The opinion of the court was delivered by: Sweet, District Judge.
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
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,
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
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.
The Shapiro FBO Account at Alliance Capital
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
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.
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.*fn1 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 GUST 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 such accounts, it is
Alliance's policy to honor an instruction to liquidate an
account, or to transfer shares in such an account, provided that
the designated broker-dealer supplies "(1) a written request
bearing a Medallion signature Guarantee, (2) a certified copy of
the corporate resolution confirming the authority of the officer
submitting the request within 30 days of Alliance's receipt, and
(3) a W-9 certification for each account to which a transfer is
being made if the tax identification number is different." Thus,
"the account [can] be redeemed without the signatures of the
Shapiros' and `based on the registration the owner of the
account . . . is Credit Bancorp.'" Alliance would not honor an
instruction to transfer or liquidate the Shapiro FBO account
from the Shapiros.
The Hoyak FBO Account at MFS
Prior to becoming involved with CBL, Jeff and Helen Hoyak had
several accounts at MFS Investment Management ("MFS"), a mutual
fund institution. One of these accounts was registered in the
name of JEFF HOYAK & HELEN HOYAKJT WROS*fn2 (the "Hoyak Joint
The CBL records in the possession of the Receiver do not
include a signed Trustee Engagement Letter or Credit Facility
Agreement for the Hoyaks. The Receiver's records do not include
a signed transfer instruction letter.
On May 10, 1999, MFS opened an account with the registration
CREDIT BANCORP LIMITED FBO JEFF HOYAK & HELEN HOYAK, and a
mailing address of CBL's offices in Geneva, Switzerland (the
"First Hoyak FBO Account"). All of the assets in the Hoyak Joint
Tenant Account, approximately $32,000 worth, were transferred
into the First Hoyak FBO Account. Subsequently, on August 24,
1999, all of the assets in the First Hoyak FBO Account were
transferred to a new account (the "Second Hoyak FBO Account").
This account also bore the registration CREDIT BANCORP LIMITED
FBO JEFF HOYAK & HELEN HOYAK, but had a different account number
and a mailing address of CBL's offices in Toms River, New
On June 18, 1999, MFS issued a certificate for all of the
assets in the First Hoyak FBO Account: 3,440 shares of MFS
Government Securities Fund B. The certificate appears to have
been redeposited as an identical number of shares were deposited
in the First Hoyak FBO Account on August 16, 1999.
On or about August 31, 1999, MFS received an instruction
letter from CBL, signed by defendant Richard Blech ("Blech").
The letter instructed MFS to "reregister all shares of the above
referenced fund into the name of Credit Bancorp Limited. Please
remove the language `for the benefit of Jeff Hoyak.'" The letter
also requested a transfer in kind to an account at SASI in the
name of Credit Suisse Private Banking, for the further credit of
CBL. CBL also sent another letter on September 14, 1999. This
letter, which was signed by Cynthia Craig of CBL's San Diego
office, attached a new instruction letter from Blech. The new
instruction letter contained the same requests to take the "for
the benefit of Jeff Hoyak" wording out of the registration on
the account, and to transfer the assets to an account at SASI,
but the letter now bore a signature guarantee. An IRS form W-8
and a CBL corporate resolution were also attached.
By letter dated September 16, 1999, MFS responded to Blech
that it was unable to process the transfers because CBL had not
provided the following documentation: (i) a corporate resolution
evidencing Blech's authority as President/CEO to authorize the
sale of the shares (along with a certification by the Secretary
of the corporation less than 60 days old); (ii) a new letter of
instruction signed by Blech, with signature guarantee; and (iii)
a corporate seal if required by state law. The letter from MFS
did not request a signature or letter of instruction from the
Hoyaks. The letter assured Blech that once the paperwork was in
order, "[t]he shares will be redeemed at the closing net asset
value of the fund on the day these items are received" and that
"[a] check for the proceeds will be mailed within seven days."
On September 22, 1999, MFS also sent another letter*fn3 to
CBL stating that the paperwork was still not in order because
MFS needed (i) "A letter of instruction, signed by an authorized
officer, clarifying the new nominee registration for [the]
account"; and (ii) "an extract from the bylaws or resolution
that specifies by name
and by title ...