Behrens v. JPMorgan Chase Bank N.A., 16-cv-5508 (VSB)

• Court: United States District Courts. 2nd Circuit. United States District Courts. 2nd Circuit. Southern District of New York
• Writing for the Court: VERNON S. BRODERICK, United States District Judge
• Parties: BRUCE BEHRENS, et al., Plaintiffs, v. JPMORGAN CHASE BANK N.A., et al., Defendants.
• Docket Number: No. 16-cv-5508 (VSB),16-cv-5508 (VSB)
• Decision Date: 31 March 2019

BRUCE BEHRENS, et al., Plaintiffs,
v.
JPMORGAN CHASE BANK N.A., et al., Defendants.

No. 16-cv-5508 (VSB)

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK

March 31, 2019

OPINION & ORDER

Appearances:

Susan J. Levy
Susan J. Levy, Esq.
New York, NY
Counsel for Plaintiffs

Eric R. Sherman
Dorsey & Whitney LLP
Minneapolis, MN

Dai Wai Chin Feman
Dorsey & Whitney LLP
New York, NY
Counsel for Defendant U.S. Bank National Association

Christopher J. Houpt
Lisa R. Blank
Victoria Whitney
Mayer Brown LLP
New York, NY

Thomas S. Kiriakos
Sean T. Scott
Tyler R. Ferguson
Mayer Brown LLP
Chicago, IL
Counsel for Defendant JPMorgan Chase Bank, N.A.

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Abby F. Rudzin
O'Melveny & Myers LLP
New York, NY
Counsel for Defendants Chicago Mercantile Exchange Inc., and CME Group Inc.

Julie Negovan
Grieising Law, LLC
Brooklyn, NY
Counsel for Defendants Perry Comeau and Russell Wasendorf, Jr.

Lisa L. Shrewsberry
Traub Lieberman Straus & Shrewsberry LLP
Hawthorne, NY
Counsel for Defendant Paul Thomas

Gregory Boyle
Kevin Murphy
Jenner & Block LLP
Chicago, IL

Adam Unikowsky
Jenner & Block LLP
New York, NY
Counsel for Defendant National Futures Association

Nicholas A. Caputo
Caputo & Popovic, P.C.
Chicago, IL

Louis V. Fasulo
Fasulo, Braverman & DiMaggio LLP
New York, NY
Counsel for Defendant Millennium Trust Company, LLC

VERNON S. BRODERICK, United States District Judge:

Plaintiffs Bruce Behrens, Kathleen Behrens, Sherri Scheffert, David Scheffert, and Richard Wakeford bring this action against Defendants asserting violations of the Commodity Exchange Act ("CEA"), 7 U.S.C. §§ 1, et seq., and the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. §§ 1961, et seq., along with various state common law claims. Before me are approximately thirteen motions, including: (1) Defendant Millennium

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Trust Company, LLC's ("Millennium") motion to stay this action pending arbitration and Plaintiffs' cross-motion to strike their arbitration agreements with Millennium; (2) the motions of Defendants U.S. Bank National Association ("U.S. Bank"), JPMorgan Chase Bank, N.A. ("JPMorgan"), Chicago Mercantile Exchange (the "Exchange"), Perry Comeau, Russell Wasendorf, Jr., CME Group Inc. ("CME Group"), Paul Thomas, and the National Futures Association (the "NFA") (collectively, the "MTD Defendants") to dismiss the Second Amended Complaint; (3) Defendants Comeau's and Wasendorf, Jr.'s motions for sanctions and Plaintiffs' cross-motion for sanctions; and (4) Plaintiffs' motion to amend the Second Amended Complaint.¹ Because the claims over which I have original subject matter jurisdiction are time barred, and I decline to exercise supplemental jurisdiction over Plaintiffs' remaining state law claims, the MTD Defendants' motions to dismiss are granted. Because Plaintiffs and Millennium entered into valid and enforceable arbitration agreements, Millennium's motion to stay is granted. Because Plaintiffs' proposed amendments to the Second Amended Complaint would be futile, Plaintiffs' request to amend is denied. Because Comeau and Wasendorf, Jr. have each failed to follow the procedural requirements set forth in Federal Rule of Civil Procedure 11, each of their motions for sanctions is denied. Accordingly, the remaining motions are denied as moot.

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I. Background²

Plaintiffs are five individuals, proceeding on behalf of themselves and all others similarly situated, who allege that they invested with Peregrine Financial Group, Inc. ("Peregrine"), a futures commission merchant. (SAC ¶¶ 1, 66.)³ Plaintiffs allege that they suffered significant thefts from and losses in their Peregrine accounts prior to and during the market crash that occurred in approximately October 2008. (Id. ¶¶ 22, 80, 87, 103, 108.) These thefts and losses were caused by a massive conspiracy—referred to in the Second Amended Complaint as the "RICO Ponzi Scheme," (id. ¶ 13)—in which some or all Defendants conspired to permit Russell Wasendorf, Sr., Peregrine's CEO and Chairman, to steal customer funds from segregated accounts held by Peregrine, (id. ¶¶ 12, 37, 327). According to Plaintiffs, Wasendorf, Sr. carried out the scheme by, among other means, intercepting accurate account statements issued by certain Defendant banks and sending forged statements to regulators and other interested parties so that Peregrine would appear to have a sufficient amount of funds in segregation to meet regulatory requirements. (See, e.g., id. ¶ 369.) Plaintiffs also contend that Wasendorf, Sr. conspired with certain of the broker and trading advisor Defendants to "purposefully cause losses in each plaintiff's account by selling naked puts and/or naked calls in each plaintiff's account during the volatile week of October 2 through October 8, 2008 . . . which ensured a total collapse

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of each account." (Id. ¶ 119.) Plaintiffs assert that these "naked puts and calls will cause losses 95% of the time," and thus constituted "a perfect strategy to wipe out plaintiffs' remaining account balances so that Wasendorf S[r]. and his co-conspirators could nicely reconcile their books after having previously pocketed the investment funds in plaintiffs' accounts." (Id. ¶ 120.) Plaintiffs maintain that "[d]uring the week of October 2, 2008 through October 9, 2008, [their] entire investments were wiped out" as a result. (Id. ¶ 115.)

On June 30, 2009—less than a year after their "entire investments were wiped out"—Plaintiffs filed arbitrations before the NFA against Peregrine and their introducing broker to recoup their investment losses. (See, e.g., id. ¶ 709, Ex. 19.) The arbitrators awarded Plaintiffs no damages. (SAC Ex. 21.) Plaintiffs allege that the arbitrations "would have made them whole but for" various injustices that the NFA allegedly perpetrated against them. (SAC ¶ 546.) Plaintiffs also allege that they lost the arbitrations due to their attorney's malpractice and fraudulent concealment. (Id. ¶ 703.)

On July 9, 2012, Wasendorf, Sr. attempted suicide. (Id. ¶ 112.) In a suicide note, Wasendorf, Sr. admitted to committing fraud and described how he concealed his theft and misappropriation of customer funds by, among other things, establishing fake bank P.O. Boxes to intercept regulatory balance confirmation requests to which he then responded with forged bank account statements. (See id.; U.S. Bank Mem. 4.)⁴ The Second Amended Complaint characterized the suicide note as "self-serving" because although Wasendorf, Sr. admitted to committing fraud, "he did not go far enough because he tried to arrogate to himself this entire fraud, when there were many John Does with the requisite intent and knowledge to share the

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blame upon information and belief." (SAC ¶ 112.) The next day, Peregrine filed for bankruptcy, (id. ¶¶ 363, 427; U.S. Bank Mem. 4), and the Commodity Futures Trading Commission ("CFTC") filed an action against Wasendorf, Sr. and Peregrine, (see CFTC v. Peregrine Fin. Grp., Inc., No. 12-cv-5383 (N.D. Ill.)). The CFTC's complaint alleged details regarding Wasendorf, Sr.'s fraud, including allegations regarding his use of certain Defendant bank accounts to carry it out. (See id. ECF No. 1.)

Wasendorf, Sr. was indicted on thirty-one counts of making and using false documents which were submitted to the CFTC. (United States v. Wasendorf, Sr., No. 12-cr-2021 (N.D. Iowa) (ECF No. 2).) Wasendorf, Sr. pled guilty on September 17, 2012 to one count each of mail fraud, embezzlement of customer funds, making false statements to the CFTC, and making false statements to a futures association, (see id. ECF Nos. 29, 39), and was sentenced to 50 years' imprisonment on January 31, 2013, (id. ECF No. 70).

On July 13, 2012, multiple plaintiffs filed class actions in the Northern District of Illinois against Wasendorf, Sr. and certain of the Defendants in this action. (See SAC ¶ 225.) The class actions were consolidated as In re Peregrine Financial Group Litigation, No. 12-cv-5546 (N.D. Ill.) (ECF No. 50) (the "Illinois Class Action"). (Id.) The Illinois Class Action sought to recover funds that putative class members believed were on deposit with Peregrine as of its collapse. (See Illinois Class Action ECF Nos. 66, 398.) The class definition included "all persons or entities who held money, property, and/or securities pursuant to 7 U.S.C. 6d(a)(2), at [Peregrine], as of the bankruptcy of [Peregrine] on July 10, 2012." (Id. ECF No. 398.) Plaintiffs were excluded from this class "[b]ecause none of [them] owned money, securities or property in 2012." (SAC ¶ 225.)

Plaintiffs filed claims in the Peregrine bankruptcy case, (SAC ¶¶ 714-15), but chose not

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to bring their own lawsuit at that time because they "were under the distinct impression that they would be entitled to a distribution" from the bankruptcy or the class action, (id. ¶ 715; see also id. ¶¶ 724-28.) However, this belief was incorrect as Plaintiffs were not included within the definition of the plaintiff class, which encompassed only those plaintiffs who held cash deposits with Peregrine in 2012. (Id. ¶¶ 225, 724-28.)

II. Procedural History

Plaintiffs commenced this action by filing their complaint on July 11, 2016. (Doc. 1.) On October 11, 2017, Plaintiffs filed their First Amended Complaint, (Doc. 79), and on December 1, 2017, filed their Second Amended Complaint, (Doc. 105).

Between December 14 and December 29, 2017, Defendants U.S. Bank, JPMorgan, the Exchange, Comeau, Wasendorf, Jr., and the CME Group filed their motions to dismiss. (Docs. 111, 113, 116, 118, 123, 133.) On February 12, 2018, Plaintiffs filed their opposition to the foregoing motions, along with a declaration and numerous affidavits, including exhibits, in support. (Docs. 150-56.) Between March 7 and April 6, 2018, Defendants filed their replies. (Docs. 168, 169, 170, 171, 180, 181.)

On November 9, 2017, Millennium filed its motion to stay. (Doc. 87.) On February 12, 2018, Plaintiffs filed their opposition, along with a declaration and numerous affidavits, including exhibits, (Docs. 150-57), and...