The opinion of the court was delivered by: LEVAL
This is an action by the Receiver of Probber International Equities Corporation ("PIE") seeking a determination that certain properties also claimed by respondent Dr. Felix Shiffman are lawfully assets of PIE's estate.
I find that the Respondent Shiffman has established convincingly his right to the properties in question and direct that they be turned over to him.
The facts are as follows.
PIE which is at the center of the controversy was in December 1978 a commodities futures trading house, registered with the Commodity Futures Trading Commission ("CFTC"). Lloyd Probber owned all of its stock and was its sole officer and director. Probber, who drove a Rolls Royce and lived and dressed expensively, convinced a wealthy investor named Abraham Zion that PIE was a highly profitable venture and an attractive investment opportunity. In fact, as the result of serious irregularities in Probber's financial management, PIE's financial condition was disastrous.
Zion was a wealthy and sophisticated investor who had made a specialty of taking over troubled companies. In early January 1979 Zion obtained and examined PIE's books and records. PIE had been having difficulties with its bank, a midtown branch of Citibank. Zion, who had close relationship with Citibank's Riverdale branch, arranged with Probber's approval for PIE's account to be transferred to the books of the Riverdale branch, where Zion intended to monitor PIE's activities. Zion discovered large shortages in PIE's net capital position and in the segregated accounts PIE was required to maintain for its customers' funds under the governing CFTC rules. It appeared that Probber had withdrawn extensive PIE funds for personal use and unrelated business purposes.
Zion nonetheless continued to be interested in PIE as an investment opportunity.
Zion asked that PIE's accountants (Price, Waterhouse & Co.) and lawyers (Webster & Sheffield) be advised of the apparent deficiencies in PIE's accounts. On January 22 Webster & Sheffield, alarmed by this news, advised that PIE should cease all trading (with the exception of close-outs of positions), which was promptly done. The lawyers also advised that the situation would soon have to be reported to the CFTC.
Price Waterhouse inspected PIE's records the next day January 23. It advised Webster & Sheffield that the segregated accounts were short $ 160,000 and that the net capital of the firm was below CFTC requirements.
Probber gave assurances that the deficiencies would be promptly cured and went that evening to visit his friend Dr. Felix Shiffman.
Shiffman, a surgeon, was a social friend of Probber as well as a customer of PIE and had treated Probber as a doctor. Probber told Shiffman that PIE had earned a $ 2 million commission in Israel which would be received any day. Probber also told him that a substantial investor was going to invest in PIE, which would result in a large profit for Probber. He said the investor intended to act promptly but wanted PIE to show a more substantial capital. Probber asked Shiffman if he could lend cash or securities for a very short time, a month at the most. The securities could be placed in a safe deposit box under Shiffman's exclusive control and could be withdrawn by Shiffman at any time. He said that he would be rolling in money as the result of the new investment and would pay Shiffman a fee of .10% of the money or securities advanced. Probber said the investor had suggested that Probber obtain loans for a short time from friends to avoid the delays involved in negotiating with a bank.
Shiffman told Probber he did have such property and might be willing to do what Probber suggested provided Shiffman would be in sole control and could remove the property whenever he wished. Probber told Shiffman he would need to come open the safe deposit boxes in order to show the securities to PIE's accountant.
Shiffman meanwhile called his sister and a friend for advice. They warned him not to do this, saying that it sounded irregular, and warned that he, and probably others, might be defrauded. The friend advised him not to be an officer of the corporation. Shiffman then called Probber and asked for assurance that Shiffman would be doing nothing wrong in advancing the funds. Probber gave him assurance and emphasized that it was the investor, Zion, who had suggested the transaction and knew all about it. Probber told Shiffman he would not be an officer but would be named Financial Administrator of PIE, having sole access to the safe boxes.
The next morning Wednesday January 24, 1979, Shiffman took Probber to the Chemical Bank at 72nd Street and Columbus Ave., where Shiffman kept property in safe deposit boxes. Four new boxes were rented in the name of PIE, with corporate resolution forms showing that Felix Shiffman, Financial Administrator, would have sole access. Shiffman paid the rental fee and obtained assurance from the bank officer that he alone would have access. In the boxes Shiffman placed his property consisting of municipal bearer bonds in the face amount of $ 396,000, cash in the amount of $ 49,400 and a collection of gold coins thought to be worth about $ 30,000.
Later that day Probber called Shiffman and asked him to come back to the bank to allow PIE's accountant to observe the contents of the boxes. Shiffman went to the bank where he was joined by Probber and Gary Hirsch, an accountant employed by Price Waterhouse.
Outside Shiffman's presence and unknown to him, Probber had told Hirsch on the way to the bank that the contents of the boxes were Probber's own property which he was contributing to the corporation to cure the deficiencies. Probber explained Shiffman's presence by saying that he was a financial administrator of PIE.
In the presence of Probber and Shiffman, Hirsch inventoried the contents of the boxes. When the cash was found to come to slightly less than Shiffman had thought, Shiffman took $ 400 from his pocket and added it to the box.
After returning to his office, Hirsch called Bernard Carrey, PIE's lawyer at Webster & Sheffield to report what he had seen. Carrey then called the CFTC and arranged for a meeting the following morning. That evening Price Waterhouse advised Probber that the bonds and the coin collection would have to be converted into cash in order to satisfy PIE's deficiencies under the CFTC regulations. Probber authorized Carrey to represent to the CFTC that the bonds were being sold.
Probber then told Zion that he had borrowed, and did not own, the contents of the boxes. Zion advised Probber, in view of the urgent need for cash to satisfy CFTC requirements, to use the securities as ...