Court Rejects Trader’s “Good Faith” Defense in $47M Regal Commodities Fraud Case

Court Rejects Trader’s “Good Faith” Defense in Commodities Fraud Case

In a terse, three-page decision, the Appellate Division, Second Department, has told commodities trader David Tauber he cannot hide behind the Commodity Exchange Act’s “good faith” defense after he allegedly lured Regal Commodities into a $47 million grain futures contract that never existed. The ruling strips Tauber of a key shield and hands the plaintiff a clearer path to trial, sending a warning flare to anyone who trades under the cover of phantom contracts.

The trouble started in 2018 when Tauber, acting through his own brokerage, pitched Regal on a “guaranteed” short-sale in CBOT corn futures. Regal wired $47 million into an escrow account controlled by Tauber, expecting the trade to be booked on the exchange. Instead, the money vanished into personal accounts, and no position ever appeared on the exchange’s books. Regal sued under New York’s Martin Act and common-law fraud; Tauber moved to dismiss, arguing the Commodity Exchange Act pre-empted state claims and that any misstatements were made in “good faith.” Queens Supreme Court agreed with Tauber on the pre-emption point but let the common-law counts stand. Both sides appealed.

Writing for a unanimous panel, Justice Valerie Brathwaite Nelson rejected Tauber’s reading of the statute. The court held that the Commodity Exchange Act’s good-faith defense protects only registered futures-commission merchants executing trades on designated contract markets—not rogue brokers who never place the order. Because Tauber allegedly pocketed the funds instead of routing them to the exchange, the defense simply does not apply. The panel reinstated the Martin Act claim, revived the fraud claim, and returned the case for discovery.

Translated into plain English, the decision says: if you take client money for a futures trade and never execute it, state fraud statutes still reach you. Federal pre-emption stops at the exchange floor; it does not cover outright theft dressed up as a commodities transaction.

The ruling tightens the net around off-exchange “consultants” who pitch crypto-like structured commodity deals. Traders who once relied on a loose reading of the CEA to dodge state regulators now face dual exposure—federal enforcement if the trade touches a real contract market, state enforcement if it never leaves their bank account. Exchanges and DeFi protocols that custody customer margin will likely add extra KYC layers and insist on on-chain proof of execution, while traders may demand third-party escrow to avoid similar disputes. Stablecoin issuers that route customer dollars into futures or commodity swaps could find themselves answering questions from both the CFTC and New York’s Attorney General.

Bottom line: the decision is a quiet but sharp reminder that in commodities—and increasingly in crypto—taking the money without taking the trade is still just fraud, no matter what the contract says.