Kumaran v. Vision Fin. Mkts.
| Decision Date | 04 August 2022 |
| Docket Number | 20-cv-03871 (GHW) (SDA) |
| Parties | Samantha Siva Kumaran et al., Plaintiffs, v. Vision Financial Markets, LLC et al., Defendants. |
| Court | U.S. District Court — Southern District of New York |
CORRECTED OPINION AND ORDER AND REPORT AND RECOMMENDATION
Before the Court are: (1) a motion by Vision Financial Markets, LLC (“VFM”); Howard Rothman (“Rothman”) Robert Boshnack (“Boshnack”); High Ridge Holding Corporation, LLC (“HRHC”); High Ridge Futures LLC (“High Ridge”); H. Rothman Family, LLC Boshnack Family, LLC; Vision Brokerage Services, LLC (“VBS”); John Felag (“Felag”); Vision Investment Advisors, LLC (“VIA”); Lazzara Consulting, Inc. (“LCI”); and Gerard Stephen Lazzara (“Lazzara”) (collectively, the “Vision Defendants”) to compel arbitration in part and dismiss in part the claims asserted by Plaintiffs in the Second Amended Complaint (“SAC”), and (2) a motion by pro se defendant Julie Villa (“Villa,” and together with the Vision Defendants, the “Defendants”) to dismiss the claims brought against her. (Vision Defs.' Mot. to Dismiss, ECF No. 101; Villa Mot. to Dismiss, ECF No. 98.)
For the reasons set forth below, it is hereby Ordered that the partial motion to compel arbitration is GRANTED and this action is STAYED with respect claims by Plaintiffs Nefertiti Risk Capital Management, LLC (“NRCM”) and Nefertiti Asset Management, LLC (“NAM”) against Defendants High Ridge, Rothman, Boshnack, Felag, LCI, Lazzara and VIA. In addition, I respectfully recommend that the motions to dismiss be GRANTED IN PART and DENIED IN PART, such that the Court dismiss the non-arbitrable federal claims; decline to exercise supplemental jurisdiction over the non-arbitrable state law claims; and grant leave to amend or, in the alternative, that the remaining claims be stayed pending the completion of arbitration.
FACTUAL BACKGROUND[1]
VFM was a Futures Commission Merchant (“FCM”)[2] registered with the National Futures Association (“NFA”)[3] until June 2014. (SAC, ECF No. 89, ¶¶ 42, 89.) VFM was owned by Boshnack and Rothman. (SAC ¶ 90.) Felag was the risk manager for VFM. (SAC ¶ 45.) In June 2014, Boshnack and Rothman announced their intention to form a new FCM under the name High Ridge. (SAC ¶ 93.) High Ridge only was permitted to register with the NFA as an Introducing Broker (“IB”), not as an FCM. (Id.) In or around August 2014, VFM agreed to transfer its former clearing business to ADM Investor Services, Inc. (“ADMIS”), an FCM registered with the NFA. (SAC ¶ 94.)
On August 28, 2014, ADMIS, through its President, Tom Kadlec, entered into a Guarantee & Fee Agreement (“G&F Agreement”) with High Ridge, Boshnack and Rothman, through which ADMIS agreed to provide credit lines for approximately 145 former VFM brokers (the “Vision IBs”).[4](SAC ¶ 95; see also G&F Agreement, 20-CV-03668 ECF No. 58-1, § 2.1(c).) The terms of the agreement included that High Ridge, Boshnack and Rothman would provide personal guarantees on all customer accounts opened by the Vision IBs. (SAC ¶ 96.) In exchange, they would receive “trailing fees and commissions” from all transactions placed in those accounts. (Id.) The G&F Agreement was not disclosed to customers. (SAC ¶ 18.)
In November 2014, High Ridge, Boshnack, Rothman and Felag entered into an oral risk services agreement (“ORSA”) with ADMIS allowing them to access ADMIS's confidential account records, including trade secrets and non-public information, and giving them discretion regarding how risks were managed, including discretionary authority over margin requirements and trading limits. (SAC ¶¶ 103-04, 529.) As with the G&F Agreement, Plaintiffs allege that the ORSA was not disclosed to customers. (SAC ¶ 114.) Plaintiffs allege that the G&F Agreement and the ORSA were part of a scheme to allow Boshnack and Rothman to continue to operate as an “quasi-FCM” under the cover of ADMIS, while at the same time accessing information from ADMIS's customers which they later used to compete against Plaintiffs. (See, e.g., SAC ¶¶ 120-23.)
On or around December 11, 2016, Plaintiff Samantha Siva Kumaran (“Kumaran”) spoke to Defendant Villa, who represented herself as an equities broker for Garwood Securities. (SAC ¶ 306.) On December 16, 2016, during a telephone call between Kumaran and Villa about software prices, Villa solicited Kumaran to open a commodity futures account for trading commodities futures and options through Lazzara (Villa's former employer and a former Vision IB). (SAC ¶ 325.) Villa was compensated for the referral, even though she no longer was registered as an Associated Person (“AP”)[5] of LCI.[6] (SAC ¶ 324.) Thereafter, Kumaran spoke with Lazzara about opening an FCM account and told him that she was in the process of registering as a CTA and forming various hedge funds, including a commodities options hedge fund under the name STORM. (SAC ¶ 333, 335-36, 341.) Lazzara referred Kumaran to open a futures account at ADMIS, but did not disclose the G&F Agreement or the ORSA. (SAC ¶¶ 334, 351-56, 371.)
In January 2017, Kumaran, as Managing Member of NRCM, opened an account with ADMIS. (SAC ¶ 430.) At the time, Lazzara represented that the only fees and commissions to the account would be $1.50 in commissions, NFA fees and Exchange fees. (SAC ¶ 431.) Thereafter, Plaintiffs allege that there were errors in risk management, and they were charged unauthorized fees. (SAC ¶¶ 449-50, 479-83, 506, 514.) However, as of April 20, 2017, the account performance was showing higher than average returns. (SAC ¶ 504.) On or around May 2, 2017, additional fees were deducted from the account in an effort to thwart performance and deplete profits. (SAC ¶ 523.) On or around June 25, 2017, Kumaran closed the account at ADMIS. (SAC ¶ 579.) On March 13, 2018, Boshnack and Rothman registered Vision Investment Advisors (“VIA”) as a CTA. (SAC ¶ 252.)
In June 2018, NRCM filed an arbitration claim with the NFA alleging multiple violations of the CEA related to “the scheme by ADMIS, [VFM] and numerous Vision IB[s], to defraud customers and CTA[s].” (See Arbitration Claim, In re Nefertiti Risk Capital Management, LLC, 18-ARB-5 (NFA) (“NFA Arbitration Claim”), ECF No. 102-4.) Among the Respondents named by NRCM in the arbitration claim were LCI, Lazzara, High Ridge, Felag, Rothman and Boshnack. (See id. at PDF pp. 2-3.)
On May 19, 2020, Kumaran filed the Complaint in this action purporting to assert claims on behalf of herself, NRCM and approximately 100 other CTAs and 100 other customers. (Compl., ECF No. 1.) On August 20, 2020, the Court dismissed all claims, except for those brought by Kumaran individually. (8/20/20 Order, ECF No. 13.) On September 30, 2020, Kumaran filed an Amended Complaint. (Am. Compl., ECF No. 20.) On December 22, 2020, counsel appeared on behalf of NRCM (ECF No. 40) and, on January 18, 2021, filed a motion to intervene to add NRCM as a plaintiff in the Amended Complaint. (1/18/21 Motion, ECF No. 41.) Absent objection from Defendants, the Court granted the motion to intervene on January 26, 2021 and directed Kumaran and NRCM to file a second amended complaint adding NRCM as a plaintiff. (1/26/21 Order, ECF No. 44.)
On March 15, 2021, Kumaran filed a purported second amended complaint on behalf of herself and, on March 16, 2021, NRCM and NAM filed a separate amended complaint. (See ECF Nos. 48 & 49.) On April 20, 2021, NAM and Nefertiti Holding Corporation (“NHC”) filed a motion to intervene. (4/20/21 Motion, ECF No. 60.) On April 30, 2021, the Court struck the amended pleadings filed in March, as they did not comply with the Court's prior Order, and directed Plaintiffs to file a single, consolidated second amended pleading. (4/30/21 Order, ECF No. 69.) On May 28, 2021, the Court granted on consent the motion by NAM and NHC to intervene. (5/28/21 Order, ECF No. 72; 6/14/21 Am. Order, ECF No. 78.) On July 30, 2021, Plaintiffs filed the 202-page SAC (with 31 exhibits) that is now before the Court. (See SAC.)
On September 17, 2021, Villa filed her motion to dismiss and on September 23, 2021 the Vision Defendants filed their motion. Plaintiffs sought to bifurcate briefing on the partial motion to compel arbitration, which the Court denied on September 30, 2021. (9/30/2021 Order, ECF No. 109.) On November 22, 2021, the Court granted Plaintiffs an extension of time to file their opposition briefing until December 14, 2021. (11/22/2021 Order, ECF No. 111.) On December 14, 2021, Plaintiffs filed their opposition memoranda. (NRCM/NAM Opp. Mem., ECF No. 114; Kumaran Vision Opp. Mem., ECF No. 115;[7]Kumaran Villa Opp. Mem., ECF No. 116.) Defendants filed their replies on January 14, 2022. (Vision Defs.' Reply Mem., ECF No. 126; Villa Reply Mem., ECF No. 128.)
“The Federal Arbitration Act (“FAA”), 9 U.S.C. § 1, et seq., creates a body of federal substantive law of arbitrability applicable to arbitration agreements . affecting interstate commerce.” Ragone v. Atl. Video at Manhattan Ctr., 595 F.3d 115, 121 (2d Cir. 2010) (internal quotation marks and citation omitted). “Enacted to reverse centuries of judicial hostility to arbitration agreements, the FAA embodies the national policy favoring arbitration and places arbitration agreements on equal footing with all other contracts[.]” Katsoris v. WME IMG, LLC, 237 F.Supp.3d 92, 100 (S.D.N.Y. 2017) (citing Bird v. Shearson Lehman/Am. Express, Inc., 926 F.2d 116, 119 (2d Cir. 1991); Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 443 (2006)) (internal quotation marks and alterations omitted); see...
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