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TAUCHER v. BORN

June 21, 1999

FRANK TAUCHER, ET AL., PLAINTIFFS,
v.
BROOKSLEY E. BORN, ET AL., DEFENDANTS.



The opinion of the court was delivered by: Urbina, District Judge.

DECISION

Entering Judgment for the Plaintiffs

A bench trial was held in the above-captioned case beginning Monday, May 3, 1999 and ending Wednesday, May 5, 1999, during which the court took testimony from various witnesses and received documents into evidence. Upon reviewing the testimony and evidence, as well as the existing record and the relevant law, the court enters the following findings of fact and conclusions of law. Based on these findings and conclusions, the court will enter judgment in this case for the plaintiffs.

I. INTRODUCTION

This case involves a First Amendment challenge to Section 4m of the Commodity Exchange Act ("CEA"), 7 U.S.C. § 6m (1994), as applied to the plaintiffs who publish books, newsletters, Internet websites, detailed written instruction manuals (known in the industry as "trading systems"), and computer software that provide information, analysis, and advice on commodity futures trading. The plaintiff-publishers in this action seek a declaration that they may lawfully publish without being registered as commodity trading advisors ("CTA") with the Commodity Futures Trading Commission ("CFTC"). The defendants contend that the registration requirement is constitutional under the First Amendment.

Plaintiffs Frank Taucher, Stephen Briese, Frederick J. Kastead*fn1, and Robert Miner (hereinafter collectively referred to as "the plaintiffs") are publishers whose publications include books, newsletters, Internet websites, trading systems, and computer software. Plaintiffs Galen Cawley, Arthur Hayner, Edward W. Hearne III, Roemer McPhee, and Roger Rines are members of the public who read and use the plaintiffs' publications and other futures-related publications.

Named as a defendant is the Commodity Futures Trading Commission ("CFTC"), the independent federal regulatory 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. Also named as defendants in their official capacities are the CFTC's chairperson, Brooksley E. Born, and CFTC commissioners Barbara Pedersen Holum, David D. Spears and John E. Tull, Jr.

II. FINDINGS OF FACT

A. General Facts

1. Participants in the futures market rely in part on published
  information, recommendations and analyses in order to make
  trading decisions.
2. Information may be gleaned from a variety of sources including
  but not limited to books, newsletters, Internet websites,
  computer software and advisory services.
3. Commodity Trading Advisors are one of several kinds of
  commodity trading professionals regulated by the Commodity
  Futures Trading Commission.
4. CTAs who give individually tailored advice to their clients
  normally also manage client funds.
5. In the commodity trading advisory profession as it is
  practiced today, a CTA ordinarily does not devise a specific
  trading strategy for a particular client.
6. Most CTAs have a system, program or discipline by which they
  trade

  futures contracts on their clients' behalf.
7. The CFTC requires that a CTA disclose to his clients the
  trading methods, strategies or disciplines he intends to use to
  trade for the client's account.
8. A CTA would not trade a $10,000 discretionary commodity
  account the same way he would trade a $100,000 account because
  the CTA does not have sufficient funds to trade the smaller
  account the same way he would trade the larger account.
9. Although a CTA will follow his trading program regardless of
  the size of a particular discretionary commodity account, the
  CTA may structure the actual trades differently in a smaller
  account because he has fewer funds with which to trade.
10. CTAs who manage their clients' money must execute a
    power-of-attorney agreement with their client which
    authorizes the CTA to execute trades on behalf of clients.
11. After the contract is executed, the client of a
    money-managing CTA does not approve or veto specific trading
    decisions.
12. A client of a money-managing CTA will generally not find out
    that a trade has been executed on his or her behalf until the
    client receives the next statement of account balance.
13. The CTA's trading decisions can expose the client to loss,
    even in excess of the initial amount invested.
14. When a client wishes to enter into a relationship with a CTA,
    the CTA provides the client with a disclosure document which
    contains, among other things, a "Risk Disclosure Statement."
    The Risk Disclosure Statement states, among other
    disclosures, that "[t]he risk of loss in trading commodities
    can be substantial."
15. As a general matter, money-managing CTAs do not communicate
    trading advice to their clients.
16. Rather, money-managing CTAs gather information and then use
    that information themselves to make trading decisions.
17. Individuals cannot execute trades in the market without going
    through a broker (known as a Futures Commission Merchant or
    FCM) who is licensed by the CFTC.
18. Because futures transactions are highly leveraged, a client
    can lose more money than he invests and, thus, the commodity
    trading account relationship between a client and broker
    involves unlimited risk on the part of the broker.
19. To insure that a client has sufficient funds to meet margin
    calls and cover losses in a trading account and, thus,
    minimize the client's potential default, the broker typically
    obtains from the client such financial information as assets,
    liabilities, net worth, liquid capital and risk capital.
20. There is no legal requirement that a CTA determine the
    suitability of a prospective client to engage in futures
    trading.

B. Robert Miner

21. Plaintiff Robert Miner ("Miner") is a publisher of futures
    trading information, analysis and advice.

22. Miner does business through Dynamic Traders Group, Inc.

23. He publishes a weekly publication called Dynamic Trader
    Weekly Report.
24. In Dynamic Trader Weekly Report Miner provides, along with
    other information, his opinion of the position of various
    financial and commodity markets based on his technical
    analysis,

    including specific trade recommendations and "stop levels."
25. In addition to advice and recommendations, Miner also
    provides subscribers with a trading education; each of the
    reports contains a tutorial, explaining the analysis used in
    the trading decisions and his approach to futures trading.
26. Miner has published a book, Dynamic Trading, that he offers
    for sale to the public, which explains his approach to
    futures trading.
27. Miner has a website, http://dynamictraders.com, that provides
    information on, and advertising for, the products and
    technical services offered by his company, as well as
    occasional technical analysis and trade recommendations.
28. Miner has published a Dynamic Trader Trading Course, which
    is a comprehensive instruction manual in commodities trading
    technical analysis.
29. The Dynamic Trader Trading Course teaches traders theory
    and practical application of analysis and trading strategies.
30. Miner has developed and markets a computer software program
    called Dynamic Trader Software that performs technical
    analysis of the financial and commodity markets.
31. The analysis provided by the Dynamic Trader Software
    reflects the technical analysis techniques described in the
    Dynamic Trader Trading Course.
32. The routines, reports and studies in the software program
    apply to all actively traded markets, including futures,
    stocks, indexes, and mutual funds.
33. The purpose of the analysis is to provide the trader with the
    information he or she requires in making a trading decision;
    the software also, within certain routines, provides buy and
    sell signal set-ups.
34. In order to generate meaningful trading advice, a user of the
    Dynamic Trader Trading Course or the Dynamic Trader
    Software is required to use it in conjunction with certain
    other information that the user supplies (the "User Input").
    The User Input is made up of "Price Data" and "Parameters."
35. Price Data consists of a series of data that corresponds to
    the prices of a certain instrument over a certain period of
    time. The Price Data may be supplied on a daily, weekly or
    other basis. The instrument may be a futures contract or some
    other type of instrument. The Price Data may represent an
    instrument that the user already owns, an instrument that the
    user does not own, or purely hypothetical data.
36. The Parameters are certain numerical values that the user may
    select in order to "fine tune" the mathematical output of
    routines within the program that examine a given set of Price
    Data. A user will normally select the Parameters that, based
    on the user's knowledge or experience, are likely to lead to
    the most profitable or otherwise meaningful result.
37. By using the Dynamic Trader Trading Course or the Dynamic
    Trader Software in conjunction with a given set of Price
    Data and a given set of Parameters, a user obtains output
    which the user must then interpret by using his own skills
    and knowledge.
38. Neither the Dynamic Trader Trading Course nor the Dynamic
    Trader Software require the user to input any personal
    information. Specifically, they do not require the user to
    input information about his particular investment objectives,
    available capital, risk preferences, current portfolio
    holdings, or personal risk

    exposures to fluctuations in other economic variables such as
    exchange rates, commodity prices, interest rates or stock
    market levels.
39. Every person who uses the same Price Data and Parameters in
    conjunction with the Dynamic Trader Trading Course will, if
    the instructions are followed correctly, receive the same
    output regardless of his individual needs and circumstances.
    Likewise, every person that uses the same Price Data and
    Parameters in conjunction with the Dynamic Trader Software
    will receive the same output regardless of his individual
    needs and circumstances.
40. Miner charges a fee to subscribers of the Dynamic Trader
    Weekly Report and the semimonthly Dynamic Trader Report.
41. Miner charges a fee to purchasers of his book, Dynamic
    Trading, his instruction manual, Dynamic Trader Trading
    Course, and his software program, Dynamic Trader Software.
42. Miner also offers issues of his Dynamic Trader Weekly
    Report at his website for a fee.
43. Through his various publications, Miner provides commodity
    trading advice to approximately 500 subscribers.
44. Miner distributes his several publications by various means,
    including mail, facsimile transmission and the Internet.
45. Miner's activities of publishing commodity trading advice are
    not solely incidental to his business.
46. Miner does not have discretionary control over customer
    accounts, nor does he execute trades on customers' behalf or
    otherwise manage customer money.
47. Miner's Dynamic Trader software is incapable of actually
    executing trades on behalf of a customer, or otherwise
    performing any trading-related activity other than causing a
    computer to display the output of the price data or
    mathematical manipulation of the price data for a user to
    interpret.
48. When Miner wrote and published his book, newsletters and
    Internet publications, he did not tailor their contents to
    the particular needs and circumstances of any individual
    reader.
49. When Miner wrote and published the Dynamic Trader Trading
    Course and the Dynamic Trader Software, he did not in any
    way tailor their contents to the particular needs and
    circumstances of any individual user.
50. When Miner wrote and published his book, newsletters, and
    Internet publications, he was unfamiliar with the particular
    needs and circumstances of specific individuals who might
    read them.
51. When Miner wrote and published the Dynamic Trader Trading
    Course and the Dynamic Trader Software, he was unfamiliar
    with the particular needs and circumstances of specific
    individuals who might use them.
52. Miner furnishes to every reader of his book, newsletters and
    Internet publications identical copies of the documents.
53. Miner furnishes to every purchaser of each edition of the
    Dynamic Trader Trading Course and the Dynamic Trader
    Software an identical copy of the manual or software.
54. Miner does not and cannot alter the contents of the Dynamic
    Trader Trading Course or the Dynamic Trader Software after
    it has been distributed to a given user.
56. Miner does not operate, has not operated and does not intend
    to operate a telephone "hot line" or other medium of
    communication by which he would inform individual users
    whether they should follow or ignore specific recommendations
    of the Dynamic Trader Trading Course or the Dynamic Trader
    Software.
57. Miner's website contains an order form where users can
    provide information through an on-line form that is delivered
    electronically to Miner.
58. This information consists solely of the trading time frame
    that the user is interested in and the market(s) that ...

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