In re Adler, Coleman Clearing Corp.
| Citation | 247 BR 51 |
| Decision Date | 15 December 1999 |
| Docket Number | Bankruptcy No. 95-08203 JLG. Adversary No. 97/8423A. |
| Parties | In re ADLER, COLEMAN CLEARING CORP., Debtor. Edwin B. Mishkin, as SIPC Trustee for the Liquidation of the Business of Adler, Coleman Clearing Corp., Plaintiff, v. Daniel David Ensminger, et al., Defendants. |
| Court | United States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Southern District of New York |
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Kenneth J. Caputo, Associate General Counsel and Senior Trial Counsel, Washington, DC, for Securities Investor Protection Corporation.
Cleary, Gottlieb, Steen & Hamilton, New York, for Trustee.
Zeisler & Zeisler, P.C., Bridgeport, CT, for certain Claimants.
Gould & Ratner, Chicago, IL, for certain Claimants.
Sadler & Associates, P.C., Atlanta, GA, for Claimants David Laskey, Kenneth Leech and Michael and Laura Polselli.
Kalmus & Martuscello, P.C., New York, for Claimant William G. Giarusso.
Bruce A. Langer, Esq., New York, for Claimants Catherine and John Romano.
Satterlee Stephens Burke & Burke LLP, New York, for Claimant Ann D. Kusch.
Ziegler, Ziegler & Altmann LLP, New York, for Claimant A.F. Lehmkuhl.
Shereff, Friedman, Hoffman & Goodman, LLP, New York, for Claimant Dr. David L. Ostman.
Kohrman Jackson & Krantz P.L.L., Cleveland, OH, for Claimant Norman Bennett.
Deutsch & Lipner, Garden City, for Claimant Robert Jurgensmeyer.
Schneck Weltman & Hashmall LLP, New York, for Claimant Gary Anderson.
Anthony Motta, Esq., New York, for Claimant Dr. David Sulman.
S.W. Azriliant, P.C., New York, for Claimants Georgios and Maria Kapsalis.
Adler, Coleman Clearing Corp. ("Adler" or "debtor") is subject to this liquidation proceeding under the Securities Investor Protection Act of 1970, as amended, 15 U.S.C. §§ 78aaa-lll (1970) ("SIPA"). Edwin B. Mishkin, Esq., is the Securities Investor Protection Corporation's ("SIPC") court-appointed trustee (the "trustee") for Adler's liquidation. Prior to its demise, Adler acted primarily as a clearing firm serving various introducing firms and their customers on a fully disclosed basis, pursuant to clearing agreements (with the introducing brokers) and Customer Agreements (with those brokers' customers). Hanover Sterling & Company ("Hanover") was among those introducing brokers.1
In accordance with the procedures which we established at the outset of the case, more than 15,000 customers filed claims against Adler to recover cash and/or securities in their accounts when SIPC closed Adler. As required by SIPA, the trustee has reviewed the filed claims and, where appropriate, has distributed cash or securities to the customers. Among the customers who have filed claims against Adler are former Hanover customers whose claims arise from transactions that purportedly occurred during the period from February 17 through 24, 1995, the last five business days of Hanover's existence (the "Final Week"). They assert preferred SIPA customer claims2 against Adler to recover (i) the cash proceeds of their purported sales to Hanover of stocks (the "House Stocks")3 in which Hanover was the market maker (the "Challenged Sales"), and (ii) for some of them, brand name securities other than House Stocks (the "Blue Chips") which they purportedly purchased with the cash proceeds from the Challenged Sales (the "Challenged Blue Chip Buys", and together with the Challenged Sales, the "Challenged Trades").
The trustee denied those former customers' claims. Pursuant to a December 18, 1996 application, he sought an order (i) upholding his determinations denying those claims, and (ii) expunging the objections to those determinations filed by those customers herein. In substance, he says that we should disallow their claims for cash and Blue Chips, but allow those customers to retain the House Stocks that were in their accounts prior to the Challenged Sales. The posted prices for the House Stocks are a fraction of what they were during the Final Week and the House Stocks are not worth nearly as much as the cash and/or securities in the customers' accounts. A group of those customers (the "Claimants") opposed the application, and on consent of the parties, we deemed the application a complaint (the "Complaint") initiating an adversary proceeding under Part VII of the Federal Rules of Bankruptcy Procedure.
All agree that under SIPA, the Claimants are "customers" of Adler, and that we must apply the SIPC Rules, 17 C.F.R. §§ 300.501 through 300.503 (the "Series 500 Rules"), to determine whether they hold preferred "customer claims" for the cash and/or securities they say was in their accounts. As support for his Complaint, the trustee contends that the Claimants do not hold claims for cash and/or securities under those rules because the Claimants (i) did not authorize their brokers to make the Challenged Trades; (ii) lacked the funds to pay for the Challenged Blue Chip Buys and (iii) did not receive trade confirmations for the Challenged Trades that Hanover supposedly effected on February 24, 1995. The trustee also contends that, in any event, under Adler's August 22, 1994 clearing agreement with Hanover (the "Clearing Agreement"), he can cancel the Challenged Trades and that pursuant to SIPC Rule 300.503, he can avoid the Challenged Trades as fraudulent transfers under the Bankruptcy Code and New York's Debtor and Creditor Law, and because they are illegal trades under the federal securities law, the Martin Act (New York's Blue Sky law) and the criminal provisions of SIPA.
On March 6, 1998, we denied a motion filed on behalf of 90 Claimants for an order dismissing the Complaint for failure to state a claim. See Mishkin v. Ensminger (In re Adler, Coleman Clearing Corp.), 218 B.R. 689 (Bankr.S.D.N.Y.1998) ("Ensminger I"). In doing so, we held that the Complaint is legally sufficient and that if the trustee could prove the allegations in support of his Complaint, we would grant him judgment upholding his determinations respecting the Claimants, and overruling the Claimants' objections to those determinations. On March 13, 1998, we granted the trustee's cross-motion for partial summary judgment on the Complaint against the 65 Claimants who are asserting claims based upon the trades that Hanover effected on February 24. None of them received written confirmations of their trades from Adler. We held that they did not hold claims for cash or securities under the Series 500 Rules. See Mishkin v. Ensminger (In re Adler, Coleman Clearing Corp.), 218 B.R. 13, 22-24 (Bankr. S.D.N.Y.1998) ("Ensminger II"). We assume familiarity with those decisions.
We conducted a trial on the issues raised in the Complaint on March 13, March 17, March 19 and March 20, 1998.4 In May and June 1998, we approved settlements between the trustee and 18 Claimants. The trustee and the remaining Claimants submitted post-trial memoranda of law and proposed findings of fact and conclusions of law.5 We heard oral argument on October 2, 1998.
The Claimants say that we should deny the trustee any relief under the Complaint because they hold valid SIPA claims for the cash and/or securities allegedly in their accounts. They maintain that they are innocent customers and that the trustee wants to make them scapegoats for the illegal, ill advised and fraudulent conduct of others. They assert that the Short Sellers (as we define that term below) intentionally destroyed Adler and Hanover by their illegal short selling of House Stocks, because they drove down the prices of those securities and in doing so, overwhelmed Hanover's and Adler's abilities to maintain their prices. They contend that the Short Sellers succeeded in their illegal scheme, but only after a protracted battle with Adler Hanover where— in a calculated business decision—Adler cooperated with Hanover to support the price of the House Stocks by funding all of Hanover's House Stock purchases in unprecedented levels. They argue that Adler financed Hanover's (and its own) defense of the Short Sellers with full knowledge that Hanover had no cash to pay for its House Stock purchases and inadequate customer demand to counteract the illegal short selling pressure. For them, Adler made a business decision to finance Hanover in reliance on Adler and Hanover's abilities to force the Short Sellers to "buy back" the House Stocks that they had sold "naked". They state that Adler's belief that it would ultimately profit from the illegal short selling motivated its conscious disregard for Hanover's wrongdoing, and that ultimately, the trustee, standing in Adler's shoes, enforced the illegal short sales by conducting a buy-in of the House Stocks on March 20 and 29, 1995, in which he received $17 million on behalf of the estate. Thus, the Claimants deny that we should grant judgment to the trustee on the Complaint. They say, among other things, that they can enforce those trades under the Clearing Agreement and the trustee cannot rescind them or otherwise avoid them because Adler guaranteed Hanover's performance under those trades.
As we will explain, the evidence proves, among other things, that beginning on or about January 20, 1995, the Short Sellers illegally manipulated the prices of the House Stocks downward and that Hanover initially sought to combat that action by purchasing large quantities of House Stocks at the posted prices. It also shows that on February 16, Hanover knew that it could not defeat the Short Sellers and knew that because it was operating in violation of its net capital requirements, it was obligated by law to cease trading. However, Hanover did not shut down, and it masked its true financial position and deceived...
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