In re Marketxt Holdings Corp.

• Decision Date: 12 October 2007
• Docket Number: Adversary No. 05-01268 (ALG).,Bankruptcy No. 04-12078 (ALG).
• Citation: 376 B.R. 390
• Parties: In re MARKETXT HOLDINGS CORP., Debtor. Alan Nisselson, as Chapter 11 Trustee of MarketXT Holdings Corp., and the Official Committee, of. Unsecured Creditors, Plaintiffs, v. Empyrean Investment Fund, L.P., Empyrean General Partner, LLC, Ash Master Fund, LP, Ash Master II, LLC, Ash Master Fund II, LP, Ash Fund, LP f/k/a Empyrean Fund LP, Empyrean Fund, LP, Ash Fund, LP f/k/a Empyrean Investment Fund, LP, Ash Fund II LP, Ash Capital, LLC f/k/a Ash Capital Management, Ash General Partner, LLC, Ash Offshore Fund Ltd, Ash General Partner Offshore, Ltd, Ash Market Neutral Fund, Ltd and Rauf Ashraf, Defendants.
• Court: U.S. Bankruptcy Court — Southern District of New York

376 B.R. 390

In re MARKETXT HOLDINGS CORP., Debtor Alan Nisselson, as Chapter 11 Trustee of MarketXT Holdings Corp., and the Official Committee, of. Unsecured Creditors, Plaintiffs, v. Empyrean Investment Fund, L.P., Empyrean General Partner, LLC, Ash Master Fund, LP, Ash Master II, LLC, Ash Master Fund II, LP, Ash Fund, LP f/k/a Empyrean Fund LP, Empyrean Fund, LP, Ash Fund, LP f/k/a Empyrean Investment Fund, LP, Ash Fund II LP, Ash Capital, LLC f/k/a Ash Capital Management, Ash General Partner, LLC, Ash Offshore Fund Ltd, Ash General Partner Offshore, Ltd, Ash Market Neutral Fund, Ltd and Rauf Ashraf, Defendants.

Bankruptcy No. 04-12078 (ALG).

Adversary No. 05-01268 (ALG).

United States Bankruptcy Court, S.D. New York.

October 12, 2007.

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Windels Marx Lane & Mittendorf, LLP by Howard L. Simon, Esq., New York NY, for Alan Nisselson, Chapter 11 Trustee, Plaintiff.

Kaye Scholer LLP by Lester M. Kirshenbaum, Esq., Margarita Y. Ginzburg, Esq., Dina Rovner, Esq., New York, NY, for the Official Committee of Unsecured Creditors, Plaintiff.

Denner Pellegrino LLP by Robert Sinsheimer, Esq., Laura Malouf, Esq., Alexander L. Cataldo, Esq., Boston, MA, for the Defendants.

MEMORANDUM OF OPINION

ALLAN L. GROPPER, Bankruptcy Judge.

This is an adversary proceeding brought by the Chapter 11 Trustee of the debtor, MarketXT Holdings Corp. (the "Debtor"), and its unsecured creditors committee (together, "Plaintiffs"). Defendants are Rauf Ashraf and several funds that he controls (collectively, "Defendants"), including "Empyrean Investment Fund, LP (`EIF') and Empyrean General Partner, LLC (`EGP')". The Amended Complaint seeks to recover on behalf of the Debtor's estate certain transfers of property to Defendants. Discovery having concluded, Plaintiffs have moved for summary judgment on several of the counts of the Amended Complaint and Defendants have responded; both parties have placed an enormous record before the Court. Based on that record, the Court adopts the following findings of fact and conclusions of law.

FACTS

The Debtor is a corporation, once known as Tradescape Corp.; Tradescape.com, Inc., and T Corp., which was owned and operated by Omar Amanat ("Amanat") and members of his family. The Debtor developed and at one time had great success with an electronic system for trading securities, but by the winter of 2001-2002 had deteriorated. On June 3, 2002, it sold its wholly-owned subsidiary, Momentum Securities, LLC, to E*Trade Financial Corp. ("E*Trade") for 11,750,000 shares of E*Trade stock (originally calculated to have a market value of $100 million) and a potential additional $180 million in E*Trade stock if Momentum thereafter achieved certain defined annual revenue thresholds (the "Earn Out").

Of the 11,750,000 shares, 2.4 million were placed in escrow to protect against possible claims against Momentum. The remaining 9,400,000 shares (the "Non-Escrow E*Trade Stock") were initially subject to contractual and securities law restrictions limiting the Debtor's ability to dispose of the stock without registration and/or E*Trade's cooperation. Although the shares were registered for SEC purposes on November 27, 2002, there is evidence in the record that the Debtor continued to have difficulty liquidating the shares at a time when it was under increasing pressure from creditors to raise cash. Some of the pressure came from the Debtor's largest and most vociferous creditor group, Softbank Finance Corp. and its affiliates (collectively, "Softbank"). Softbank had sued the Debtor to collect some of the claimed debt, and the parties had entered into a settlement agreement pursuant to which the Debtor acknowledged obligations to Softbank of approximately $33,000,000 and agreed to fund the settlement by borrowing against some portion of the Non-Escrow E*Trade Stock. The record indicates that Softbank had set March 31, 2003, as an absolute deadline for the Debtor to make a substantial payment on the debt or face an involuntary bankruptcy petition.

The record is disputed as to the Debtor's ability to sell the shares to raise cash, but there is no dispute that it eventually negotiated two transactions with an affiliate of Bank of America ("B of A"). These transactions are central to the issues in this lawsuit and must be examined in detail.¹

(i) The STARS Transaction

Amanat enlisted the participation of defendant Ashraf in the first transaction. Ashraf was just embarking as the founder and prospective manager of a group of hedge funds in Boston, and Ashraf and the Debtor's principal, Amanat, had some business interests in common. The initial structure of the first B of A transaction had one of Ashrafs funds, EIF, acting as middleman between the Debtor and B of A, obtaining a pledge of the stock from the Debtor, obtaining value for the stock from B of A, and advancing to the Debtor and some of its creditors the proceeds obtained from B of A.

Specifically, on March 28, 2003, the Debtor pledged to EIF the 9,400,000 shares of Non-Escrow E*Trade Stock pursuant to a Pledge Agreement (the "Pledge Agreement"). In return, EIF agreed to advance to the Debtor up to $17,200,000, which was 50% of the then market value of the pledged shares (based on the lowest price of E*Trade stock during the preceding 20 days), payable only from the proceeds of the re-hypothecation of the stock itself. Any distribution to the Debtor, however, was subject to the terms of the Pledge Agreement, which provided for the payment of $11.6 million to Softbank, certain additional payments to other creditors and use of 17/18^th of any additional proceeds to pay Softbank.² Under the terms of the Pledge Agreement, EIF was not permitted to sell the shares to a third party, such as B of A. Section 6(e) of the Pledge Agreement permitted EIF to re-pledge the stock but only on the condition that EIF could repossess the stock on five business days' notice. The stock remained the property of the Debtor.

The note evidencing the EIF advances originally was for one year and bore interest at the non-default rate of 8%. Since EIF was advancing to the Debtor the proceeds of the Debtor's own property, the Trustee contends that the 8% interest rate gave EIF a handsome return for its services but still allowed the Debtor, to the extent necessary, to repay the "loan," require EIF to recall the shares it had repledged, and recover the pledged shares.

However, the transaction was not carried out in the original form. At some point, Amanat and Ashraf agreed to substitute a note (the "Note") bearing interest at 19% per annum over a four-year term, with a "prepayment penalty" equal to 19% over the life of the loan if the Debtor paid down any of the advances prior to maturity. By the terms of the prepayment penalty, EIF claims it became entitled to most of the remaining value of the stock.³

Moreover, as will be seen below, EIF did not merely re-hypothecate the stock — it sold the stock to B of A⁴ Specifically, ten days after the transaction described above, on April 9, 2003, EIF and B of A consummated a "STARS Variable Share Prepaid Forward Contract," in which EIF transferred 6,746,168 of the shares of the stock to B of A for $27,435,933.30 (the so-called "STARS transaction").⁵ B of A undertook to liquidate the shares, retaining for itself any appreciation in their value. As had earlier been agreed, EIF paid $11.6 million of the B of A proceeds to Softbank and $200,000 was paid to a secured creditor named Scott Appleby. An additional $162,000 was paid to reimburse Ashraf, who had a few days before satisfied a judgment lien on the Non-Escrow E*Trade Stock held by another creditor, Dan Connell, which was a condition to the STARS transaction.⁶ But 17/18^th of the balance was not paid to Softbank as contemplated or to any of the Debtor's other creditors. EIF kept the balance of $15.5 million, transferring it to various accounts held in Defendants' names.⁷

(ii) The Collar Transaction

About a month after the STARS transaction closed, in early May 2003, the Debtor entered into a second transaction directly with B of A (the so-called "Collar transaction"). This was a put/call transaction with B of A which resulted in the remaining 2,400,000 shares of the Non-Escrow E*Trade Stock being liquidated for approximately $14,600,000. EIF was not a party. Plaintiffs contend that the Debtor's creditors did not have knowledge of this transaction when it took place, and Defendants have not pointed to any evidence to the contrary.

Of the proceeds from the Collar transaction, B of A paid $200,000 to the Debtor to cover certain expenses, B of A received approximately $400,000 for its services, and approximately $760,000 was distributed to various individuals and entities (including $400,000 paid to an account in the name of Tradescape.com, one of the Debtor's former names). The remaining balance of $13.2 million was first transferred to two accounts in the name of T Corp. Technologies, an affiliate of the Debtor controlled by Amanat or his brother, Irfan Amanat.⁸ The first account was at the brokerage firm of CCS/White Pacific Securities and the second was at the firm of Sanford Bernstein. It is not disputed that Amanat and Ashraf made some attempts to use the funds in both of these accounts to trade in securities through E*Trade, presumably to pursue the Earn Out. It is also undisputed that they were unsuccessful.⁹

In August 2003, the $13.2 million was moved to an account at Goldman Sachs opened by one of the Defendants, Ash Master Fund. The $13.2 million deposit was originally booked as a capital contribution to the Ash Master Fund (one of the Defendants) by a Cook Islands trust, Epic Investments Trust ("EIT").¹⁰ EIT, created by Amanat, was the limited partner of another trust, Epoch Investments Ltd. ("Epoch").¹¹ Epoch, now a debtor in another Chapter 11 proceeding in this Court,...