S.E.C. v. Credit Bancorp, Ltd.
| Decision Date | 16 October 2001 |
| Docket Number | No. 99 CIV. 11395(RWS).,99 CIV. 11395(RWS). |
| Citation | 168 F.Supp.2d 122 |
| Parties | SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. CREDIT BANCORP, LTD., Credit Bancorp, Inc., Richard Jonathan Blech, Thomas Michael Rittweger and Douglas C. Brandon, Defendants. |
| Court | U.S. District Court — Southern District of New York |
Securities and Exchange Commission by Thomas M. Melton, Salt Lake City, UT, for Plaintiff.
Securities and Exchange Commission by Robert Blackburn, New York City, Local Counsel.
Morrison & Foerster by Carl H. Loewenson, Receiver and Fiscal Agent, Oliver Metzger, Andrew J. Fields, New York City, for Receiver.
Szaferman, Lakind, Blumstein, Watter, Blader, Lehmann & Goldshore by Scott P. Borsack, Lawrenceville, NJ, for Leonid and Bella Shapiro.
Sheldon A. Weiss, Mountainside, NJ, for Lorraine Jankowski.
Carl Loewenson Jr. (the "Receiver"), as receiver for Credit Bancorp, Ltd. and its affiliated entities ("CBL"), has moved this Court for an order allowing certain customer accounts held by CBL "for the benefit of" certain of its customers (the "FBO Accounts") to be treated similarly to all other CBL customer accounts in order to implement the Plan of Partial Distribution approved on November 29, 2001. SEC v. Credit Bancorp Ltd., 2000 WL 1752979 (S.D.N.Y.). The motion is opposed by two of the holders of such F.B.O. accounts — Lorraine Jankowski ("Jankowski"), and Leonid and Bella Shapiro (the "Shapiros"). Because title to these accounts was in the hands of CBL and the inclusion of "FBO" and a customer's name in the registration of the account did not materially affect CBL's ability to use the FBO Accounts as part of CBL's Ponzi scheme, the accounts are to be treated the same as the other CBL customer accounts and the motion of the Receiver is granted.
Certain of the prior proceedings are described in previous opinions of this Court, familiarity with which is presumed. See SEC v. Credit Bancorp, Ltd., 194 F.R.D. 457; SEC v. Credit Bancorp, Ltd., 93 F.Supp.2d 475 (S.D.N.Y.2000); SEC v. Credit Bancorp, Ltd., 96 F.Supp.2d 357 (S.D.N.Y.2000); SEC v. Credit Bancorp, Ltd. 103 F.Supp.2d 223; SEC v. Credit Bancorp, Ltd., 109 F.Supp.2d 142 (S.D.N.Y.2000); SEC v. Credit Bancorp, Ltd., No. 99 Civ. 11395, 2000 WL 968010 (S.D.N.Y. July 12, 2000); SEC v. Credit Bancorp, Ltd., 194 F.R.D. 469 (S.D.N.Y. 2000); SEC v. Credit Bancorp, Ltd., 2000 WL 1170136.
On November 29, 2000, this Court approved a plan of partial distribution which is in essence a pro rata return of customer-deposited property of the CBL customers, either in the form of deposited property, i.e. securities, or in the form of cash or replacement securities. See SEC v. Credit Bancorp Ltd., 2000 WL 1752979 (S.D.N.Y.); SEC v. Credit Bancorp Ltd., 129 F.Supp.2d 259 (S.D.N.Y. Jan. 19, 2001); Orders of January 19, 2001 and May 16, 2001.
In order to effectuate that plan, the Receiver now seeks a declaration that the FBO accounts, as described more fully below, may be treated the same as other CBL customer accounts. The four FBO accounts are held by Ms. Jankowski, the Shapiros, Jeff and Helen Hoyak, and Rose Kocinski. The motion was marked fully submitted on June 27, 2001.
There is no genuine dispute as to the facts relevant to this opinion.
In the process of marshalling the assets of CBL, the Receiver in this case has located numerous accounts at financial institutions in the United States and Europe. Almost all of these accounts are registered in the name of "Credit Bancorp" or some variation thereof. However, the Receiver has identified four accounts that are registered in the name of Credit Bancorp (or some variation thereof) with the designation "FBO" (meaning "for the benefit of") and then the name of one of CBL's customers. These accounts have previously been brought to the Court's attention. See SEC v. Credit Bancorp, Ltd. et al., 99 Civ. 11395, 2000 WL 1752979, at *10 n. 8 (S.D.N.Y. Nov. 29, 2000).
Leonid and Bella Shapiro, Jeff and Helen Hoyak, Lorraine Jankowski and Rose Kocinski had accounts at various mutual funds prior to their involvement with CBL. Each of these customers then entered into an agreement with CBL and instructed the mutual fund with which they had an account to create a new account in the name of "CBL" or some variation thereof, followed by "FBO," meaning "for the benefit of," followed by the customer's name.
Unbeknownst to these customers, CBL then attempted to transfer the assets in these accounts to other accounts that were in the name of CBL alone (i.e., accounts that lacked "FBO" and the customer's name). These attempts failed, however, because CBL supplied the mutual funds with improper paperwork. CBL was quite capable, however, of providing the proper paperwork, and in fact successfully transferred other accounts that were registered at mutual funds in the name of "CBL FBO [customer]."
The CBL FBO accounts at issue in this motion were frozen pursuant to the asset freeze entered in this case, and remain open and frozen to this day.
Prior to becoming involved with CBL, Leonid and Bell Shapiro had an account at Alliance Capital ("Alliance"), a mutual fund (the "Shapiro Joint Tenant Account"), and the mailing address was the Shapiros' mailing address in Lawrenceville, New Jersey.
On or about March 27, 1999, the Shapiros executed a standard CBL Credit Facility Agreement and Trustee Engagement Letter. They also received from CBL and executed a transfer instruction letter and a blank stock power. The transfer instruction letter, which was dated March 25, 1999, instructed Alliance to re-register all of the shares in the Shapiro Joint Tenant Account "into CBL's name for the benefit of Leonid and Bella Shapiro," and to put the shares in the mutual fund in certificate form and mail them to defendant Thomas Rittweger ("Rittweger") at CBL.
On April 8, 1999, Alliance opened a new account with the registration CREDIT BANCORP CUST FBO LEONID & BELLA SHAPIRO (the "Shapiro FBO account"). Alliance transferred 35,542.7670 shares of Alliance Municipal Income Fund II, worth $372,488.20 at the time, from the Shapiro Joint Tenant Account into the Shapiro FBO account.
CBL attempted to have the assets in the account transferred to a non-FBO account in the name of CBL, but the attempt failed. Pursuant to the transfer instruction letter that the Shapiros had executed, Alliance issued a certificate on April 21, 1999, representing shares in the municipal bond fund held in the Shapiro FBO account, and apparently sent the certificate to CBL. The certificate was in the name of CREDIT BANCORP CUST FBO LEONID & BELLA SHAPIRO. On or about May 6, 1999, the certificate came back to Alliance Fund Services with a letter from Swiss American Securities Inc. ("SASI") requesting that Alliance transfer the shares held in the Shapiro FBO account (and represented by the certificate) to Sema & Co. at a New York address. On May 12, 1999, Alliance responded with a letter stating that it could not effect the transfer without (i) a letter of instruction from the current custodian, Credit Bancorp, with a medallion-guaranteed signature of an authorized signer, and (ii) a certified copy of a corporate resolution confirming the authority of the officer(s) executing the stock power with a guaranteed signature. The letter did not request an instruction letter from the Shapiros, nor did it request that the Shapiros' signatures accompany any request for transfer of assets out of the account.
Because the mailing address on the Shapiro FBO account was the Shapiros' home address, Alliance's response letter was sent to the Shapiros' home address. Confused because they had not seen the SASI letter to which the Alliance letter was responding, and concerned because they had not requested any transfers in the account, the Shapiros called their account representative at Alliance who told them not to worry about it. The Shapiros did nothing further. Alliance eventually cancelled the certificate, and redeposited the shares in the Shapiro FBO account.
One exchange was made within the account. On or about October 19, 1999, the Shapiros executed a form on which they requested that their shares in the Alliance New Jersey Municipal Bond Fund be liquidated and the resulting funds be reinvested in a money-market account.1 The request was apparently sent to defendant Douglas Brandon ("Brandon"), who forwarded it to Rittweger with the handwritten instruction: "Please execute trade as instructed below." It appears, however, that Alliance did not execute the trade because on October 21 the Shapiros' broker at Pacvest, Bruce Butler ("Butler"), sent a fax to Brandon stating that the trade request "hit up at Alliance" on the 21st, but that "Alliance canceled the request." The fax also states that the "[t]he reason the exchange request was cancelled is because the account is (apparently) set up to accept orders from either the owner (Leonid/Bella Shapiro) or the broker of record (Bruce Butler) only." Butler then states that he gave the authorization for the exchange by telephone. Alliance's records show that a telephone exchange was executed within the Shapiro FBO account on October 21, 1999.
At some point between the opening of the account and the SEC's initiation of this litigation, the Shapiros received a "custodial dividend" from CBL of $3,703.03. The Shapiros have offered to repay this dividend, provided that they can regain control of the account. The account at Alliance remains open today with the registration CREDIT BANCORP CUST FBO LEONID & BELLA SHAPIRO. The account contains approximately $370,000 worth of shares in a mutual fund. The account does not have a margin lien, and statements for the account do not reflect any withdrawals from the account.
Alliance considers the Shapiro FBO account to be a "Broker/Dealer Custodial" account. The designated broker-dealer for the Shapiro FBO account is CBL. With...
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S.E.C. v. Credit Bancorp, Ltd., 99 Civ. 11395(RWS).
...2000 WL 1752979 (S.D.N.Y. Nov. 29, 2000); S.E.C. v. Credit Bancorp, Ltd., 129 F.Supp.2d 259 (S.D.N.Y.2001); S.E.C. v. Credit Bancorp, Ltd., 168 F.Supp.2d 122 (S.D.N.Y.2001); Orders of January 19, 2001 and May 16, 2001. The approval of the plan of partial distribution was affirmed by the Sec......