Landow v. Wachovia Sec., LLC

• Decision Date: 12 August 2013
• Docket Number: No. 12–CV–3277 (SJF)(AKT).,12–CV–3277 (SJF)(AKT).
• Citation: 966 F.Supp.2d 106
• Parties: Jonathan LANDOW, Plaintiff, v. WACHOVIA SECURITIES, LLC, Wells Fargo Advisors, LLC, Robert William Eddy, George M. Gordon III, Walter R. Anderson and Walter Randolph Anderson, Jr., Defendants.
• Court: U.S. District Court — Eastern District of New York

966 F.Supp.2d 106

Jonathan LANDOW, Plaintiff,

v.WACHOVIA SECURITIES, LLC, Wells Fargo Advisors, LLC, Robert William Eddy, George M. Gordon III, Walter R. Anderson and Walter Randolph Anderson, Jr., Defendants.

No. 12–CV–3277 (SJF)(AKT).

United States District Court, E.D. New York.

Aug. 12, 2013.

Bernard A. Nathan, Bernard A. Nathan, P.C., West Islip, NY, for Plaintiff.

David Alan Picon, Proskauer Rose LLP, New York, NY, for Defendants.

ORDER

FEUERSTEIN, District Judge.

On June 29, 2012, plaintiff Jonathan Landow (“plaintiff”) commenced this action against defendants Wachovia Securities, LLC (“Wachovia”), Wells Fargo Advisors, LLC (“Wells Fargo”), Robert William Eddy (“Eddy”), George M. Gordon III (“Gordon”), Walter R. Anderson (“Anderson”) and Walter Randolph Anderson, Jr. (“Anderson Jr.”) ¹, asserting claims, inter alia, seeking damages for fraud, breach of fiduciary duty, aiding and abetting breach of fiduciary duty, and violations of certain rules of the National Association of Securities Dealers (“NASD”) and New York Stock Exchange (“NYSE”). Pending before the Court are: (1) defendants' motion to dismiss the complaint in its entirety pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure for failure to state a claim for relief; and (2) plaintiff's cross motion pursuant to Rule 15(a)(2) of the Federal Rules of Civil Procedure for leave to amend the complaint. For the reasons set forth below, defendants' motion is granted and plaintiff's cross motion is denied.

I. BACKGROUNDA. Factual Background ²

Plaintiff owned a corporation, New York Medical, Inc. (“NY Medical”), through which he sought to establish an employee stock ownership plan (ESOP) in order to “diversify[ ] his personal assets and simultaneously reward[ ] employees of N.Y. Medical.” (Compl., ¶¶ 6, 81). Specifically, plaintiff, “decided to engage in a so-called seller-financed ESOP transaction with leveraged qualified replacement property (QRP), as defined in Section 1042 of the Internal Revenue Code.” (Compl., ¶ 84).

On November 30, 2000, N.Y. Medical and plaintiff entered into a letter agreement with Citibank, N.A. (“Citibank”), pursuant to which Citibank agreed to lend N.Y. Medical fifteen million dollars ($15,000,000.00) upon N.Y. Medical's execution of a demand note payable in that amount to Citibank. (Compl., ¶ 85). On that same date: (1) Citibank loaned N.Y. Medical fifteen million dollars ($15,000,000.00); (2) N.Y. Medical loaned the entire amount of the Citibank loan proceeds to its ESOP; (3) the ESOP used the entire amount of N.Y. Medical's loan proceeds to purchase four hundred fifty thousand (450,000) shares of N.Y. Medical's stock from plaintiff; (4) plaintiff used the proceeds from the stock sale to lend N.Y. Medical fifteen million dollars ($15,000,000.00); and (5) N.Y. Medical used the proceeds of plaintiff's loan to satisfy its obligation under the Citibank demand note. (Compl., ¶ 86). As a result of those transactions, plaintiff did not retain any cash from his sale of stock to the ESOP, but held a note of N.Y. Medical in the amount of fifteen million dollars ($15,000,000.00) evidencing his loan to that company. (Compl., ¶ 87).

After plaintiff's sale of stock to the ESOP, he “sought to purchase certain QRP in order to defer under Section 1042 of the Internal Revenue Code recognition of any gain that he had realized on the sale of that stock.” (Compl., ¶ 88). Since plaintiff did not retain any cash from his sale of stock to the ESOP, “he was unable to buy that QRP without borrowing the funds to do so.” ( Id.) On November 1, 2000, plaintiff, N.Y. Medical and Citibank executed a “Revolving Credit Note (Multiple Advances)” (“the revolving credit note”), pursuant to which Citibank made available to plaintiff a line of credit not exceeding twelve million dollars ($12,000,000.00). (Compl., ¶ 89). According to plaintiff, the line of credit was a recourse loan on which he was allowed to draw during the period from November 1, 2000 to October 31, 2001. ( Id.) On that same date, (1) plaintiff executed a “General Hypothecation Agreement” (“GHA”), pursuant to which he pledged certain rights to the QRP he intended to purchase with the loan proceeds that he borrowed against the line of credit as security for the line of credit, (Compl., ¶ 90); and (2) N.Y. Medical executed a “General Security Agreement,” pursuant to which it granted a security interest in all of its assets to Citibank as collateral for its obligations under the revolving credit note. (Compl., ¶ 91). Between November 2, 2000 and November 29, 2001, plaintiff purchased floating rate notes (“FRNs”) as QRP at a total cost of fifteen million dollars ($15,000,000.00). ( Id.)

On February 11, 2002, plaintiff and his wife executed the following documents amending the revolving credit note and GHA: (1) an “Amended and Restated Revolving Credit Note (Multiple Advances)” (“amended revolving credit note”), inter alia, increasing the Citibank line of credit to $13.5 million (“the Citibank increased line of credit”), and substituting plaintiff's wife for N.Y. Medical as a borrower thereunder; and (2) an “Amended and Restated General Hypothecation Agreement” (“the amended GHA”). (Compl., ¶ 92). According to plaintiff, he drew upon the Citibank increased line of credit, and used $1.5 million of his own funds, to purchase “$15 million of FRNs,” and pledged those FRNs as security for the Citibank transaction. (Compl., ¶ 93).

Plaintiff alleges that “[i]n proposing a line of credit * * *, Citibank informed him that the use of FRNs as QRP would achieve a result known as ‘zero-cost borrowing’, which was [his] objective.” (Compl., ¶ 95). According to plaintiff, on June 12, 2002, after Citibank failed to provide such “zero-cost borrowing” during 2001 and 2002, he retained Corporate Solutions Group, LLC (“CSG”) “to assist him in negotiating with a different lender a new loan of $13.5 million dollars [sic] that would replace the Citibank increased line of credit.” (Compl., ¶ 95).

On or about August 2002, CSG informed plaintiff about Derivium Capital, LLC (“Derivium”), (Compl., ¶ 96), a limited liability company of which Charles Cathcart (“C. Cathcart”) was a fifty percent (50%) owner and Yuri Debevc and Scott Cathcart (“S. Cathcart”) were each twenty-five percent (25%) owners (collectively, “the Derivium owners”). (Compl., ¶¶ 2, 35). At all relevant times: (1) other entities, including Optech Ltd. (“Optech”), Bancroft Ventures, Ltd. (“Bancroft”), Witco Services Ltd. (“Witco”) and Veridia Solutions LC (“Veridia”) (collectively, “the Derivium alter ego companies”), were wholly owned or controlled by the Derivium owners, (Compl., ¶¶ 3, 35); and (2) Anderson Jr. was an employee, the director of client services and an account executive of Derivium, (Compl., ¶ 9).

According to plaintiff, “Derivium perpetrated a fraudulent securities loan scheme known as the Derivium 90% Securities Loan Program” (“the 90% Loan Program”), ( Id.), pursuant to which Derivium “purported to make loans to borrowers worth 90% of the value of their securities.” (Compl., ¶ 36). According to plaintiff, borrowers under the 90% Loan Program “would deposit their securities as collateral for the 90% Loan into accounts at one of several major brokerage houses, including Wachovia * * *, where their securities would purportedly be held and hedged by Derivium using what Derivium purported to be * * * a secret, proprietary hedging strategy. At the end of the loan term, borrowers could pay the loan balance and retrieve their collateral, surrender their collateral in satisfaction of the loan, or renew their loan.” ( Id.)

On August 19, 2002, Derivium prepared separate “ESOP QRP Loan–Indicative FRN Loan Term Sheets” (“the proposed loan term sheets”) with respect to each of plaintiff's FRNs, proposing to lend plaintiff, on a nonrecourse basis, ninety percent (90%) of the face value of the respective FRN at a net interest rate calculated in accordance therein, (Compl., ¶ 97), and prohibiting (a) Derivium from calling the respective loan before maturity unless plaintiff was in default on that loan and (b) plaintiff from prepaying the principal of the respective loan before maturity, (Compl., ¶ 98).

On or about August 20, 2002, plaintiff received a letter from CSG outlining a proposal for ninety percent (90%) financing of the FRNs with no recourse loans. (Compl., ¶ 99). Shortly thereafter, plaintiff spoke to a CSG representative who represented, inter alia, (a) that the ninety percent (90%) financing was a loan and not subject to tax; (b) that the loan allows for a potential deferral of tax until the loan is due; and (c) that at the end of the loan term, the borrower would have the option to have the collateral, i.e., his FRNs, returned or the loan terminated. ( Id.)

On or about August 28, 2002, Derivium sent plaintiff certain information regarding the proposed loans under the 90% Loan Program, including a “Master Agreement to Provide Financing and Custodial Services” and a separate Schedule A with respect to each of his FRNs, each containing information that was “materially identical” to the information contained in the proposed loan term sheets. (Compl., ¶ 100). On September 20, 2002, Derivium sent plaintiff additional documents, (Compl., ¶ 101), and from September 23 to 26, 2002, Derivium sent plaintiff revised versions of certain of the documents previously sent, none of which differed materially from the documents previously sent to plaintiff on August 28, 2002. (Compl., ¶ 102).

According to plaintiff, “[a] major feature in the marketing material for the [90% Loan Program] was that the transaction was a loan, not a sale, so even though [he] would borrow 90% of the value of his securities as a loan * * *, [he] was told the refinance would not affect his capital gains tax deferral recognition from his prior [Citibank] transaction and [he] could continue to defer paying capital gains tax for the duration of the loan...