Cibc World Markets, Inc. v. Deutsche Bank Securities, Inc.
| Decision Date | 11 March 2004 |
| Docket Number | No. 2:03-CV-05374 (DRD).,2:03-CV-05374 (DRD). |
| Citation | 309 F.Supp.2d 637 |
| Parties | CIBC WORLD MARKETS, INC., Plaintiff, v. DEUTSCHE BANK SECURITIES, INC., Deutsche Bank Securities Limited, Wayne Breedon, R.B.F. International, Inc., Kenneth D'Angelo, Richard Evangelista, Genesisintermedia.Com, Ultimate Holdings, Ltd., Ramy El-Batrawi, and Bradford Keiller, Defendants. |
| Court | U.S. District Court — District of New Jersey |
Harold G. Levison, Esq., Joseph A. Gershman, Esq., Kasowitz, Benson, Torres & Friedman LLP, New York City, for Plaintiff.
Sheryl M. Schwartz, Esq., Herold and Haines PA, Warren, NJ, James H.R. Windels, Esq., Davis Polk & Wardwell, New York City, for Defendants Deutsche Bank Securities, Inc., and Deutsche Bank Securities Limited.
Melanie H. Muhlstock, Esq., Glenn S. Kerner, Esq., Goodwin Procter LLP, Roseland, NJ, Jeffrey A. Simes, Esq., Eric D. Musselman, Esq., Richards M. Strassberg, Esq., Goodwin Procter LLP, New York City, for Defendant Wayne Breedon.
Michael Q. Carey, Esq., Carey & Associates LLC, New York City, for Defendant Richard Evangelista.
Plaintiff CIBC World Markets, Inc. ("CIBC"), a Canadian securities broker-dealer, has filed suit seeking compensation1 for losses it suffered allegedly as a result of its unwitting participation in a fraudulent stock loan and market manipulation scheme orchestrated by Defendants. Four of the Defendants — Deutsche Bank Securities, Inc. ("Deutsche Bank Securities"), Deutsche Bank Securities Limited ("DBSL"),2 Richard Evangelista ("Evangelista") and Wayne Breedon ("Breedon") (collectively, "the Moving Defendants") — have moved to transfer the case to the U.S. District Court for the District of Minnesota ("Minnesota court"), where several similar cases brought by other securities broker-dealers allegedly defrauded by the same scheme are pending. Because the instant case might have been brought in the Minnesota court and because that court would be a more convenient forum for its litigation, the court will grant the Moving Defendants' motion.
CIBC alleges that Defendants perpetrated a multi-million dollar fraudulent scheme ("the scheme") involving stock of the struggling marketing company GenesisIntermedia.com, Inc. ("Genesis"). The scheme was comprised of two major components: (1) fraudulent manipulation (by various methods) of Genesis stock to artificially inflate its value, and (2) use of the artificially inflated stock as collateral to obtain loans from various securities broker-dealers, including CIBC. After the market dropped the week of September 11, 2001, Defendants were no longer able to keep the price of the stock inflated, or to repay the loans to the broker-dealers. The scheme collapsed, leaving numerous broker-dealers holding worthless stock and causing those broker-dealers and the investing public to lose hundreds of millions of dollars.
One of the Defendants — Kenneth D'Angelo ("D'Angelo") — has already been charged with and pled guilty to two felonies (securities fraud and wire fraud) arising out of his participation in the scheme. Furthermore, the SEC has filed a civil action arising out of the scheme against D'Angelo and his company, securities lending "finder" RBF International, Inc. ("RBF"). Both of these actions were filed in the U.S. District Court for the Central District of California in September, 2003.
* * * * * *
Stock lending is a common practice in the securities industry whereby a party loans securities to a broker-dealer in exchange for cash collateral to cover short positions or for other legitimate purposes.4 The parties mark the cash collateral to market, so that, as the price for a particular stock rises and falls, cash is delivered to or returned from the lender.
In 1999, Defendant Ramy El-Batrawi ("El-Batrawi"), who controlled Genesis, approached D'Angelo and proposed that he structure a scheme by which both could exploit the practice of stock-lending for profit. The proposed scheme would revolve around El-Batrawi and Ultimate (a company controlled by El-Batrawi that was a major Genesis shareholder) loaning overvalued Genesis stock down several "chains" of broker-dealers in exchange for cash collateral.5
D'Angelo agreed to structure the scheme and employed the assistance of his friends and former business associates Evangelista (the head of securities lending at New Jersey broker-dealer Native Nations) and Breedon (a DBSL employee). D'Angelo, Breedon and Evangelista over time created a series of stock loan "chains" that at their height extended in this way: El-Batrawi and Ultimate lent Genesis stock to Native Nations, which in turn lent the stock to numerous broker-dealers including CIBC6 ("the intermediate broker-dealers") which in turn lent it to DBSL. In exchange for the Genesis stock, DBSL posted cash collateral with the intermediate broker-dealers, which in turn posted the cash with Native Nations, which posted it finally with the original lender, El-Batrawi.7 El-Batrawi divided some of the cash among the Defendants and used the rest to manipulate the price of Genesis stock to artificially inflate its value.
El-Batrawi and some of the other Defendants achieved the artificial inflation of Genesis's stock price by, among other methods: (1) secretly compensating a financial commentator to falsely "tout" Genesis stock on widely televised financial programs in order to hype demand for the stock; (2) engaging in manipulative trading of Genesis stock in numerous brokerage accounts in order to boost the trading volume of the stock and support its price; (3) "parking" substantial amounts of Genesis stock in order to limit the supply of the stock available for purchase in the open market; and (4) promoting a "short squeeze" to additionally reduce the amount of Genesis stock available and force investors who were "shorting" Genesis stock to make purchases of the stock at inflated prices.
As the price of Genesis stock went up, DBSL, the intermediate broker-dealers, and Native Nations all marked to market, thus sending more cash up the loan chain, ultimately to El-Batrawi. When the stock price dropped in September 2001, CIBC and other intermediate broker-dealers took back the stocks they had loaned DBSL and gave back to DBSL the cash collateral it had taken at the time of the loan. Native Nations, however, was unable to return the cash collateral it had taken from CIBC and the other broker-dealers. As a result, the broker-dealers were left holding virtually worthless securities.
CIBC has filed an eleven count Complaint against Defendants seeking damages for Defendants' acts within this broad scheme that directly caused it harm. The Complaint contains two claims under the Securities Exchange Act of 1934 ("the Securities Exchange Act"), four claims under New Jersey securities and racketeering statutes, and common law claims of fraud and fraudulent concealment, aiding and abetting fraud and fraudulent concealment, civil conspiracy, negligent misrepresentation, and breach of contract.
None of the individual parties to this lawsuit reside in Minnesota and none of the corporate parties are incorporated in Minnesota or registered to do business there.8 None of the loans CIBC took from Native Nations or gave to DBSL in 2000 were effected in Minnesota.
In September 2002, two intermediate broker-dealers (FBW and E*Trade) and the trustee in bankruptcy of another intermediate broker-dealer (MJK) (collectively, "Minnesota Plaintiffs") initiated lawsuits ("Minnesota actions" or "Minnesota Complaints") in the Minnesota court9 based on injuries they suffered as a result of the scheme described above.10 The Minnesota Plaintiffs, like CIBC, had occupied positions between Native Nations and DBSL in the "loan chains" Defendants structured.11 The Minnesota Plaintiffs named as defendants in the Minnesota actions largely the same defendants CIBC has named in the instant case,12 and brought claims against them similar to the claims CIBC has brought against Defendants in the instant case.13 Venue was proper for these cases in the District of Minnesota because MJK is a Minnesota corporation and the loans in question in the Minnesota actions all either were made to MJK or flowed through MJK.
CIBC's Complaint is related to MJK's complaint not only because CIBC occupied a position roughly analogous to MJK's on loan chains Defendants created, but also because CIBC was alerted to the fact that it had been the victim of Defendants' fraudulent scheme by the unsealing of MJK's Complaint. Without seeing that Complaint, CIBC would have had "no reason to know that anything other than the garden-variety failure of a lower tier broker-dealer ... in the market turmoil following September 11" had caused its losses. Complaint ¶¶ 11-12.
Furthermore, the factual allegations in CIBC's Complaint are explicitly based on, among other things, the allegations in the Minnesota Complaints. As the Moving Defendants point out, certain allegations in CIBC's Complaint are copied almost word-for-word from allegations in the Minnesota Complaints. Moving Brief, n. 2.
In late 2002, the defendants named in the Minnesota actions filed motions to dismiss the Minnesota Complaints. On September 8, 2003, after a day-long hearing, Judge Kyle of the Minnesota court issued a 79-page ruling dismissing some of the claims, but holding that others survived.
On September 10, 2003, another intermediate broker-dealer who allegedly was harmed by the scheme, Wedbush Morgan Securities, Inc. ("Wedbush"), filed suit in the Minnesota court.14
On October 24, 2003, Magistrate Judge Boylan of the District of Minnesota issued a detailed order consolidating the Minnesota actions for pretrial purposes and establishing procedures, limits, and a schedule for discovery.
The Moving Defendants have asked this court to transfer CIBC's case to the Minnesota court pursuant to 28 U.S.C. § 1404(a).
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