Lyons v. Jefferson Bank & Trust, Civ. A. No. 91-B-2245.

• Decision Date: 22 January 1992
• Docket Number: Civ. A. No. 91-B-2245.
• Citation: 781 F. Supp. 1525
• Parties: David J. LYONS, Commissioner of Insurance for the State of Iowa, and receiver for the Iowa Trust, Plaintiff, v. JEFFERSON BANK & TRUST, a Colorado corporation, Defendant.
• Court: U.S. District Court — District of Colorado

781 F. Supp. 1525

David J. LYONS, Commissioner of Insurance for the State of Iowa, and receiver for the Iowa Trust, Plaintiff, v. JEFFERSON BANK & TRUST, a Colorado corporation, Defendant.

Civ. A. No. 91-B-2245.

United States District Court, D. Colorado.

January 29, 1992.

Nunc Pro Tunc January 22, 1992.

COPYRIGHT MATERIAL OMITTED

Edwin S. Kahn, Walter W. Garnsey, Jr., Kelly/Haglund/Garnsey & Kahn, Denver, Colo., Anuradha Vaitheswaran, Asst. Atty. Gen., Iowa Securities Bureau, Des Moines, Iowa, for plaintiff.

Philip E. Lowery, Marcella T. Clark, Lowery, Lamb & Lowery, P.C., Denver, Colo., for defendant.

MEMORANDUM OPINION AND ORDER

BABCOCK, District Judge.

Plaintiff moves for a preliminary injunction ordering defendant to preserve and set aside $42,843,614.13, together with income earned thereon since November 25, 1991, in an escrow account pending final resolution of this action. The motion was heard on January 21 and 22, 1992. I granted a preliminary injunction on the record at the conclusion of the hearing. In accordance with that bench ruling, these written findings and conclusions follow.

I. FINDINGS OF FACT

The parties are diverse and, therefore, jurisdiction is proper under 28 U.S.C. § 1332. The defendant resides in the District of Colorado. Thus, venue is proper under 28 U.S.C. § 1391.

The Iowa Trust is a trust organized under the laws of Iowa with its principal place of business in Iowa. It was formed in January, 1989 to allow various political subdivisions within Iowa to pool their funds for investment purposes. The beneficiaries of the Iowa Trust include 88 cities, counties, and other political entities. Its assets include pension funds and other funds used by the governmental entities for essential services, payroll, and public works projects.

Plaintiff David J. Lyons is the Iowa Insurance Commissioner. He was appointed receiver for the Iowa Trust on December 19, 1991 by the Iowa District Court for Polk County. The court charged him with marshalling, recovering, and distributing the trust's assets.

Defendant Jefferson Bank & Trust is a Colorado corporation and bank with its principal place of business in Lakewood, Colorado. It has approximately $160 million in assets and 20,000 depositors. Approximately 125 depositors have accounts exceeding the FDIC insurance maximum.

Plaintiff filed this action on December 27, 1991 seeking the imposition of a constructive trust on $42,843,614.13 held by defendant. He seeks a preliminary injunction to preserve this amount, together with income earned on it since November 25, 1991, asking that it be set aside in an escrow account pending the resolution of the action. Noting that this written opinion would follow, I granted plaintiff's motion on the record on January 22, 1992 (a copy of the form of injunction is attached to this opinion as Appendix 1). By agreement of the parties and myself, this case is set on an expedited docket and trial on the merits will commence on April 27, 1992.

A. The Iowa Trust Trades

In early 1990, the Iowa Trust entered into an investment management agreement with Denman & Co. (Denman), a corporation owned and wholly controlled by Steven D. Wymer (Wymer). Subsequently, Institutional Treasury Management, Inc. (ITM), another company solely owned and controlled by Wymer, succeeded Denman. Pursuant to the management agreement, Wymer directed investments for the Iowa Trust and he had authority to order trades and transfers for its account. The Iowa Trust also entered into a custodian agreement with Bankers Trust Company of Des Moines, Iowa, under which Bankers Trust held the Iowa Trust's cash and securities for investment upon Wymer's directions.

On November 21, 1991, at Wymer's direction, the Iowa Trust bought $40 million principal (face) amount of 7.75% 2/15/95 United States Treasury Notes (the 1995 Notes). The 1995 Notes were placed in its custodian account at Bankers Trust.

On November 25, 1991, beginning at approximately 9:00 a.m. M.S.T., Wymer directed execution of the following transactions:

1. Bankers Trust wire transferred the 1995 Notes free (without payment) to ITM's trading account with First Interstate Bank of Denver (FIB);

2. ITM sold the 1995 Notes and deposited the proceeds of $42,843,614.13 into ITM's securities clearing demand checking account with FIB;

3. Together with additional funds in the checking account, ITM used the $42,843,614.13 from the sale the 1995 Notes to purchase $41 million principal (face) amount of 8.625% 8/15/94 United States Treasury Notes (the 1994 Notes) at a price of $44,824,531.25;

4. FIB wire transferred the 1994 Notes free to defendant's account with Refco Securities, Inc.;

5. Refco Securities sold the 1994 Notes for $44,786,093.75 and placed the cash in defendant's account at Refco Securities;

6. Refco Securities wire transferred $44,786,093.75 to defendant's account with Refco Capital Corporation;

7. Refco Capital then wire transferred $44,927,031.25, which sum included the $44,786,093.75 derived from the sale of the 1994 Notes, to defendant.

(A graphic summary of these transactions is attached to this opinion as Appendix 2). I find that at the close of business on November 25, 1991 defendant held $42,843,614.13 of Iowa Trust's funds derived from the sale of the trust's 1995 Notes.

Defendant's president Maurice Grotjohn testified that the bank moved these funds in and out of several securities and currently holds them in its investment account at the Federal Reserve Bank in Kansas City. Thus, I further find that defendant continues to hold funds and securities traced directly from the 1995 Notes, including interest from November 25, 1991 until the hearing on January 22, 1992. The total amount of these funds and securities subject to this preliminary injunction is $43,173,614.13.

B. The Jefferson Trades

In December, 1989, defendant also entered into an investment management agreement with Wymer and his companies. By that agreement, Wymer had authority to trade and transfer funds and securities for defendant's benefit.

On November 18, 1991, defendant purchased through Wymer $41 million principal (face) amount of 8.625% 8/15/94 Notes (the Jefferson Notes) for $44,859,765.62. Shearson Lehman Brothers (Shearson) acted as broker.

Pursuant to its standing delivery instructions with Shearson, the Jefferson Notes were supposed to have been wire transferred to defendant's account with Refco Securities. However, there is no satisfying or persuasive evidence that this transfer ever occurred. Santo Maggio, president of Refco Securities, testified unequivocally that Refco Securities never received the Jefferson Notes. His uncontradicted testimony was that the notes sold on November 25 were the 1994 Notes transferred from FIB and not Shearson.

Rather, Maggio testified that between November 18, 1991 and November 25, 1991 the only $41 million principal (face) amount of 8.625% 8/15/94 United States Treasury Notes wire transferred from Shearson were deposited into the State of Wyoming's account with Refco Securities. Wyoming was also a Wymer client. I infer from these facts that Wymer misappropriated the Jefferson Notes to cover a shortfall in Wyoming's account. When defendant sought to liquidate its portfolio on November 25, Wymer misappropriated Iowa Trust's 1995 Notes to cover defendant and converted them into the 1994 Notes, when he then transferred to defendant's account.

If I grant the preliminary injunction, Grotjohn testified that his bank could fail. He said that lack of depositor confidence in the bank could cause a run on deposits that could not be paid while maintaining its current loan and investment portfolios. Further, Grotjohn testified that defendant would lose the flexibility necessary to earn a maximum return on the $42.8 million. He testified that, if I grant the preliminary injunction and freeze this money, defendant could lose approximately $1 million in net income. Finally, he noted that shareholder equity in Jefferson was close to $10 million and that the shareholders would lose this equity if the bank failed.

C. Wymer's Collapse

In approximately October, 1991, the Securities and Exchange Commission (SEC) began investigating the activities of Wymer, Denman, and ITM. On December 9, 1991, the SEC filed a complaint in the United States District Court for the Central District of California alleging that Wymer, Denman, and ITM engaged in a massive securities fraud. Wymer's misappropriation of Iowa Trust's notes is alleged in that complaint.

Steen Ronlov was the Colorado representative of ITM and Wymer's close associate. In early 1990, Wymer and Ronlov began purchasing Jefferson Bank capital stock and, as of July 1991, Wymer owned 20% and Ronlov owned 4.75% of this bank's issued and outstanding stock. In July, 1991, Ronlov acquired Wymer's 20% Ronlov was also a member of Jefferson's Board of Directors from July, 1990 until December 13, 1991.

On December 10, 1991, Ronlov tipped Jefferson Bank president Grotjohn that Wymer had resigned from ITM and that the SEC was "in." Grotjohn immediately ordered the liquidation of Jefferson's ITM managed trading account at Shearson and directed Shearson to remit the proceeds "first thing in the morning." On December 11, 1991, more than $40 million in cash was wire transferred to defendant.

On December 11, 1991, the federal district court hearing the California action appointed a receiver to examine Wymer and ITM's books. The court also froze all assets in any account managed by Wymer and ITM until the accounting could be completed. The freeze order would have applied to defendant's account at Shearson but took effect two hours after defendant withdrew its funds from this Wymer managed account. Wymer was subsequently indicted by a California federal grand jury and charged with securities fraud, mail fraud, and money laundering.

II. CONCLUSIONS OF LAW

Because the parties are diverse, jurisdiction is proper under 28 U.S.C. §...