In re Nappy, Bankruptcy No. 895-81248-288. Adversary No. 895-8293-288.
Decision Date | 13 October 1999 |
Docket Number | Bankruptcy No. 895-81248-288. Adversary No. 895-8293-288. |
Parties | In re John F. NAPPY, Debtor. Securities Investor Protection Corporation, Plaintiff, v. John F. Nappy, Defendant. |
Court | United States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Eastern District of New York |
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Kenneth J. Caputo, Deputy General Counsel, Securities Investor Protection Corp., Washington, DC, for plaintiff.
John Franklin Nappy, Malverne, NY, defendant pro se.
The plaintiff, Securities Investor Protection Corporation (SIPC), is a non-profit membership corporation created under the Securities Investors Protection Act (SIPA), 15 U.S.C. § 78aaa et seq. One of SIPC's members was John Franklin Associates, Inc. (JFA), a securities broker-dealer registered with the United States Securities and Exchange Commission (SEC) as well as a SIPC member. The chapter 7 debtor and defendant in this adversary proceeding is an individual named John Franklin Nappy (Nappy); he was a director, controlling shareholder, and president of JFA. SIPC liquidated the assets of JFA in a proceeding filed in this Court.
One of JFA's customers was Swedish Medical Center (SMC) whose unsecured claim had been allowed in the SIPA liquidation.1 SIPC's claim arose from the debtor's alleged misappropriation of funds that SMC had remitted to JFA for the purchase of securities (Claim). SMC then assigned its rights in the Claim to SIPC.
SIPC filed its complaint against Nappy for a determination that the Claim was nondischargeable under 11 U.S.C. §§ 523(a)(2)(A) and (4).2 Under the first branch of its complaint, SIPC alleges that Nappy engaged in a pattern of actual fraud against SMC; under the second branch, SIPC alleges that Nappy embezzled funds that are directly traceable to SMC wire-transfers to JFA or one of its affiliates by transferring those funds to his own personal accounts and using those proceeds for his personal benefit.
Nappy's denial of, and affirmative defense to, SIPC's allegations is rather complex and often inconsistent. In the main, however, Nappy denies that he retained any personal benefit from SMC's funds, claims that he did not authorize any improper transfers of SMC's funds to his personal account, or, alternatively, claims that he is entitled to some of those transfers of SMC's funds as proper reimbursement for his prior personal advances to JFA on SMC's behalf.
This proceeding took ten days to try over a six-week period. The principal witnesses for the plaintiff were Theodore W. Barrow, an Examiner employed by SIPC, and Josephine Wang, Esq., SIPC's in-house general counsel.3 SIPC's trial narrative was simple and straight-forward, saying, in effect:
The thrust of Mr. Barrow's disciplined testimony was a recounting of his detailed tracing of the cash flows among the various accounts maintained by JFA, Nappy, and John Franklin Co. with respect to the allowance of the Claim. This testimony was graphically summarized in two diagrams (SIPC 12) tracing those cash flows, which he tied into his very elaborately annotated spread sheets (SIPC 11). Ms. Wang testified at length about her role in the SIPC liquidation of JFA, her supervision of Mr. Barrow's overall investigations, her detailed review of SMC's proof of claim, and her efforts over many months to respond to various "leads," inquiries, and challenges from Nappy concerning his claims and defenses.
Despite repeated urging by the Court that the debtor retain experienced trial counsel to assist him, Nappy persisted in representing himself.4 He cross-examined SIPC's two principal witnesses for three long days during which he repeatedly tried to argue his principal affirmative defenses. Based upon active listening to that cross-examination, this Court finds that Nappy failed to impugn the credibility of either of these witnesses.
At the conclusion of SIPC's case in chief, Nappy was ordered to submit his own direct testimony in writing under oath. The Court explained to Nappy that it was his burden to present a compelling counter-narrative. He tried to meet that burden through a series of memoranda and exhibits. At the request of the Court, Nappy summarized his testimony in the form of a more comprehensive exhibit (Proposed Nappy 40)5 that not only subsumed SIPC 12, but also purported to show diagrammatically why SIPC 12 was critically incomplete and, thus, materially misleading. Nappy was also granted the opportunity to submit supplemental pleadings and memoranda by a deadline following the conclusion of the trial; he, in fact, filed lengthy and convoluted6 post-trial memoranda, including some submissions that fell considerably past the extended deadline. This Court has declined to give any probative weight to any of Nappy's untimely-filed post-trial submissions which, in any event, were largely redundant of prior submissions.
Nappy also called eight witnesses in his defense.7 These included: (i) two former JFA securities brokers or salesmen, Douglas Nevin and Paul Laude, (ii) a business and social acquaintance and sometime private lender, Gino Camparetto, (iii) a former JFA office manager, Kathleen Davis, (iv) two account officers at Merrill Lynch, Rick Walsh, III and Judy Aune, who were familiar with his options trading history, (v) an IRS appeals officer, Steven Wurman, and (vi) Nappy's expert witness, an accountant named George Donley. From the Court's perspective, after considering the testimony of these witnesses, the only testimony of any potentially material relevance to Nappy's defense came from the last two persons. Wurman's and Donley's testimony is discussed infra.
After considering the full record in this adversary proceeding, the Court has determined to enter a judgment of nondischargeability in favor of SIPC based upon the findings of fact and conclusions of law set forth in this Memorandum.
In September 1984, Nappy, the debtor-defendant, formed a securities broker-dealership known as JFA and registered it with the SEC. He was the principal shareholder of JFA. Nappy also formed and controlled an affiliated company doing business as Harbor Financial Corporation; this affiliate operated from the same building and address as JFA's. JFA conducted a general securities business, clearing its securities transactions on a fully-disclosed basis through Raymond James & Associates, Inc. (Raymond James) except as to mutual fund transactions which it "self-cleared". Nappy had also established a company named John Franklin & Co. (JFC). Nappy actively traded through JFA, Harbor Financial, and Raymond James for his own personal investment account. Nappy claimed a special expertise and early success in the sophisticated trading of options on margin.
One of the defining characteristics of Nappy's business dealings was that he, his wife, Lori Tortelli, and his various business affiliates opened and maintained a substantial number of commercial checking accounts at various banks, with most of these accounts at National Westminster Bank (Natwest). The better part of trial time was expended in analyzing the flow of funds back and forth among these various accounts over a seven-month period in 1985-86, for the gravamen of SIPC's complaint is that Nappy embezzled customer funds for his own benefit. The accounts referred to in the exhibits admitted into evidence during the trial include the following:
Account Holder Accounts at Natwest Exhibits John F. Nappy XXXXXXXXXX (0812) Nappy 11 Lori Tortelli Nappy XXXXXXXXXX (6785) Nappy 11 JFA X-XXX-XX-XXXX (1564) SIPC 6 A/B, 6 A/C, 29 and 30 (Money Market) JFA X-XXX-XX-XXXX SIPC 21 (Special Account) JFC X-XXX-XX-XXXX (4841) SIPC 6 A.D., 6, 39 N.Y.S. 746 A/E and 19 Harbor Financial 84034684 SIPC 26 Account Holder Accounts at Ray./James Exhibits John F. Nappy 42223563 (3563) SIPC 6 A/F and 6 A/G Personal trading account
JFA entered into a clearing house agreement with Raymond James which has its principal offices in Florida. Among the customers for which JFA acted as a broker in placing orders for mutual funds were SMC, Pekin Memorial Hospital (Pekin), and Cy-Wayne F.C.U. (Cy-Wayne). From September of 1985 through May of 1986, SMC had placed several orders for the purchase of Putnam and Oppenheimer mutual funds with (and through) JFA.
In March of 1986, JFA was experiencing operational difficulties. At the suggestion of a representative of Raymond James, Nappy hired one of its employees, Janet Sanders (Sanders), to assist JFA in its day-to-day operations and administration. In the April of 1986, Nappy then hired Frank Gemino (Gemino), who had been previously employed by Drexel Burnham, as JFA's Vice President of Sales.
In the summer of 1986, Nappy married Lori Tortelli. The Nappys then spent most of the month of August of 1986 on a honeymoon in Europe. Upon his return to the United States in late August, Nappy claims to have discovered for the first time that the accounts for SMC and Cy-Wayne were "sho...
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