A tough slog toward justice for investors

By David S. Hilzenrath
Washington Post Staff Writer
Sunday, November 21, 2010; G01

For many investors cheated by brokers and other trading professionals, seeking justice from a federal agency responsible for policing the commodities market has been an exercise in futility.

A top official recently sent a stunning message to the public, saying that for decades the deck has been stacked against investors when they try to recover damages through the Commodity Futures Trading Commission.

In an unusual farewell statement, George H. Painter, one of two administrative law judges who hear investor complaints, said the other judge has long forced investors "to run a hostile procedural gantlet until they lose hope, and either withdraw their complaint or settle for a pittance."

The judge, who is retiring at 83, alleged that his colleague, Bruce C. Levine, undercuts investors "in the cynical guise of enforcing the rules."

A Washington Post examination of the issue found that Painter's comments are just one symptom of a weak and troubled system where small investors get tripped up on technicalities, legal standards are moving targets and agency leaders have cried foul on what they see as issues of basic fairness.

Although its name may be unfamiliar, the CFTC regulates trading in vital markets - from commodities such as oil, cotton and gold to foreign currencies and the complex instruments that helped bring the financial system to the brink of collapse two years ago.

Its mission is to protect investors in markets so risky they have been called the Wild West of Wall Street. Legislation passed this year in response to the financial crisis gives it added responsibilities.

However, as a forum for resolving complaints, the CFTC today is on the brink of irrelevance because investors and even the commission's own staff have chosen to avoid making use of it.

The situation poses a test for CFTC Chairman Gary Gensler, who took office advocating a tough approach to regulation. He had a hard time winning confirmation because some lawmakers doubted his commitment to the task; during the Clinton administration, he resisted efforts to expand CFTC power over financial instruments known as derivatives, which played a central role in the near-meltdown of the financial system.

Gensler declined to be interviewed for this article.

Among The Post's findings:

l Painter is not alone in criticizing Levine's work. CFTC commissioners have repeatedly overruled Levine's decisions, accusing the judge of abusing his discretion.

l The CFTC was so concerned about the fairness of its proceedings that it issued a policy statement in January reminding the judges that, under commission rules, they should not let an overly literal application of procedural standards get in the way of justice.

l At least partly because of a loss of faith in the process, private lawyers say, hardly any investors are turning to the CFTC for relief. As of Nov. 8, there were nine investor complaints pending before an administrative law judge.

"Nobody wants to use it," said Kansas lawyer Barry D. Estell. "It's not fair."

l Justice can be slow. In October, the CFTC issued a 14-page opinion in an appeal that dated from 2003.

l Painter's conduct, too, has been called into question. The CFTC found that Painter "was unusually acrimonious and intemperate" in 2008 when he ejected a defense lawyer from a case. "That's one I don't remember," Painter said in an interview.

l Although the CFTC has the option of trying its own enforcement cases before the two judges based in its Washington headquarters - supposedly the authorities in this area of law - it almost never does so. Instead, it sends its lawyers to litigate charges in federal courts around the country. Currently, no enforcement cases are pending before a CFTC administrative law judge.

CFTC enforcers have avoided the in-house forum partly because they did not want to take their chances with Levine, said a former commission official who spoke on the condition of anonymity to avoid straining relations with people at the agency.

"The Enforcement Division chooses the venue that is best for each particular case," a CFTC spokesman said by e-mail.

Unlike administrative judges, federal courts have the power to freeze assets while cases are pending.

l As for investors, even when they win, they can lose. Once investors obtain CFTC judgments, they are left to their own devices to enforce them through the courts. That can be a challenge if the firms have folded or if the brokers would sooner forfeit their professional licenses than pay the debt. In some cases, even as the commission awarded damages, it warned investors that they might be unable to collect.

In many instances, investors have won judgments but, as far as the agency knows, never recouped the money. A CFTC database lists more than 1,000 individuals or firms in almost 1,200 cases who have apparently failed to pay reparations.

The unpaid judgments total $40.3 million, though that includes double-counting where parties are jointly liable for the same damages.

The CFTC would not or could not say what percentage of judgments remained unpaid.

A spokesman for the agency would not address Painter's allegations. Citing an agency policy that bars CFTC staff, including its media representatives, from speaking publicly, he provided some information for this article on the condition that his name not be used.

Commodities investors who think they have been mistreated by industry professionals can seek compensation in court, through arbitration, or through administrative proceedings at the CFTC. The commission has said its reparations program was meant to provide an informal and economical option to accommodate the vast majority of investors who file claims without a lawyer.

In his legal writing, Levine has explained that he is trying to uphold the rule of law against an arbitrary, anything-goes approach. In a recent opinion, Levine accused the CFTC of having "A Different Rule For Every Day."

"Clearly defined law - no matter how bad - has the minimal benefit of allowing litigants to know the rules of the game and act accordingly," he wrote. "Hopelessly muddled rules, however, offer nothing but unbounded agency discretion - something that amounts to no law at all."

Levine declined to be interviewed.

A Washington Post review found that since the beginning of 2008, Levine has resolved one case in favor of an investor, awarding damages of $52,624.95 plus interest.

The accused chose not to attend a hearing in the case and thus lost the right to introduce evidence, Levine wrote.

Levine's cases often ended with perfunctory notices saying that the complaint was dismissed at the parties' request. Other cases have taken a more tortuous route.

India Moss-Thomas, an investor from Winnsboro, Tex., filed a complaint alleging that she had been misled by brokers using high-pressure sales tactics. Levine threw out part of her case because she missed a document deadline by three days. Then, citing a rule the CFTC had ordered him to follow in another case, Levine declined her request to move a hearing from Houston to Dallas.

Moss-Thomas, who had said her father's medical condition would make the 51/2-hour drive to Houston difficult, gave up.

"I cannot take this anymore," she said in a letter to the judge. "My family and I cannot handle the stress any longer . . . and I feel like we have worked so hard for nothing."

CFTC commissioners took the extraordinary step of reviewing the case on their own initiative and awarded her $104,626 plus interest.

Similarly, after Levine threw out a complaint by Edna D. Anderson, a retired sheriff's deputy from Metairie, La., the CFTC ordered Levine to give Anderson her day in court.

Levine granted a hearing, but he barred both sides from introducing any new testimony or evidence. Then he dismissed the case again, saying Anderson had failed to prove her claim.

The CFTC overruled Levine for a second time and reassigned the case to Painter. He awarded her $47,627.59 plus interest. Although Anderson won the case, she has yet to collect.

"I am really deeply hurt, but what can I do?" Anderson, 77, said in an interview.

The broker in the case, David M. Beach, said he has not paid because he lacks the funds and "the case never has had any merit." Beach said the CFTC process "was horribly one-sided" in favor of his accuser, who he said presented no proof that he misled her.

Beach does not appear on the commission's list of people and firms named in outstanding judgments. The CFTC spokesman said Beach "should be added to the sanctions list shortly."

In his September farewell notice, Painter pleaded with the CFTC to enlist a new judge, saying he could not "in good conscience" leave his open cases to Levine.

The commission said it lacked the authority to honor Painter's request. In a recent order, it reassigned his cases to Levine.

Staff researcher Lucy Shackelford contributed to this report.

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