S.E.C. v. Credit Bancorp, Ltd.

• Decision Date: 21 August 2003
• Docket Number: No. 99 CIV. 11395(RWS).,99 CIV. 11395(RWS).
• Citation: 279 F.Supp.2d 247
• 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

279 F.Supp.2d 247

SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. CREDIT BANCORP, LTD., Credit Bancorp, Inc., Richard Jonathan Blech, Thomas Michael Rittweger and Douglas C. Brandon, Defendants.

No. 99 CIV. 11395(RWS).

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

August 21, 2003.

Golenbock, Eiseman, Assor, Bell & Peskoe, New York, By David J. Eiseman, Esq., Of Counsel, for Carl H. Loewenson, Jr., Esq., Court-appointed Receiver for Credit Bancorp, Ltd. and affiliated entities.

Davis, Polk & Wardwell, New York, By James H.R. Windels, Of Counsel, for Intervenor Deutsche Bank Securities, Inc.

Wollmuth Maher & Deutsch LLP, New York, By Frederick R. Kessler, Of Counsel, Hall, Estill, Hardwick, Gable, Golden & Nelson, P.C., Tulsa, OK, By T. Lane Wilson, Of Counsel, for Intervenor Stephenson Equity Company.

OPINION

SWEET, District Judge.

Carl H. Loewenson Jr. Esq., as Court-appointed Receiver (the "Receiver") for Credit Bancorp, Ltd. and affiliated entities (individually and collectively, "CBL") has moved for an order (1) directing Deutsche Bank Securities, Inc. ("DBSI") and DB Alex Brown LLC ("DBAB") (collectively, "Deutsche Bank") to transfer the custody of the Receiver all assets transferred after August 11, 1999 into accounts maintained at Deutsche Bank in the name of CBL, (2) declaring unsecured all margin loans extended by Deutsche Bank after August 1999, in such accounts, as well as all interest that has accrued on such loans, and (3) directing Deutsche Bank to credit to an account designated by the Receiver certain proceeds realized from the tender of shares of Praegitzer Industries, Inc. ("Praegitzer").

Intervenor Deutsche Bank¹ moves simultaneously for (1) a declaration of the validity of its security interest in the 2,400,000 shares of Vintage Petroleum, Inc. ("Vintage") stock in the accounts of CBL at Deutsche Bank; and (2) authorization to sell the Vintage shares to satisfy the approximately $17.4 million in CBL's outstanding margin loans and interest, plus collection costs.

Intervenor Stephenson Equity Company ("SECO")² moves simultaneously with the Receiver and with Deutsche Bank for an order (1) directing Deutsche Bank to transfer to the custody of the Receiver all assets transferred into the CBL accounts after December 1, 1998, (2) declaring unsecured all margin loans extended by Deutsche Bank in the CBL accounts after December 1, 1998, as well as all interest that has accrued on such loans, and (3) directing Deutsche Bank to credit to the CBL accounts the proceeds previously received in connection with the tender offer of the Praegitzer shares.

For the following reasons, the motion of the Receiver is granted in part, the motion of Deutsche Bank is denied, and the motion of SECO is granted in part and denied in part.

PRIOR PROCEEDINGS

This action was initiated on November 17, 1999 by the plaintiff, the Securities and Exchange Commission (the "SEC"), to freeze the assets of CBL upon the allegations that Richard Jonathan Blech ("Blech") and others had engaged in a complicated securities fraud. The fraud, which was in effect a Ponzi scheme, affected over 200 customers with interests exceeding $200 million. An equity receivership was established on January 21, 2000.

Certain of the prior proceedings are described in previous opinions of this Court, familiarity with which is presumed. The following is a partial list of opinions of relevance to the present motion: SEC v. Credit Bancorp, Ltd., 2002 WL 1792053, (S.D.N.Y. Aug.2, 2002) ("Credit Bancorp V"); SEC v. Credit Bancorp, Ltd., 2001 WL 1658200, (S.D.N.Y. Dec.27, 2001) ("Credit Bancorp IV"); SEC v. Credit Bancorp, Ltd., 2000 WL 1752979 (S.D.N.Y. Nov.29, 2000) ("Credit Bancorp III"); SEC v. Credit Bancorp, Ltd., 124 F.Supp.2d 824 (S.D.N.Y.2000) ("Credit Bancorp II"); SEC v. Credit Bancorp, Ltd., 194 F.R.D. 457 (S.D.N.Y.2000) ("Credit Bancorp I"). In addition, the Second Circuit has issued two opinions in the case: SEC v. Credit Bancorp, Ltd., 297 F.3d 127 (2d Cir.2002) ("CBL II") and SEC v. Credit Bancorp, Ltd., 290 F.3d 80 (2d Cir.2002) ("CBL I").

Deutsche Bank moved on April 11, 2003 for an order declaring the validity of its security interest and for leave to sell its Vintage shares. The Receiver moved on April 14, 2003 for an order transferring certain securities to the Receiver, declaring certain of Deutsche Bank's margin loans unsecured, and directing Deutsche Bank to credit certain proceeds to an account designated by the Receiver. On May 2, 2003, SECO cross-moved for an order invalidating Deutsche Bank's asserted lien on assets held in CBL accounts and responding to the motions by Deutsche Bank and the Receiver. The Receiver submitted a brief in opposition to Deutsche Bank's motion and in further support of the Receiver's motion. Deutsche Bank submitted a brief on May 16, 2003 in opposition to the motions of the Receiver and SECO with respect to Deutsche Bank's liens. On June 20, 2003 the Court heard the testimony of Reindert Houben ("Houben"), who was an employee of Deutsche Bank at all times relevant to this motion. The Court heard the testimony of Blech on June 23, 2003, followed by oral argument on the motion. At that time the motion was deemed fully submitted.

FACTS

As part of its illegal activities, CBL wrongfully deposited customer-owned securities in its own name held by a variety of securities broker/dealers, including Deutsche Bank. The broker/dealers, including Deutsche Bank, then made margin loans to CBL, using as collateral the securities deposited in the accounts of the broker/dealers.

CBL's Margin Account at Deutsche Bank

In the summer of 1998, CBL approached Deutsche Bank and opened several accounts in which it deposited and traded securities. These accounts originated in the Geneva, Switzerland office of BT Alex. Brown ("BTAB"), Deutsche Bank's predecessor, through a BTAB broker named Reindert Houben. Houben had been contacted by a CBL trader named Basil Shoukry, whom Houben had met previously when Shoukry had applied for a position in the Geneva office of BTAB. One of the accounts opened by CBL at Deutsche Bank was a margin account in which CBL purchased securities using margin loans provided by Deutsche Bank (the "CBL Account.")

On September 15, 1998, Blech, on behalf of CBL, signed a margin agreement with Deutsche Bank which granted Deutsche Bank a security interest in all of the securities held in the CBL Account. The margin agreement granted Deutsche Bank discretion to sell "any or all" of the securities in the account, as selected by Deutsche Bank in its discretion, in order to satisfy CBL's margin debts. Windels Declaration Exhibit 2, ¶ 10. CBL further agreed "to pay the reasonable costs and expenses of collection" of its indebtedness "including any reasonable attorney's fees and costs." Id., ¶ 9.

After Deutsche Bank AG acquired Bankers Trust and its affiliates in June 1999, Deutsche Bank requested that customers of BTAB authorize the transfer of their accounts to Deutsche Bank Securities, Inc. CBL authorized the transfer of the CBL Account in a form executed on June 15, 1999, and signed a new customer agreement, governed by New York law.

The agreement granted Deutsche Bank a lien on all assets in CBL's accounts at Deutsche Bank and the discretion to select securities to be liquidated to enforce the security interest. See Windels Decl. Exh. 4 ¶ 3. CBL again agreed to reimburse Deutsche Bank for the "reasonable costs or expenses of collection of any debit balance and any unpaid deficiency in any of [its] accounts, including but not limited to attorneys' fees incurred and payable or paid by [Deutsche Bank]." Id., ¶ 6.

The account documents completed by Houben with respect to the CBL Account state that the CBL Account did not contain the assets of a third party. Houben testified that he took steps to assure himself the that the assets being traded by CBL belonged to CBL and not to third parties. Eiseman Decl. Exh. 50 at 140-41.

Houben also visited CBL's offices in Geneva, where he met with Blech. Houben testified that his observations of CBL's offices and his discussions with Blech were entirely consistent with his understanding that CBL was an investment vehicle exclusively for Blech's family. On a note which Houben alleges he wrote around the time he was first introduced to CBL, Houben notes that Blech "manages his own + father's money" and "not money on behalf of clients." Eiseman Decl. Exh. 4 (emphasis in original); Exh. 50 at 296-97. Blech, however, testified that he never told Houben that any of CBL's assets came from his father's wealth. (6/23/03 Tr. at 129-130).

The DCH Shares

On October 7, 1998, CBL transferred five DCH Technology ("DCH") share certificates into its account at CBL, representing 450,000 shares. See Windels Supp. Decl. Exh. 1. The share certificates stated that CBL was the "record holder" of the shares and were marked "Restricted," presumably under Rule 144.³ Id. Because the shares and were marked restricted, Deutsche Bank classified them in CBL's account as Type 1, i.e., Deutsche Bank would not view the shares as reliable collateral for margin loans to CBL because there was a risk that they could not be sold easily. See Windels Supp. Decl. Exh. 2; Hoddinott Dep. at 64-65.

On November 16, 1998, CBL faxed a letter to Houben and Keith Cummins, one of Houben's sales assistants, requesting them to deliver from the CBL Account the "five restricted DCH Technology certificates to the transfer agent with the instruction that they are to be re-registered in the name of Oxford International" and, following re-registration, returned to CBL at its offices in Toms River, New Jersey. Eiseman Decl. Exh. 19, at DB 1843. No evidence has been presented as to what Oxford is, or identifying Oxford's relationship, if any, to DCH, CBL, or the Blech family. The letter was provided to Gail Rosen, another of Houben's sales assistants, to process. Id. at DB 1843-444; Exh. 50 at 231, 243.

Rosen...