A recent federal appellate decision shows there are limits to the ability of a regulator to claim monetary sanctions for statutory violations. Last week the 11th Circuit held that investors whose losses were solely associated with registration violations by their fraudster traders were not entitled to a restitution award – because such losses had not been proximately caused by the registration violations.

In an enforcement action brought by the Commodity Futures Trading Commission, the 11th Circuit affirmed a Florida district court’s findings that two companies and their CEO committed fraud by falsely representing to some investors that they had purchased physical metals on their behalf (when they had actually purchased futures), and violated the registration requirements of the Commodities Exchange Act (CEA) by trading in futures without registering as futures commission merchants. The district court had awarded restitution for losses arising from both of these violations. While the 11th Circuit upheld the restitution award of approximately $1.5 million based on the fraudulent misrepresentation, it vacated the award of approximately $560,000 based on the failure to register, holding that this violation did not proximately cause the investors’ losses.

By its terms, the CEA permits restitution only for “losses proximately caused by [a] violation.”^[1] Because no circuit court had analyzed proximate cause under the CEA, the 11th Circuit looked at courts’ prior analyses of proximate cause under the Fair Housing Act (FHA). Just last year, the Supreme Court held that proximate cause under the FHA “requires ‘some direct relation between the injury asserted and the injurious conduct alleged,’”^[2] thus overturning the 11th Circuit’s previously articulated standard that awarded restitution if the losses were “a reasonably foreseeable result of the defendant’s violations.”^[3] Finding that the Supreme Court’s common law approach to proximate cause should apply, the 11th Circuit reasoned that:

[L]osing money is a foreseeable result of investing with an unregistered trader, but this is not because a trader’s failure to register will itself cause any loss. More likely, any loss will result from some other factor, such as the trader’s incompetence or dishonesty, which the failure to register correlates but does 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.^[4]

According to the 11th Circuit, the record did not contain evidence to support a finding that investors’ losses were proximately caused by the traders’ failure to register.

Thus, not every regulatory violation translates to investor losses that can be recouped by the government; courts expect a showing that the losses were a direct result of the violation.

^[1] 7 U.S.C. Section 13a-1(d)(3).

^[2] Bank of America Corp. v. City of Miami, 137 S. Ct. 1296, 1306 (2017) (quoting Holmes v. Sec. Inv’r Protection Corp., 503 U.S. 258, 268 (1992)).

^[3] U.S. Commodity Futures Trading Commission v. Southern Trust Metals, Inc., et al., No. 16-16544 (11th Cir. 2018) (citing City of Miami v. Bank of Am. Corp., 800 F.3d 1262, 1282 (11th Cir. 2015)).

^[4] Id.