Nomura Securities Intern. v. E*Trade Securities
| Decision Date | 04 September 2003 |
| Docket Number | No. 01 Civ. 9280(RWS).,01 Civ. 9280(RWS). |
| Citation | 280 F.Supp.2d 184 |
| Parties | NOMURA SECURITIES INTERNATIONAL, INC., Plaintiff, v. E*TRADE SECURITIES, INC., Defendant. |
| Court | U.S. District Court — Southern District of New York |
Dreier & Baritz LLP, New York, NY, for Plaintiff, By: Marc S. Dreier, Amianna Stovall, of counsel.
Morgan, Lewis & Bockius LLP, New York, NY, for Defendant, By: Christopher P. Hall, John G. Moon, David G. Rizzo, of counsel.
Munger, Tolles & Olson LLP, Los Angeles, CA, for Defendant, By: Marc T.G. Dworsky, of counsel.
Plaintiff Nomura Securities International, Inc. ("Nomura") has moved for summary judgment pursuant to Rule 56 of the Federal Rules of Civil Procedure, and defendant E*Trade Securities, Inc. ("E*Trade") has cross-moved for partial summary judgment. Additionally, E*Trade moves to modify Magistrate Judge Michael H. Dolinger's May 20, 2003 Report and Recommendation (the "Report"), or in the alternative, for leave to amend its pleadings.
For the reasons set forth below, Nomura is granted partial summary judgment, and E*Trade's objections to the Dolinger Report are sustained in part. E*Trade is granted leave to amend its pleadings to add the affirmative defenses of illegality and fraudulent inducement and a fraud counterclaim, which is not compulsory. Discovery will be extended, if necessary, following a pretrial conference. Statements in the Dolinger Report will not be struck as "gratuitous."
This action commenced on October 22, 2001 when Nomura filed its complaint, and it was initially assigned to the Honorable Allen G. Schwartz. Nomura first sought a temporary restraining order and preliminary injunction, but on November 6, 2001, Nomura agreed to withdraw its motion for an injunction "in exchange for an understanding that discovery would be expedited, and that a merits determination of its claims would be rendered with some promptitude." (Report at 4.) Discovery was initially to be completed by February 1, 2002, and then extended to February 28, 2002, with expert discovery till March 18, 2002.
On February 15, 2002, E*Trade moved for leave to amend its answer and counterclaims, based on evidence uncovered through the limited discovery in this case and through third-party discovery from Deutsche Bank in a separate lawsuit, and for an extension of the discovery period. This motion was briefed before Magistrate Judge Dolinger.
In March 2002, the discovery period closed, and the parties moved for summary judgment in June 2002.
Based on its discovery, E*Trade, along with the SPIC Trustee of MJK Clearing, Inc. and broker-dealer Ferris, Baker, Watts, Inc. ("Ferris"), filed omnibus fraud complaints in the District of Minnesota in September 2002. All three suits include claims for securities fraud, RICO, and common law fraud. E*Trade and Ferris included Nomura as a defendant in the suit.
On October 18, 2002, Nomura sought a temporary restraining order and preliminary injunction from this Court to enjoin E*Trade from pursuing its Minnesota action against Nomura. Nomura argued that E*Trade's fraud-based claims were compulsory and could be brought only in the instant action. Nomura's motion was denied without prejudice on October 23, 2002, and E*Trade was asked to hold in abeyance its claim against Nomura in the District of Minnesota, pending resolution of the instant motions. This was upon the representation that "the time period will be limited" — "a couple of weeks" for the resolution of the motion to amend and "a couple of weeks" to decide the summary judgment motions.1 (Oct. 23, 2002 Hearing before Judge Schwartz at 23, 35.)
After Judge Schwartz's untimely death, on April 16, 2003, the case was reassigned to this Court. On May 20, 2003, Judge Dolinger issued his Report and Recommendation, denying E*Trade's motion to amend and reopen discovery for seven months. The summary judgment motions and E*Trade's objections to the Dolinger Report were heard and marked fully submitted on June 25, 2003.
Nomura is a corporation organized and existing under the laws of the State of New York, with a principal place of business located at 2 World Financial Center, Building B, New York, New York. Nomura has temporarily relocated its principal place of business to 25 Corporate Park South, Piscataway, New Jersey. Nomura conducts business as a registered broker-dealer within the meaning of the Securities and Exchange ACT of 1934, as amended (the "1934 Act").
E*Trade is a corporation organized and existing under the laws of the State of California, with a principal place of business located at 4500 Bohannon Drive, Menlo Park, California. E*Trade conducts business as a registered broker-dealer within the meaning of the 1934 Act.
Jurisdiction is proper, pursuant to 28 U.S.C. § 1332, as the parties are citizens of different states and the amount in controversy is in excess of $75,000.00 exclusive of interest and costs.
The facts are set forth based upon the parties' submissions and Judge Dolinger's Report and Recommendation.
Both Nomura and E*Trade are broker-dealers, who engage in the business of borrowing and lending securities. On or about March 16, 1999, Nomura and E*Trade entered into the standard industry Master Securities Loan Agreement ("MSLA"), which "sets forth the terms and conditions under which one party (`Lender') may, from time to time, lend to other party (`Borrower'), certain securities against a pledge of collateral."
Under the terms of the MSLA, the Borrower must secure the loan of any securities it borrows by providing the Lender with collateral equal to the full market value of the securities. (MSLA § 3.) The parties further agreed to mark the loans to market, so that as the market price of the borrowed securities fluctuates, adjustments are made in the amount of collateral posted. (MSLA § 8.1.) Additionally, the Borrower can return any borrowed securities and terminate the loan "on any Business Day by giving notice to the Lender and transferring the Loaned Securities to the Lender before the Cutoff Time on such Business Day. . . ." (MSLA § 5.) The Lender must then immediately return the Borrower's collateral. Id. Nomura and E*Trade specified in the MSLA that each is acting as principal on all transactions, thereunder, unless expressly stated otherwise in a specified written form. (MSLA § 9.4.)
Between April 30 and June 7, 2001, Nomura borrowed 2,455,000 shares of GenesisIntermedia, Inc. ("GENI") common stock shares from MJK Clearing, Inc. ("MJK"), a Minnesota broker-dealer. However, sometime between June 7 and June 21, Nomura informed Thomas Brooks ("Brooks"), who was then the manager of the Stock Loan Department at MJK, that Nomura needed to reduce its credit exposure with MJK and, therefore, needed to unwind the loan and have its cash collateral returned. Nomura was still prepared to borrow GENI shares, but only from a lender with more available credit than MJK. E*Trade was identified as such a candidate.
On June 21, 2001, MJK loaned the 2,455,000 GENI shares to E*Trade, and E*Trade, in turn, loaned the GENI shares to Nomura. Nomura, in exchange, paid E*Trade $41,735,000.00 in cash collateral. On September 21, 2001, as the price of GENI shares was declining, Nomura returned 805,900 of the borrowed GENI shares to E*Trade, and E*Trade returned the corresponding cash collateral to Nomura. Thus, Nomura remained with 1,649,100 GENI shares and E*Trade remained with $14,841,900 cash collateral — the equivalent of $9.00 per share, the market value of the stock at the time.
On September 25, 2001, the price of GENI shares dropped precipitously, and NASDAQ halted trading. GENI was worth $5.90 per share at the time. At the close of trading, Nomura marked its GENI shares down to $6.00 per share based on this last market price. E*Trade initially rejected the mark, but accepted it on September 27, 2001.
On September 26, 2001, MJK declared its insolvency and was placed into liquidation under the Securities Investor Protection Act. Nomura sought to return its remaining 1,649,100 GENI shares to E*Trade. E*Trade refused to take the shares and to release the remaining collateral, which then totaled nearly ten million dollars.
From October 15, 2001 to October 18, 2001, E*Trade attempted to mark the GENI shares up to $9.00 per share, although the market price had never risen above the $5.90 price when trading was halted on September 25. Nomura rejected these marks.
Nomura contends that the MSLA obligated E*Trade to accept its remaining GENI shares and return the collateral and that E*Trade's refusal to do so constituted a breach of contract.
In its original and amended answer, E*Trade responded that the MSLA did not apply to the GENI transaction with Nomura because E*Trade was merely facilitating a "run-through" or "pass-through" loan, a standard industry practice, between Nomura and MJK. Nomura alleged that the stock loan agreement was between MJK and Nomura, and E*Trade was MJK's agent, a mere intermediary. According to E*Trade, since MJK declared insolvency before Nomura sought to return its remaining GENI shares, E*Trade could refuse to process the transaction, and E*Trade did not have a duty to guarantee MJK's obligations.
E*Trade also asserted counterclaims for conversion, money had and received, and unjust enrichment against Nomura. These counterclaims were premised on Nomura having "marked to market" its remaining shares, a transaction that, because of the rapidly declining price of the GENI shares, resulted in a transfer of nearly five million dollars from E*Trade's Depository Trust Company ("DTC") in late September 2001. E*Trade contends that Nomura's action was improper because it knew that MJK was in the middle of financial collapse and would be unable to come up with the cash to reimburse E*Trade for the...
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