."
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 never told
Escobio that the trades Berkeley handled for Loreley would
lead to the storage of metals.
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.
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.
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.
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."
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
the metals-derivatives scheme, the complaint alleges that the
Defendants accepted money from customers who wished to invest
in metals with 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.
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.
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.
Standard of review
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
Equitable estoppel does not bar the CFTC's
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 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.
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] ...