Lyons v. Jefferson Bank & Trust

• Decision Date: 08 May 1992
• Docket Number: Civ. A. No. 91-B-2245.
• Citation: 793 F. Supp. 981
• Parties: David J. LYONS, commissioner of insurance for the State of Iowa and receiver for the Iowa Trust, Plaintiff, v. JEFFERSON BANK & TRUST, a Colorado corporation, Defendant.
• Court: U.S. District Court — District of Colorado

793 F. Supp. 981

David J. LYONS, commissioner of insurance for the State of Iowa and receiver for the Iowa Trust, Plaintiff, v. JEFFERSON BANK & TRUST, a Colorado corporation, Defendant.

Civ. A. No. 91-B-2245.

United States District Court, D. Colorado.

May 8, 1992.

Edwin S. Kahn, Walter W. Garnsey, Jr., Kelly, Haglund, Garnsey & Kahn, Denver, Colo., Anuradha Vaitheswaran, Asst. Atty. Gen., Iowa Securities Bureau, Des Moines, Iowa, for plaintiff.

Philip E. Lowery, Marcella T. Clark, Lowery, Lamb & Lowery, P.C., Denver, Colo., for defendant.

FINDINGS OF FACT, CONCLUSIONS OF LAW AND ORDER

BABCOCK, District Judge.

This is an action in equity filed in December, 1991. Plaintiff seeks imposition of a constructive trust and return of funds. That claim arises out of an elaborate securities kiting scheme orchestrated by Steven D. Wymer.

Following hearing on January 21 and 22, 1992, I granted plaintiff's motion for a preliminary injunction to preserve and set aside the corpus of the claimed constructive trust. See, Lyons v. Jefferson Bank & Trust, 781 F.Supp. 1525 (D.Colo.1992). The parties have stipulated that, pursuant to Fed.R.Civ.P. 65(a)(2), the evidence admitted at the preliminary injunction hearing is to be considered a part of the record for trial on the merits. Since January 23, 1992, $42,843,614.13, together with interest earned thereon since November 25, 1991, has been held in an escrow at Norwest Bank of Denver (formerly United Bank of Denver). Trial on the merits of plaintiff's claim was held from April 27, 1992 through May 5, 1992.

Resolution of this dispute and the disposition of these funds turns on whether plaintiff has met his burden of tracing Iowa Trust monies from its custodial account with Bankers Trust Company of Des Moines, Iowa to defendant and, if so, whether equity should convert defendant into a trustee. I find these issues for plaintiff and against defendant.

I. FINDINGS OF FACT

The parties are diverse. Therefore, jurisdiction is proper under 28 U.S.C. § 1332. The defendant resides in the District of Colorado. Thus, venue is proper under 28 U.S.C. § 1391.

The Iowa Trust is a trust organized under the laws of Iowa with its principal place of business in Iowa. It was formed in January, 1989 to allow various political subdivisions within Iowa to pool their funds for investment purposes. The beneficiaries of the Iowa Trust include 88 cities, counties, and other political entities. Its assets include pension funds and other funds used by the governmental entities for essential services, payroll, and public works projects.

Plaintiff David J. Lyons is the Iowa Insurance Commissioner. He was appointed receiver for the Iowa Trust on December 19, 1991 by the Iowa District Court for Polk County. The court charged him with marshalling, recovering, and distributing the trust's assets.

Defendant Jefferson Bank & Trust is a Colorado corporation and bank. Its principal place of business is in Lakewood, Colorado.

A. The Iowa Trust Trades

In early 1990, the Iowa Trust entered into an investment management agreement with Denman & Co. (Denman), a corporation solely owned and controlled by Steven D. Wymer (Wymer). Subsequently, Institutional Treasury Management, Inc. (ITM), another company solely owned and controlled by Wymer, succeeded Denman. Pursuant to the management agreement, Wymer directed investments for the Iowa Trust and he had authority to order trades and transfers for its account. The Iowa Trust also entered into a custodian agreement with Bankers Trust Company of Des Moines, Iowa, under which Bankers Trust held the Iowa Trust's cash and securities for investment upon Wymer's directions.

On November 21, 1991, at Wymer's direction, the Iowa Trust bought $40 million principal (face) amount of 7.75% 2/15/95 United States Treasury Notes (the 1995 Notes). The 1995 Notes were placed in its custodian account at Bankers Trust.

On November 25, 1991, Wymer directed execution of each of the following transactions:

1. Bankers Trust wire transferred the 1995 Notes free (without payment) to ITM's trading account with First Interstate Bank of Denver (FIB) 2. ITM sold the 1995 Notes and deposited the proceeds of $42,843,614.13 into ITM's securities clearing demand checking account with FIB;

3. Together with additional funds in the checking account, ITM used the $42,843,614.13 from the sale the 1995 Notes to purchase $41 million principal amount of 8.625% 8/15/94 United States Treasury Notes (the 1994 Notes) at a price of $44,824,531.25;

4. FIB wire transferred the 1994 Notes free to Refco Securities, Inc. ($5 mm of the notes at 2:25 p.m. and $36 mm at 3:29 p.m.);

5. Between 3:29 p.m. and 3:55 p.m., having credited the 1994 Notes to defendant's account, Refco Securities purchased as principal the 1994 Notes from defendant's account for $44,786,093.75 and placed the cash in defendant's account at Refco Securities;

6. At 3:55 p.m. Refco Securities wire transferred $44,786,093.75 from defendant's account at Refco Securities to defendant's account with Refco Capital Corporation;

7. Refco Capital then wire transferred $44,927,031.25, which sum included the $44,786,093.75 derived from the sale of the 1994 Notes, to defendant.

See, Exhibits 29 and 81. (A graphic summary of these transactions is attached to this opinion as Appendix 1). There is no evidence that plaintiff willfully approved these transactions.

It is clear from the evidence, both direct and circumstantial, that at the close of business on November 25, 1991 defendant held $42,843,614.13 of Iowa Trust's funds derived from the sale of the trust's 1995 Notes.

Notwithstanding these facts, defendant attacks plaintiff's tracing with its theory of "the two minute gap." Defendant points to a transfer from Refco Securities of $41 million face amount of 8.625% 8/15/94 Notes (the Shearson Notes) to Dean Witter at 3:27 p.m. on November 25, 1991. Further, $36 million of the 1994 Notes did not arrive at Refco Securities from FIB until 3:29 p.m. on that day. See, infra, p. 7, ¶ 6. Thus, defendant contends that it received the proceeds from the sale to Dean Witter and not the proceeds of the sale of notes traceable to the Iowa Trust because Refco Securities could not sell what it did not yet have. However, I find that there were two distinct sales of identical blocks of treasury notes on November 25, 1991. See, infra, pp. 983-85. Refco Securities sold notes that it purchased on November 22, 1991 to Dean Witter. See, Exhibits 80 and 82. Refco Securities also bought the 1994 Notes from defendant's account. See, Appendix 1 and Exhibit 81. The purchase price Refco Securities paid into defendant's account and the wire-out of cash to defendant's account at Refco Capital are identical. Therefore, I find that it was the proceeds from this second transaction that were wire-transferred to defendant's Refco Capital account and then to defendant.

Defendant's president Maurice Grotjohn testified at the preliminary injunction hearing that defendant moved the funds traceable to the Iowa Trust in and out of several securities and held them in its investment account at the Federal Reserve Bank of Kansas City at the time of the hearing. Thus, I found at the preliminary injunction hearing that defendant held funds and securities traced directly from the 1995 Notes from November 25, 1991 to January 22, 1992. However, at the preliminary injunction hearing and at trial, plaintiff failed to prove that defendant profited from trading funds subject to the constructive trust — the $42,843,614.13 derived from the sale of the 1995 Notes.

By injunction dated January 22, 1991, I ordered that funds and securities in the amount of $43,173,614.13 be segregated into an escrow account with United Bank of Denver, now Norwest Bank of Denver. The amount deposited into the escrow account included the proceeds realized from the sale of the 1995 Notes, plus interest on that amount of $330,000 from November 25, 1991 to January 22, 1992. I further find that defendant continues to hold funds and securities traced directly from the 1995 Notes.

B. The Alleged Jefferson Trades

In March, 1988 and subsequently in December, 1989, defendant also entered into investment management agreements with Wymer and his companies. By those agreements and through a course of conduct, Wymer had authority to trade and transfer funds and securities for defendant's benefit, including repurchase and reverse repurchase transactions (financing arrangements). Indeed, the broker-dealers executing the transactions evidenced in this case executed trades in defendant's name upon only Wymer's oral instructions without independent verification.

Defendant claims that on November 18, 1991 it purchased the Shearson Notes through Wymer for $44,859,765.62. Defendant claims that it purchased the Shearson Notes through Shearson Lehman Brothers (Shearson) as broker and that these notes were wire-transferred to its account at Refco Securities on November 18, 1991. Defendant also claims that, to generate the funds to purchase the Shearson Notes, it sold on November 18, 1991 (1) $20 million face amount of 7.25% 7/15/93 Notes that it claims to have purchased on November 5, 1991 and (2) $22 million face amount of 7.75% 2/15/95 Notes that it claims to have purchased on November 12, 1991. Defendant further claims that (1) in order to purchase the 7.25% 1993 Notes on November 5, 1991, it sold $21 million face amount of 7.375% 5/15/96 Notes and/or $21 million face amount of 7.0% 5/15/94 Notes and (2) in order to purchase the 7.75% 1995 Notes on November 12, 1991, it sold $22 million face amount of 7.5% 1/31/96 Notes.

Contrary to defendant's claims, the credible evidence is overwhelming that:

1. on November 18, 1991, Refco Securities received the Shearson Notes from Shearson but, upon Wymer's instructions, credited those notes to the account it knew as the "State of Wyoming" (It is undisputed that the State of Wyoming never authorized

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