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S.E.C. v. CREDIT BANCORP

October 16, 2001

SECURITIES AND EXCHANGE COMMISSION, PLAINTIFF,
V.
CREDIT BANCORP, LTD., CREDIT BANCORP, INC., RICHARD JONATHAN BLECH, THOMAS MICHAEL RITTWEGER AND DOUGLAS C. BRANDON, DEFENDANTS.



The opinion of the court was delivered by: Sweet, District Judge.

OPINION

Prior Proceedings

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.

Facts

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.

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 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.*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 Tenant Account").

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 Jersey.

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 ...


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