## Facts

- AVCO Financial Corp., controlled by Anthony Vartuli, marketed “Recurrence,” first as a book and later as software, beginning around 1989.
- Users were instructed to input current market price data for certain currency futures; Recurrence then generated specific buy/sell instructions and otherwise remained silent.
- Marketing materials represented that customers could follow Recurrence’s instructions without interpretation or independent analysis and suggested the system could generate profits “automatically.”
- Performance claims relied on hypothetical or back-tested results rather than actual trading results.
- As customers incurred substantial losses, AVCO and Vartuli allegedly continued to tout extraordinary profitability and failed to disclose poor real-world performance and related complaints.
- The CFTC brought a civil enforcement action alleging (1) solicitation fraud, (2) fraud by a commodity trading advisor (CTA), and (3) failure to register as a CTA under the Commodity Exchange Act (CEA).
- The district court found liability on all three theories, entered a permanent injunction barring CTA activity (including dissemination of Recurrence), and ordered disgorgement (later reduced).
- Vartuli appealed (including First Amendment challenges to registration and the injunction); the CFTC cross-appealed the reduction in disgorgement.

## Issues

1. Whether designing, marketing, and selling software that produces concrete futures buy/sell signals constituted acting as a “commodity trading advisor” under the CEA, triggering anti-fraud duties and a registration requirement.
2. Whether the defendants’ promotional statements about Recurrence violated the CEA’s anti-fraud provisions as statements made “in connection with” futures trading.
3. Whether applying the CTA registration requirement to defendants’ conduct violated the First Amendment.
4. Whether the permanent injunction was an unconstitutional prior restraint because it broadly prohibited future dissemination of Recurrence and related communications.
5. Whether the district court properly calculated disgorgement and whether a statutory “clients” issue required further consideration.

## Decision

- The Second Circuit affirmed findings that AVCO and Vartuli violated the CEA’s anti-fraud provisions and acted as CTAs without registering.
- The court held the CTA registration requirement, as applied to the conduct at issue, did not violate the First Amendment because the challenged promotional communications were misleading commercial speech.
- The court held the injunction was overbroad in part because it could restrict non-fraudulent speech (such as general market commentary) and therefore required modification on remand.
- The court remanded for narrowing of injunctive relief and for further proceedings on remedial matters, including disgorgement and whether a “clients” issue was preserved and material.

## Legal Principles

- Under the CEA, statements and practices used to market a product intended for futures trading may satisfy the “in connection with” requirement for commodities fraud when they materially influence trading-related decisions.
- A person or entity can qualify as a CTA by providing, for compensation, advice on the advisability of futures trading through publications or other written means, including software that generates specific buy/sell signals based on market data.
- Misleading commercial speech is not protected by the First Amendment; the government may regulate or prohibit deceptive promotional claims, including through enforcement of registration and anti-fraud provisions.
- Even when regulating deceptive commercial conduct, injunctive relief must be narrowly drawn; an injunction that broadly suppresses future speech may operate as an impermissible prior restraint if it reaches potentially protected non-fraudulent communications.

## Conclusion

The Second Circuit upheld CEA liability for misleading promotion and unregistered CTA activity arising from marketing software that generated specific futures trading instructions, but required the permanent injunction to be narrowed because its breadth risked restraining lawful, non-fraudulent speech; remedial issues, including disgorgement, were left for further proceedings on remand.


Commodity Futures Trading Comm’n v. Vartuli, 228 F.3d 94 (2d Cir. 2000)