Commodity Futures Trading Commission v. Gemini Trust Company, LLC

Background

This order addressed discovery issues reserved from an earlier hearing. Gemini argued that it should be allowed to depose employees of the Commodity Futures Trading Commission (CFTC) about their review of Gemini’s disclosures and their discussions about those disclosures. Gemini relied principally on a 2016 Supreme Court decision, Universal Health Services, Inc. v. United States ex rel. Escobar, arguing that evidence that an agency knew about an alleged misstatement but nevertheless allowed a product to be self-certified could show that the statement was not material.

The dispute concerns alleged violations of the Commodity Exchange Act. Under the provision discussed by the court, the CFTC must prove that a person made a false or misleading statement of material fact to the CFTC and knew, or reasonably should have known, that the statement was false or misleading. The statute also covers omissions of material information needed to prevent a statement from being misleading.

Court’s analysis

The court defined materiality as an objective question: whether the statement was capable of influencing the agency’s decision-making process at the time it was made. A statement may be material if it could influence a decision or distract a government investigator from a critical matter. The court stated that materiality does not depend on the later thought processes of individual employees who read a disclosure, and that materiality and actual reliance are separate inquiries.

The court recognized that agency regulations, policies, and procedures may help show whether a statement was capable of influencing the agency. It also explained that an agency’s regular disregard of a stated policy may support an argument that the policy was immaterial. Under Escobar, if agency indifference to a requirement is shown, the decision-maker may be questioned about awareness of the alleged misstatement and the reason for indifference. The court stated that Escobar did not change the objective definition of materiality.

Discovery rulings

The court ordered the CFTC to identify, in an answer complying with Federal Rule of Civil Procedure 33, the statements in Gemini’s disclosures that the CFTC alleges were materially false or misleading. For alleged omissions, the CFTC must identify the statements needed to make the challenged statements not false or misleading. The CFTC also must identify which of its employees viewed the challenged statements on or before the bitcoin futures product became self-certified, along with the materials Gemini says it disclosed. The order required those identifications by January 19, 2024.

After the CFTC makes those identifications, Gemini may notice or complete depositions of the identified individuals, with questioning limited to the scope allowed by the order. The court also allowed an interrogatory, as modified, concerning statements made by entities other than Gemini that the CFTC considers misleading or false and attributes to Gemini.

Judge Hellerstein concluded that, based on the earlier hearing transcript, the earlier summary order, and this order, Gemini’s motion to compel and the CFTC’s motion for a protective order were granted and denied to the extent indicated. The CFTC’s motion for further briefing was denied. The Clerk was directed to terminate the open motions at ECF Nos. 49, 53, and 74. This order regulated discovery and did not decide the ultimate liability question described in the opinion.