Commodity Futures Trading v . Cromwell CV-05-210-JD 02/22/06 UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW HAMPSHIRE

Commodity Futures Trading Commission and New Hampshire Department of State, Bureau of Securities Regulation v. Civil N o . 05-cv-210-JD Opinion N o .

Cromwell Financial Services, Inc. et a l .

O R D E R

The defendants move to transfer this action, brought under

sections 6c and 6d of the Commodity Exchange Act, 7 U.S.C. §§

13a-1 and 13a-2, to the United States District Court for the

Southern District of Florida pursuant to

(a). 1

The plaintiffs, who are the Commodity Futures Trading Commission

(the “CFTC”) and the New Hampshire Department of State, Bureau of

Securities Regulation (the “BSR”).

Background

The plaintiffs accuse the defendants, Cromwell Financial

Services, Inc., and five of its directors and managers, of

soliciting trades in options on commodity futures through false

and misleading representations. Cromwell, a Florida corporation,

1 In the alternative, the defendants seek to stay this action pending the resolution of a complaint brought against some of them in the Business Conduct Committee of the National Futures Association, which assertedly arises out of the same conduct. has its main office in Deerfield Beach in that state and has

branch offices in three other Florida cities. Cromwell has a

branch in Fort Lauderdale, which until January 2004, was managed

by defendant Dennis Gee; in Boca Raton, which is managed by

defendant Richard Peluchette; and in Pompano Beach, which is

managed by defendant Richard Astern. Defendant Phillip Tuccelli,

Cromwell’s founder and sole shareholder, runs the Deerfield Beach

office. Cromwell’s director of compliance is defendant Michael

Staryk. All of these men reside in southern Florida.

Allegedly, Cromwell employees at each of the firm’s Florida

offices made “cold calls” recommending investments in particular

options, touting sizeable returns coupled with minimal risk.

These representations were false, the plaintiffs allege, because,

among other reasons, “the market in options on commodity futures

is highly speculative and the likelihood of realizing the

described profits within the described periods was remote at

best.” Compl. ¶ 26(e). Cromwell’s relatively steep

commissions–-allegedly as high as $230 per contract traded in

some cases–-further hurt its customers’ returns. In fact,

according to the plaintiffs, at least 85 percent of Cromwell’s

customers closed their accounts with the brokerage at a loss.

The plaintiffs allege that, through these representations,

Cromwell convinced some 900 people to trade in commodities

futures contracts. These customers lost approximately $19

2 million as a result.

In their complaint, the plaintiffs charge that (1) Cromwell

and Tuccelli engaged in fraud and attempted fraud in connection

with commodity option transactions in violation of

and (2) all of the defendants failed to supervise their

employees in violation of

, allowing them to

make misrepresentations to investors. The plaintiffs seek a

number of remedies, including an injunction forbidding the

defendants from further violations of CFTC regulations and “any

activity relating to commodity interest trading,” Compl. § V.B.2,

disgorgement of their allegedly ill-gotten gains and restitution

of those monies to the claimed victims, and monetary penalties.

The parties resolved the plaintiffs’ motion for a temporary

restraining order, filed with the complaint, by stipulating to an

order enjoining the defendants from violating certain CFTC

regulations or destroying any of their business records.

The complaint does not identify any of the defendants’ 900

alleged victims, except to say that they “includ[e] New Hampshire

residents.” Compl. ¶ 2 . In their opposition to the motion to

transfer, the plaintiffs represent that “at least four” of the

claimed victims reside in New Hampshire, and “[m]ore may reside

in nearby states, and . . . thus within driving distance,” but

“none . . . are known to reside within the Southern District of

Florida.” Opp’n Mot. Transfer at 6, 8 . The plaintiffs do not

3 further identify any of the alleged victims in their opposition.

Together with their motion for a temporary restraining order,

however, the plaintiffs submitted a variety of evidentiary

materials naming some of these claimed victims. Of the ten such

people whose locations can be discerned from those materials, two

reside in New Hampshire and one resides in Connecticut, while the

others live in California, Texas, or Wyoming.2

The defendants, meanwhile, have augmented their transfer

motion with an affidavit from Tuccelli, who states that, though

Cromwell has customers throughout the United States, all of its

“customer files and records” and “officers, corporate

representatives, and employees” are in southern Florida.

Tuccelli Aff. ¶¶ 7-9. Tuccelli also claims that “[t]raveling to

New Hampshire for a trial which may last weeks would be unduly

burdensome both in terms of transportation costs for Defendants’

witnesses, counsel, and records, as well as in terms of

disruption to Defendants’ business resulting from the prolonged

absence of key personnel.” Id. ¶ 1 1 .

Discussion

“For the convenience of parties and witnesses, in the

interest of justice, a district court may transfer any civil

2 Generally, these materials do not give the alleged victim’s present location, but his or her address on file with Cromwell, the CFTC, or the BSR at the time of the events at issue.

4 action to any other district . . . where it might have been

brought.”

(a). The parties appear to agree that

this case “might have been brought” in the United States District

Court for the Southern District of Florida, which would have

subject matter jurisdiction and venue over the action and

personal jurisdiction over the defendants. See 17 James Wm.

Moore et a l . , Moore’s Federal Practice § 111.12[1][a] (3d ed.

2004). The parties disagree, however, on whether “the

convenience of the parties and witnesses” or “the interest of

justice” counsel in favor of transferring this action there.

Whether to transfer an action pursuant to section 1404(a)

lies within the broad discretion of the court. See Codex Corp.

v . Milgo Elec. Corp.,

(1st Cir. 1977); Adam

v . Hawaii Prop. Ins. Ass’n,

8 ,

, at *2

(D.N.H. Mar. 2 1 , 2005); 17 Moore, supra, § 111.13[1][a], at

111-65. In deciding whether to exercise this discretion to

transfer a case, the court considers a number of factors,

including the convenience of the parties and witnesses and the

availability of documentary evidence in each forum. Coady v .

Ashcraft & Gerel,

, 11 (1st Cir. 2000) (citing Cianbro

Corp. v . Curran-Lavoie, Inc.,

, 11 (1st Cir. 1987)).

Courts have also weighed a number of additional integers,

including where the events at issue in the litigation took place,

the relative cost of trying the case in each forum, and the

5 public interest in having local controversies adjudicated

locally. 17 Moore, supra, § 111.13[1][b], at 111-67.

The burden of justifying a change of venue under section

1404(a) rests with the party seeking i t . Coady,

1 .

Indeed, “there is a strong presumption in favor of the

plaintiff’s choice of forum.”

(citing Gulf Oil Corp. v .

Gilbert,

0 1 , 508 (1947)). But the strength of this

presumption should not be overestimated. As this court has

observed, the Supreme Court’s oft-cited decision in Gulf Oil did

not consider the standard for transferring a case under section

1404(a), which did not yet exist at that time, but for dismissing

a case under the common-law doctrine of forum non conveniens.

Slattery v . Walt Disney World Co.,

,

, at *3 (D.N.H. Dec. 8 , 2003). Because transfer amounts

to a less severe remedy than dismissal, the Supreme Court has

reasoned that section 1404(a) “permit[s] courts to transfer upon

a lesser showing of inconvenience. This is not to say that the

relevant factors have changed or that the plaintiff’s choice of

forum is not to be considered, but only that the discretion to be

exercised is broader.” Norwood v . Kirkpatrick,

9 , 32

(1955); see also 17 Moore, supra, § 111,03[2], at 111-35.

The defendants argue that “the three substantive criteria

set forth in § 1404(a) weigh heavily in favor of transferring

this case to the Southern District of Florida.” Mot. Transfer at

6 4. First, the defendants contend that they face “an enormous

inconvenience,” in terms of expense and disruption to their

business, in traveling and transporting their business records

here from Southern Florida for a trial which the parties have

agreed will take between two and four weeks. Id. at 4-5. The

defendants suggest that, in contrast, the CFTC will experience

“at most, a marginal inconvenience” in litigating this action in

southern Florida, as opposed to in New Hampshire. Id. at 4 .

The plaintiffs do not dispute this point. Indeed, one court

has noted that the CFTC’s “almost exclusive practice” of bringing

enforcement actions “in a district where the defendant was

incorporated or had an office . . . at least hints that the CFTC

derives little added convenience from trying a case” in any

particular district.3 CFTC v . First Nat’l Monetary Corp.,

(N.D. Ill. 1983); see also CFTC v . Delay,

, at *3 (N.D. Ill. Oct. 2 5 , 2005) (reasoning that CFTC’s

“authority to pursue actions such as this across the country”

results in little inconvenience from transfer). Thus, rather

than arguing that transferring this case would put the CFTC out,

the plaintiffs plead inconvenience to the BSR, who would suffer a

“drain on its limited financial resources to litigate this matter

in Florida.” Opp’n Mot. Transfer at 6.

3 The defendants, in fact, cite a number of unrelated CFTC actions brought against Florida corporations and residents in the Southern District of Florida. Mot. Transfer at 7-8.

7 The court believes, however, that the BSR’s resources can

be preserved through an appropriate allocation of the burdens of

prosecuting this case between the BSR and the CFTC. Although the

BSR has a legitimate interest in asserting the rights of the New

Hampshire residents allegedly defrauded by the defendants, see

7 U.S.C. § 13a-2(1), those residents number but four of the

defendants’ 900 claimed victims, by the plaintiffs’ own estimate.

New Hampshire citizens therefore comprise less than one-half of

one-percent of those injured by the defendants’ charged conduct.4

Given New Hampshire’s relatively limited interest in this matter,

the CFTC, rather than the BSR, should be expected to bear the

vast majority of the expenses in litigating the action,

particularly those incurred in connection with appearing for

judicial proceedings.5 Transferring this case to Florida, then,

should not inconvenience the BSR as a practical matter.

In a related vein, the plaintiffs insist that the deference

owed their selection of a New Hampshire forum overcomes any

4 The plaintiffs do not suggest that New Hampshire residents accounted for a disproportionately large share of the $19 million in losses attributed to the defendants’ alleged scheme. The two New Hampshire investors who swore out declarations in support of the plaintiffs’ motion for a temporary restraining order claim to have lost approximately $40,700 between them. 5 For example, deposing the defendants in Florida–-which the plaintiffs acknowledge as a possibility even if the case remains in New Hampshire, Opp’n Mot. Transfer at 6–-would most efficiently be handled by the CFTC, to save the BSR the expense of traveling to Florida for that purpose.

8 inconvenience to the defendants from keeping the case here. The

plaintiffs argue, in fact, that their choice deserves added

weight because they brought this action pursuant to the broad

venue provisions of the Commodity Exchange Act, under which venue

lies, inter alia, in the district where the act or practice

allegedly violating the statute “occurred.” 7 U.S.C. §§ 13a-1(e)

and 13a-2(4). Some courts, considering the analogous venue

provision of the Securities and Exchange Act of 1934, 15 U.S.C.

§ 78aa, have indeed accorded particular respect to the SEC’s

decision on where to bring an enforcement action. See, e.g., SEC

v . Rose Fund, LLC,

, at *2 (N.D. Cal. Jan. 9,

2004); SEC v . Elecs. Warehouse, Inc.,

3 , 74 (D.

Conn. 1988) (citing S-G Secs., Inc. v . Fuqua Inv. Co.,

(D. Mass. 1978)). Other courts, however, have

reasoned that “[a]s a federal regulatory agency, the SEC does not

need the same inducement to enforce the securities laws” as

private parties do and that any special deference given the

plaintiff’s choice of venue under section 78aa should therefore

not extend to the SEC. SEC v . Captain Crab, Inc.,

, 617 n.1 (S.D.N.Y. 1986) (citing cases); see also SEC v .

KPMG, LLP,

, at *4 (S.D.N.Y. Apr. 9, 2003); SEC v .

Ernst & Young,

1 1 , 413 (D.D.C. 1991).

The court considers this reasoning persuasive and concludes,

as a result, that the plaintiffs’ choice of venue here deserves

9 no particular weight.6 See CFTC v . Savage,

7 0 , 279

(9th Cir. 1979) (“the CFTC’s choice of forum is entitled to some

weight”) (emphasis added). Furthermore, courts generally place

less importance on this factor where the operative events did not

take place in the plaintiffs’ chosen district, even where one of

the plaintiffs resides there, as the BSR does in this case.

17 Moore, supra, § 111.13[1][c][iii], at 111-70. While the defendants directed their allegedly misleading solicitations into

New Hampshire, as well as a number of other states, the

solicitations emanated from the defendants’ offices in Florida.

As just discussed, New Hampshire citizens comprise only a small

percentage of those harmed by the defendants’ allegedly

fraudulent activity.

Moreover, the defendants’ alleged failure to supervise the

employees who made the solicitations constitutes the plaintiffs’

only theory of liability against four of the six defendants; that

alleged failure to supervise occurred in Florida. Thus, although

venue over this action lies in this district under the broad

provisions of the Commodity Exchange Act, the facts giving rise

to the plaintiffs’ claims have no strong connection to this

forum, rendering their decision to bring suit here less deserving

6 Although Captain Crab considered only whether a federal regulatory agency, such as the SEC or the CFTC, should be accorded particular deference in choosing venue, its reasoning is equally applicable to a state regulatory agency like the BSR.

10 of deference. SEC v . Pignatiello,

, at *6 (S.D.N.Y. June 5 , 1998); see also SEC v . Kasirer,

, at * 2 ; (N.D. Ill. Mar. 2 1 , 2005); Ernst & Young,

; SEC v . Thayer,

, at *2 (S.D.N.Y. Mar. 1 6 , 1984). Of course, the fact that most of the operative events underlying the plaintiffs’ claims happened in Florida means that many of the witnesses to those events are there as well. 17 Moore, supra, § 111.13[1][c][iii], at 111-71. As this court has observed, “the convenience of witnesses is one of the most significant factors to be considered in any analysis under section 1404(a).” Adam,

, at *4 (citing Buckley v . McGraw-Hill, Inc.,

3 0 , 440 (D.N.H. 1991)). The defendants state that most of their witnesses, who they identify as their officers and employees, are concentrated in southern Florida, while the plaintiffs’ witnesses, who presumably include allegedly defrauded Cromwell customers, are dispersed throughout the country. Accordingly, the defendants argue that New Hampshire provides a less convenient forum for their witnesses than south Florida, while the districts are equally inconvenient for the bulk of Cromwell’s customers, who will have to travel from their homes to the courthouse regardless of the forum.7

7 The defendants also point out that their client files and other business records, which would likely comprise part of the documentary evidence in this case, are located in Florida. The court agrees with the plaintiffs, however, that this fact deserves little weight, given the ease of preparing and transmitting exhibits with contemporary technology.

11 In response, the plaintiffs simply repeat their claim

that “[a]t least four” of the defendants’ alleged victims reside

in New Hampshire and speculate that “[m]ore may reside in nearby

states, and thus within driving distance . . . .” Opp’n Mot.

Transfer at 8 . The materials submitted with the plaintiffs’

motion for a temporary restraining order, however, identify just

two Cromwell customers from New Hampshire and only one more from

a nearby state, Connecticut.

In any event, few if any of the alleged victims can testify

in detail about the defendants’ failure to supervise their

employees, which, again, constitutes the plaintiffs’ only claim

against four of the defendants; most of the testimony on that

subject would have to come from Cromwell’s employees or others

familiar with its operations. The court concludes that the

District of Southern Florida would provide a considerably more

convenient forum for the witnesses in this action than this

district would.8 See First Nat’l Monetary Corp.,

(finding, in CFTC enforcement action charging fraudulent

marketing practices, that convenience of witnesses favored

transfer where officers, employees, and outside firm who

8 The plaintiffs’ argument that the defendants “will hardly be inconvenienced at all by the maintenance of this matter in the District of New Hampshire as they will be deposed, if at all, in Florida,” Opp’n Mot. Transfer at 6-7, ignores the general preference for live trial testimony. See Kasirer,

, at *3 (“One of the aims of § 1404(a) is to minimize the risk of trial by deposition.”) (internal quotation marks omitted).

12 developed and implemented practices were in transferee district,

while only four alleged victims resided in transferor district);

17 Moore, supra, § 111.13[f][ii], at 111-79 (“if the majority of

the defendant’s witnesses are in the proposed transferee district

while most of the plaintiff’s witnesses are in neither district

and thus will have to travel regardless, transfer to enhance the

convenience of the defendant’s witnesses may be granted”)

(footnote omitted); c f . SEC v . Brooks,

, at *3-*4

(D.N.H. June 2 7 , 1994) (denying motion to transfer SEC

enforcement action from New Hampshire where “at least half of the

defendants and many third-party witnesses” were located here).

Finally, the defendants argue that adjudicating this matter

in the District of Southern Florida will better serve the

interests of justice than adjudicating it here, essentially

because the alleged wrongdoing took place in southern Florida,

while New Hampshire’s ties to it are minimal. The plaintiffs

respond with the sweeping assertion that “[t]he Southern District

of Florida has no local interest in litigating [their] claims,”

while the District of New Hampshire “has a strong interest in

providing justice to those customers” who hail from this state.

Opp’n Mot. Transfer at 7 . The court disagrees.

While this forum certainly has an interest in hearing claims

that New Hampshire residents have been defrauded, such claims

represent only a small fraction of the malfeasance attributed to

the defendants, who are accused of similarly victimizing some 900

13 people out of $19 million through a large-scale boiler room

operation. To say that southern Florida, the site of this

alleged operation in its entirety, has “no interest” in this

litigation simply because “none of the victims . . . are [ s i c ]

known to reside” there, Opp’n Mot. Transfer at 6-7, is to betray

a serious misunderstanding of the concept of “local interest.”

The District of South Florida, in fact, has a strong local interest in adjudicating this attempt to shut down such an

operation within its jurisdiction, as well as in providing its

citizens who have been named as defendants with an opportunity to

defend themselves. See Adam,

, at *4 (discerning

Hawaii’s “substantial interest” in outcome of case charging

Hawaiian entities with race-based conspiracy and fraud).

Furthermore, the plaintiffs seek a variety of injunctive

relief against the defendants, and have already obtained a

temporary restraining order against them, which may necessitate

further proceedings, such as contempt hearings. The most

appropriate and efficient place for such proceedings to occur i s ,

again, in Florida, where the defendants and other potential

witnesses can readily appear. See KPMG,

, at *4

(reasoning that SEC’s request for injunction against corporate

defendant’s practices supported choosing site of headquarters as

forum because any future violations would likely occur there).

The court therefore concludes that the interests of justice favor

transferring this case to the Southern District of Florida.

14 Conclusion

Based on the foregoing analysis, the court concludes that

the balance of considerations relevant to the section 1404(a)

inquiry weigh in favor of transferring this case to the United

States District Court for the Southern District of Florida. The

defendants’ motion to transfer (document no. 15) is therefore

GRANTED. The defendants’ motion to stay (document no. 16), which

they have sought in the alternative to transfer, is DENIED as

moot. The clerk shall transfer this matter to the United States

District Court for the Southern District of Florida and close the

case.

SO ORDERED.

Joseph A. DiClerico, Jr. United States District Judge February 22, 2006

cc: Melanie M. Bell, Esquire Joseph A. Konizeski, Esquire Timothy J. Mulreany, Esquire John P. Sherman, Esquire Erik B. Weinick, Esquire Burke M. Wong, Esquie

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