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FIRST INTERREGIONAL EQUITY CORP. v. HAUGHTON

January 24, 1994

FIRST INTERREGIONAL EQUITY CORPORATION, a New Jersey Corporation, Plaintiff,
v.
GABRIEL F. HAUGHTON, an individual, GERALD H. CAHILL, an individual, VICTOR LOMBARDI, an individual, STANLEY SCHWARTZ, an individual, MERLIN BAINES & CO., INC., a Delaware Corporation, OTRA CLEARING, INC., a wholly-owned subsidiary of OTRA SECURITIES GROUP, INC., a Delaware Corporation, JOHN WHITESIDE, an individual, HASSAN GROWNEY CO., formerly doing business as CASTLETON-RHODES, INC., a New York Corporation, GATEWAY BANK, a Connecticut Corporation, RAYMOND T. BOGERT, an individual, JULES LIPOW, an individual, and WARREN SCHREIBER, an individual, Defendants. In the Matter of the Arbitration Between FIRST INTERREGIONAL EQUITY CORPORATION, Claimant, v. OTRA CLEARING, INC., now known as REYNOLDS KENDRICK STRATTON, INC., WILLIAM R. STRATTON, DAVID PHILLIPS and JOHN WHITESIDE, Respondents.


SWEET


The opinion of the court was delivered by: ROBERT W. SWEET

Sweet, D.J.

 Respondents OTRA Clearing, Inc., John Whiteside, William Stratton, and David Phillips (collectively "OTRA") have moved pursuant to 9 U.S.C. § 10 to vacate an arbitration award entered June 8, 1993 by an arbitrator appointed by the National Association of Securities Dealers, Inc. ("NASD") in the NASD arbitration styled First Interregional Equity Corp. v. OTRA Clearing, et.al., Case Number 92-02159. Claimant First Interregional Equity Corporation ("FIEC") has cross-petitioned pursuant to 9 U.S.C. § 9 for orders confirming the award, directing that judgment be entered upon the award against the OTRA respondents, and granting costs. For the reasons that follow, OTRA'S petition to vacate the award is denied; FIEC's petition for orders confirming the award and directing that judgment be entered upon the award is granted with interest from the date of the award; and FIEC's claim for costs is denied.

 The Parties

 The parties, prior proceedings, and facts in this case, described briefly below, have been thoroughly discussed in prior opinions of this Court, familiarity with which is assumed. See 1992 U.S. Dist. LEXIS 6281 (S.D.N.Y. 1992); 805 F. Supp. 196 (S.D.N.Y. 1992); 1993 U.S. Dist. LEXIS 12813 (S.D.N.Y. 1993).

 FIEC is a New Jersey corporation with its principal place of business in Short Hills, New Jersey. It is a broker-dealer licensed by the Securities Exchange Commission and is a member of NASD.

 Respondent OTRA Clearing, Inc. ("OTRA"), a wholly-owned subsidiary of OTRA Securities Group, Inc., a Delaware corporation, is a member of NASD. Respondents Whiteside, Stratton, and Phillips are officers or former officers of OTRA.

 Prior Proceedings

 FIEC filed its first Complaint, alleging securities fraud, on December 28, 1990, but did not serve any of the Defendants at that time. It filed its First Amended Complaint on April 16, 1991.

 The present motions were filed on July 16, 1993, and argument was heard upon them on September 15, 1993. On September 27, 1993, attorneys for FIEC submitted by letter to the court copies of two cases, Neuberger & Berman v. Donaldson, Lufkin & Jenrette Sec. Corp., No. 16853/91 (N.Y. Sup. Ct. 1991), and Wing v. J.C. Bradford & Co., 678 F. Supp. 622 (N.D. Miss. 1987). Respondents, by their attorneys, submitted a memorandum of law in response to FIEC's September 27 letter on September 30, 1993. This motion was considered fully submitted as of September 30, 1993.

 Facts

 The Defendants are alleged to have participated in a scheme to defraud FIEC involving the manipulation the price of shares of Merlin Baines common stock, a "penny stock." The facts of the alleged scheme were more fully stated in the prior opinions, but for clarity's sake a certain amount of repetition is necessary.

 On December 13, 1989, FIEC's representative Lawrence Doherty ("Doherty") allegedly received a phone call from one Victor Lombardi in which Lombardi stated that he and a number of other persons intended to execute a trade under SEC Rule 144, 17 C.F.R. § 230.144. *fn1" Doherty told Lombardi that he would not execute the trade until certain required Rule 144 paperwork was complete.

 Lombardi called Doherty again on December 18, 1989, to discuss this paperwork further, and to introduce one Gerald H. Cahill, whom he described as his business partner, to Doherty. The following day, FIEC received restricted stock certificates, Merlin Baines's 10K and 10Q reports, account information, and other Rule 144 paperwork from the shareholders. FIEC first learned that the security involved was Merlin Baines common at that time.

 On December 20, 1989, Doherty told Cahill and Lombardi that FIEC needed legal opinions stating that the stock being offered complied with Rule 144. Cahill and one Stanley Schwartz, who was identified as Merlin Baines's corporate counsel, called Doherty and assured him that legal opinions would be delivered that afternoon. Later that day, Schwartz FAXed a single legal opinion letter to Doherty. Doherty, in turn, sent the letter to Alex Brown & Sons, FIEC's clearing broker. Alex Brown rejected the letter, informing FIEC that a group letter was not appropriate, but instead that a separate Rule 144 legal opinion letter was required from each individual shareholder who was selling stock. Doherty called Schwartz and told him of this development.

 On December 21, 1989, FIEC received FAX copies of additional Rule 144-related paperwork. Believing the paperwork to be in order, FIEC sold 2,100,000 shares of Merlin Baines stock at $ 0.02625 per share and 588,000 shares at $ 0.00105 per share on December 21.

 On December 22, 1989 Doherty informed Schwartz and Cahill that original copies of the opinion letters had to be sent to Alex Brown by December 28, the settlement date. Schwartz and Cahill assured Doherty that they would send the letters to FIEC immediately, though by December 27, 1989, FIEC still had not received the letters.

 On January 8, 1990, Alex Brown notified FIEC that OTRA had issued an intent to "buy-in" the shares sold by FIEC on December 21. OTRA was allegedly acting as an agent for the purchaser of the stock and issued the notice because FIEC could not deliver unrestricted shares without original copies of the legal opinion letters. Upon learning this, Doherty immediately telephoned Lombardi, Schwartz, and one Jules Lipow and told them that the opinion letters were needed to avoid the buy-in. Doherty was allegedly assured that FIEC would receive the letters before the buy-in was executed.

 This apparently never happened. FIEC asked OTRA to delay the buy-in pending receipt of the opinions. There was evidence at the NASD hearing to the effect that industry practice called for OTRA to give FIEC a brief extension of time.

 Alex Brown notified FIEC that OTRA bought-in 700,000 shares of Merlin Baines at $ 0.50 per share. FIEC paid Alex Brown $ 350,000 to satisfy the buy-in. FIEC alleged at the NASD hearing that OTRA shared its profits from the buy-in with others who, FIEC claims, participated with OTRA in the ...


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