F.D.I.C. v. Refco Group, Ltd., Civ.A. 93-K-85.
| Decision Date | 19 December 1997 |
| Docket Number | No. Civ.A. 93-K-85.,Civ.A. 93-K-85. |
| Parties | FEDERAL DEPOSIT INSURANCE CORPORATION, as Receiver for Jefferson Bank & Trust, Plaintiff, v. REFCO GROUP, LTD., Refco, Inc., Refco Capital Corporation, Refco Securities, Inc., and Kimberly Goodman, Defendants. |
| Court | U.S. District Court — District of Colorado |
Craig B. Shaffer, S. Kirk Ingebretsen, Dufford & Brown, P.C., Denver, CO, for plaintiff/petitioner.
Jack Weinberg, Graubard, Mollen & Miller, New York City, Edward W. Stern, Parcel, Mauro, Hultin & Spaanstra, P.C., Denver, CO, Kimberely Goodman, Grand Island, NY, for defendants/respondents.
The Federal Deposit Insurance Corporation ("FDIC"), as Receiver for Jefferson Bank & Trust ("JBT"), pursues this action against Refco Group, Ltd., Refco, Inc., Refco Capital Corporation, Refco Securities, Inc. (collectively "Refco"), and Kimberley Goodman.1
FDIC seeks damages, including punitive damages, alleging they arise from Defendants' conduct and that of certain of their employees or agents during the period December 1989 through December 1991 and resulted in substantial losses to and the ultimate failure of JBT.
In what remains of the Third Amended Complaint, FDIC asserts the following claims for relief2:
1. First, for violation of § 18-17-104(3) of the Colorado Organized Crime Control Act ("COCCA") against all Defendants;
2. Second, for violation of section 18-17-104(4) of COCCA against all Defendants;
3. Third, for civil conspiracy against all Defendants;
4. Fourth, for violation of §§ 11-51-125(3) and 11-51-604(4) of the Colorado Securities Act against Refco;
5. Ninth, for conspiring to commit or aiding and abetting false representation against all Defendants;
6. Tenth, for relief for false representations against all Defendants;
7. Eleventh, for relief for conspiring to commit or aiding and abetting fraudulent concealment against all Defendants;
8. Twelfth, for fraudulent concealment against all Defendants;
9. Thirteenth, for conspiring to commit and aiding and abetting breach of fiduciary duty against all Defendants;
10. Fourteenth, for breach of fiduciary duty against all Defendants;
11. Fifteenth, for conspiring to commit or aiding and abetting conversion against all Defendants;
12. Sixteenth, for conversion against all Defendants; and
13. Seventeenth, for breach of contract against all Defendants except Goodman.
In its answer, Refco denies the allegations in the Third Amended Complaint and asserts thirteen affirmative defenses. No counsel has formally entered an appearance on behalf of Goodman and she has not filed an answer to the Third Amended Complaint.
Jurisdiction is based on the diversity of citizenship of the parties, pursuant to 28 U.S.C. § 1332. In its answer to the Third Amended Complaint, Refco denies FDIC's averments that personal jurisdiction over Refco and Goodman is proper pursuant to Colorado Revised Statutes § 13-1-124(1)(a) and (b) because Refco has transacted business and committed one or more tortious acts within the State of Colorado.
Upon removal of the case to this court, it was assigned to Judge Lewis T. Babcock, who entered a pretrial order on December 17, 1996. In January 1997, Judge Babcock recused himself and reassigned the case to me, vacating a hearing on pending motions and a six week jury trial. I address the pending motions in the following order:
I. Refco's Motion for Summary Judgment to Dismiss Each of Plaintiff's Claims 1, 2, 3, 4, 9, 10, 12, 13, 14, 15, 16 and 17 and the Parties' cross-motions for partial summary judgment on Seventeenth Claim for Relief;
II. FDIC's Motion for Partial Summary Judgment on Affirmative Defenses 5 through 10 and 13 through 16;
III. Refco's Cross-Motion to Bifurcate the Alter-ego Claims from the Main Action;
IV. Refco's Motion for Rule 11 Sanctions; and
V. FDIC's Motion for Leave to Call Steven Seelig as a Fact Witness.
In approximately 1985, Steven Wymer formed SDW Asset Management ("SDW") to conduct an investment advisory business. That company was succeeded by Denman & Company ("Denman"). In 1986, Denman registered as an investment advisor with the Securities and Exchange Commission ("SEC"). Denman's successor, Institutional Treasury Management ("ITM") registered with the SEC in December 1990, and by December 1991 had approximately eighty active clients and managed assets totalling nearly $1.2 billion. Wymer was the president and sole stockholder of Denman and ITM and was principally responsible for all activities of those companies.
Denman, and later ITM, provided investment advisory services to institutional customers4, principally municipal entities and financial institutions, by investing customers' funds in mid-range United States Treasury securities and related investment products. Denman's promotional materials and sales presentations described a trading approach which promised to surpass the yield a customer might otherwise receive by passively investing in the same Treasury securities. Customers were told Denman never took custody of customer funds or securities, third party custodial services were used to ensure proper controls and safekeeping of customer assets, and they could achieve the highest current return available while investing in securities backed by the credit of the United States Government or short-term money market instruments. Customers would be provided with monthly reports or "performance reviews" listing assets in the account and all transactions that had occurred during the reporting period.
In reality, Wymer was engaged in an ongoing scheme to defraud. In 1986, he began diverting and misappropriating customer assets to cover trading losses in other customers' accounts. To conceal this activity and encourage customers to place additional funds under its management, Denman employees prepared false "performance reviews" and trade confirmations which seemingly confirmed the enhanced returns Wymer reported.
In 1987, Kimberley Goodman, a registered representative of Refco Securities, Inc. ("RSI"), solicited Denman's brokerage business. RSI accepted Wymer's conditions for doing business, namely that RSI would extend credit lines for Wymer and his customers and allow Wymer to trade options on United States Treasuries in those accounts; all communications would be between RSI and Wymer; RSI could not have direct contact with Denman clients; and Wymer would be allowed to share in the premiums earned on options transactions in his customers' accounts at RSI. When RSI began opening accounts for Denman customers, Wymer provided it with copies of his form ADV, Denman promotional materials, and copies of management agreements for specific customers.5
On August 13, 1987, Wymer also forwarded to RSI an "investment advisor's letter" stating that Denman acted for a number of customers "with full discretionary power to invest on their behalf, including the execution of orders to buy and sell securities." This claim contradicted the information contained in Denman's Form ADV and promotional materials.
On September 1, 1987, RSI prepared a new "investment advisor letter" for Wymer's signature, purportedly applying to all current and future Denman customer accounts, which stated that Denman had obtained all necessary agreements and authorization from its customer to issue instructions for transactions in securities. RSI did not attempt to verify the new authority Wymer claimed to have, or to reconsider the representations in that letter in light of conflicting information in Denman's promotional materials and Form ADV.
By August 1987, RSI allowed Wymer to claim whatever portion of his customers' option premiums he desired without revealing either the amount or percentage to his customers. In October 1987, RSI requested that Wymer obtain written authorization from his customers for payment of these "fees". Contrary to the authorization form, however, the fees were not paid from customer accounts but from funds held in an RSI account at Refco Capital Corporation ("RCC").
Also during this period, Wymer opened cash management accounts at RCC for several Denman customers, designating each as a subaccount under the SDW Management master account. RCC employees did not verify Wymer's authority to open accounts on behalf of his customers. Unbeknownst to JBT, such a cash management subaccount was opened on its behalf in March 1987. As with all other subaccounts, monthly statements and confirmations for the JBT subaccount were mailed only to Denman.
At Wymer's instance, RSI employees Goodman, Douglas Blair (a vice president of Refco Group, Ltd. and registered representative of RSI who ran an RSI trading desk which conducted over-the-counter options transactions and broker cash transactions in U.S. government securities), and Robert Dantone (an assistant trader on the RSI over-the-counter options desk and a registered representative assigned to certain house accounts) transferred funds between these RCC cash management accounts, thus commingling Denman customer funds.
By about May 1988, Blair feared that if Wymer's portion of the option proceeds continued to increase, Denman customers might no longer be interested in these types of transactions and his desk might lose that business. He discussed Wymer's escalating fees with Phillip Bennett, the President of RCC, and other unusual activity in the Denman-management accounts. At Bennet's instruction, Blair suspended trading in the Wymer-managed accounts, met with RSI's outside counsel to discuss documenting the Denman accounts, and on May 18, 1988 prepared a memorandum "to the credit...
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