Citigroup Global Markets Inc. v. Abbar

• Decision Date: 01 August 2014
• Docket Number: Docket No. 13–2172.
• Citation: 761 F.3d 268
• Parties: CITIGROUP GLOBAL MARKETS INC., Plaintiff–Counter–Defendant–Appellee, v. Ghazi Abdullah ABBAR, as temporary administrator of the estate of Abdullah Mahmoud Abbar, shall be substituted for Decedent, Ajial Leveraged Feeder Holdings Limited, Amatra Leveraged Feeder Holdings, Limited, Amavest Holdings Limited, Gama Investment Holdings Limited, Christine Woodhouse, as temporary administrator of the estate of Abdullah Mahmoud Abbar, shall be substituted for Decedent, Defendants–Counter–Claimants–Appellants. Abdullah Mahmoud Abbar, Defendant–Counter–Claimant.
• Court: U.S. Court of Appeals — Second Circuit

761 F.3d 268

CITIGROUP GLOBAL MARKETS INC., Plaintiff–Counter–Defendant–Appellee,

v.Ghazi Abdullah ABBAR, as temporary administrator of the estate of Abdullah Mahmoud Abbar, shall be substituted for Decedent, Ajial Leveraged Feeder Holdings Limited, Amatra Leveraged Feeder Holdings, Limited, Amavest Holdings Limited, Gama Investment Holdings Limited, Christine Woodhouse, as temporary administrator of the estate of Abdullah Mahmoud Abbar, shall be substituted for Decedent, Defendants–Counter–Claimants–Appellants.

Abdullah Mahmoud Abbar, Defendant–Counter–Claimant.^*

Docket No. 13–2172.

United States Court of Appeals,Second Circuit.

Argued: May 16, 2014.

Decided: Aug. 1, 2014.

William B. Adams, Quinn Emanuel Urquhart & Sullivan, LLP, New York, New York (Cleland B. Welton II, Quinn Emanuel Urquhart & Sullivan, LLP, New York, New York; John G. Rich, Ross B. Intelisano, Rich, Intelisano & Katz, LLP, New York, New York, on the brief), for Appellants.

Scott A. Edelman (Daniel M. Perry, Jed M. Schwartz, Katherine Rhodes Janofsky, on the brief), Milbank, Tweed, Hadley & McCloy LLP, New York, New York, for Appellees.

Jenice Malecki, Malecki Law, New York, New York, for amicus curiae Public Investors Arbitration Bar Association.

Brent J. McIntosh, Sullivan & Cromwell LLP, Washington, DC, for amicus curiae Securities Industry and Financial Markets Association.

Before: JACOBS, CABRANES, and LIVINGSTON, Circuit Judges.

DENNIS JACOBS, Circuit Judge:

Ghazi Abbar, a Saudi businessman who managed Abbar family trusts, lost $383 million invested with a United Kingdom affiliate of Citigroup, Inc. He seeks to arbitrate his grievances under the rules of the Financial Industry Regulatory Authority (“FINRA”) against a New York affiliate, which is a FINRA member. The United States District Court for the Southern District of New York (Stanton, J.) permanently enjoined the arbitration on the ground that Abbar is not a “customer” of the New York affiliate.

The Abbar family trusts were administered through two wholly-owned investment vehicles (defendants Amatra Leveraged Feeder Holdings, Limited and Ajial Leveraged Feeder Holdings, Limited) that held the family portfolio. Abbar pursued a risky leveraged investment by purchasing options from Citigroup Global Markets Ltd. (“Citi UK”), which is incorporated in the United Kingdom under the laws of England and Wales. The options entitled Abbar to the value of certain assets in a fund held by Citi UK. Some of the investment bankers who helped develop Abbar's trading strategy, and some of the personnel who worked on the investments, were employed at another Citigroup affiliate, Citigroup Global Markets Inc. (“Citi NY”), which is incorporated under the laws of New York. When the investments lost all value, Abbar commenced a FINRA arbitration in New York against Citi NY, a FINRA member.

Citi NY brought an action in the Southern District of New York to enjoin the arbitration, citing the FINRA Code of Arbitration Procedure for Customer Disputes (“FINRA Code”), which provides that a FINRA member consents to arbitration with its customers. After a bench trial, the district court ruled that Abbar, who purchased no goods or services from Citi NY and had no account with it, therefore lacked the indicia of a customer. Accordingly, the injunction was issued. We affirm.

BACKGROUND

The following facts are drawn from the district court opinion and the undisputed portions of the parties' pleadings and filings.

In late 2005 to early 2006, Ghazi Abbar's private banker, Mohanned Noor, left Deutsche Bank and joined Citigroup Private Bank in Geneva, bringing with him the business of the Abbar family. In the following months, Abbar family trusts (through the defendant investment vehicles) purchased complex options in London from Citi UK.

The structure of the option transactions was as follows (with some blessed simplification). Citi UK set up two “reference funds” to hold the investment assets. Abbar contributed $198 million ¹ to the reference funds and Citi UK agreed to contribute between $300 and $900 million in “leverage” funds. ² Citi UK held ownership of all the assets in the reference funds, including Abbar's contribution. In exchange for Abbar's contribution and certain fees, Citi UK issued options to the Abbar family trusts that entitled them to the value of the assets held in the reference funds, less the leverage funds. Under this arrangement, the Abbar family trusts were allowed to keep 100 percent of any upside, but had to bear the first $198 million in losses. If the reference funds lost more than the $198 million, the additional loss was borne by Citi UK.³

While Citi UK owned the reference funds, they were managed by Abbar with oversight from New York by Citi NY. Abbar served as the Investment Advisor and selected the funds' investments, subject to review and approval by Citi NY. The voting rights in the reference funds were held by Citi NY, which retained the right to remove Abbar as Investment Advisor (and eventually did).

The work of structuring and negotiating the options was done mainly by Citi NY personnel working in a Citigroup division known as the “Hybrids Group.” Such “fund derivatives” were within that division's area of specialty, whereas London traders at Citi UK typically arranged investments in different financial products.

Providing expertise to Citigroup colleagues elsewhere was routine for Citi NY personnel. The arrangement was desired by Abbar, who wanted his private banker Noor “to be able to walk the corridors of the entire Citigroup,” and have “access to the entirety of Citigroup”—“wherever the best people were.” Citigroup Global Mkts., Inc. v. Abbar, 943 F.Supp.2d 404, 406 (S.D.N.Y.2013) (“ CGMI v. Abbar ”). Abbar had frequent communication with the personnel at Citi NY, paid little attention to which Citigroup entity employed the people he was working with, and interacted with employees of Citigroup divisions and offices in Geneva as well as in London and New York.

Under the two option agreements (one with each of the defendant investment vehicles), the Citigroup counterparty to the option transactions was Citi UK. The terms of the options were set forth in confirmations between Citi UK and Abbar's investment vehicles. The transactions were recorded on Citi UK's books of account.

The option agreements themselves included no forum selection or choice-of-law clause, but Citi UK and Abbar entered into an additional agreement that did. Two structuring-services letters contained Abbar's agreement to pay Citi UK for setting up the investment, and these included forum-selection and choice-of-law clauses providing that “any disputes which may arise out of or in connection with this letter agreement” would be adjudicated in English courts under English law.

After the transactions closed in May 2006, Citi NY personnel continued to monitor the risk to Citi UK and helped prepare monthly reports on the status of the funds. Citi NY performed due diligence on hedge-fund assets to assess Citi UK's leverage and exposure. As holder of the funds' voting rights, Citi NY had final say over investment decisions. These services were performed by Citi NY more for the benefit of Citi UK than for Abbar. The setup allowed Citi NY to override Abbar's decisions as Investment Advisor and, in that way, protect Citi UK's very considerable interest.

The interrelationship between Citi UK and Citi NY was set out in internal Citigroup documents, and was formalized in powers of attorney, including one that granted Citi NY authority to sign the transaction confirmations for Citi UK. Accounting adjustments reflected the value of services each affiliate performed for the other.

The option transactions came under stress in 2008. Citi NY removed Abbar as Investment Advisor early in 2009. In the fall of 2009, Citi NY employees participated in workout efforts with Abbar. Those efforts failed, and Abbar lost his entire investment.

Abbar filed a statement of claim with FINRA in August 2011 on behalf of himself, his father (Abdullah Mahmoud Abbar), and their investment vehicles. He requested arbitration against Citi NY.

The statement of claim, which alleged losses from the option transactions, also complained of a failed $100 million private equity loan facility extended to Abbar by Citibank Switzerland SA and the Geneva branch of Citibank NA. The March 2007 loan supplied Abbar with funds he needed to meet capital calls on his heavily-leveraged hedge fund investments. Pursuant to the loan agreement, Abbar transferred control of $147 million worth of hedge fund investments to the Swiss Citigroup entities. The financial crisis wiped out the hedge fund investments, and Abbar blamed the losses on the Swiss banks' mismanagement of the funds. Although Citi NY personnel played no role in negotiating the loan, Abbar testified that the loan facility and the option transactions were a “package deal,” and that the workout discussions proposed consolidation of the two transactions. Abbar therefore claimed that Citi NY was responsible for the $147 million loss, and sought recovery in the FINRA arbitration.

Abbar lost $198 million on the option transactions, $147 million on the private equity loan facility, and an additional $38 million that he injected into these transactions at various points. All told, Abbar lost $383 million.

Citi NY brought this action in the Southern District of New York to enjoin the FINRA arbitration, and named as defendants Abbar, Abbar's father, and their investment vehicles. Because Citi NY had no written arbitration agreement with Abbar, the FINRA rules mandate arbitration only if Abbar is a “customer” of Citi NY. Citi NY argued that Abbar was a customer of Citi UK, but not of Citi NY.

Judge Stanton granted the injunction following almost two years of pre-trial motions and a nine-day trial (with thousands of pages of documents and scores of exhibits admitted in evidence). The opinion explains...