The opinion of the court was delivered by: Wood, U.S.D.J.
The Court is now presented with the question of which of two judgment creditors, Plaintiff Commodity Futures Trading Commission (the "CFTC"), or Intervenors Eric Migliorino, Rosa Migliorino, Gerardo Lordi, Maria Lordi, and Vincenzo Lordi (the "Migliorino Intervenors"), has priority to funds in the North Fork Bank account of Defendant AJR Capital Inc. ("AJR Capital").
This question comes before the Court as follows. In 2007, this Court entered default judgment in the instant case in favor of the CFTC, and against Alexander Efrosman ("Efrosman"), AJR Capital, and Century Maxim Fund, Inc. ("Century Maxim") (collectively "Defendants"). The Court ruled that Defendants had violated the Commodities Exchange Act ("CEA") by operating a fraudulent investing scheme involving foreign currency futures. The Court ruled that any remaining funds in AJR Capital's North Fork Bank account ("the funds") should be turned over to the CFTC, to be distributed pro rata among all defrauded investors, as restitution.
Following entry of judgment, the Migliorino Intervenors, five individual investors in Defendants' scheme, moved to intervene in this action, claiming that they had superior rights to the funds. The Migliorino Intervenors told the Court that they had independently sued AJR Capital in New Jersey state court, and that the New Jersey court had entered default judgment in their favor in 2005 -- approximately a year and a half before this Court entered its judgment for the CFTC. The Court permitted the Migliorino Intervenors to intervene in this action for the purpose of asserting their claim to the funds.
The Migliorino Intervenors now move for a judicial determination that they have priority to the funds, such that they may recover their losses in the entirety, or at minimum recover their attorneys' fees, before the CFTC distributes the funds pro rata among the victims of Defendants' fraud. Specifically, the Migliorino Intervenors argue that their rights are superior to the CFTC's because (1) this Court's judgment in favor of the CFTC is void for lack of jurisdiction; (2) the law of priority weighs in the Migliorino Intervenors' favor because they levied the funds before this Court entered judgment for the CFTC; and (3) equitable considerations weigh in the Migliorino Intervenors' favor because they have invested significant time and money in their effort to recover from Defendants.
The CFTC, which opposes any preferential payment to the Migliorino Intervenors and continues to seek a pro rata distribution of the funds in their entirety among all defrauded investors, disagrees with each of the Migliorino Intervenors' arguments. The CFTC maintains that (1) this Court's judgment in favor of the CFTC is not void, because this Court has subject matter jurisdiction over the action; (2) the law of priority weighs in the CFTC's favor because this Court froze all funds in AJR Capital's bank account before the Migliorino Intervenors executed their levy; and (3) equitable considerations weigh in favor of a pro rata distribution of the funds to all investors defrauded by Defendants.*fn1
For the reasons stated below, the Court disagrees with the Migliorino Intervenors. The Court finds that (1) its judgment in favor of the CFTC is not void for lack of jurisdiction; (2) it is unnecessary to reach the question of which party has legal priority to the funds; and (3) equitable considerations weigh in favor of a pro rata distribution of the funds to all defrauded investors. The Court DENIES the Migliorino Intervenors' motion to be accorded priority.
Both the instant case and the case filed by the Migliorino Intervenors in New Jersey state court arise from a fraudulent investment scheme. Defendants are the perpetrators of that scheme. Specifically, Efrosman is the individual who engineered the scheme, and AJR Capital and Century Maxim are New York corporations, created by Efrosman, for the purposes of putting the scheme into effect.
The CFTC is an independent federal agency, charged with protecting market users and the public from fraud, manipulation, and abusive practices related to the sale of commodity and financial futures and options.*fn2 The CFTC is authorized to bring enforcement actions against those who violate the CEA.
The Migliorino Intervenors and the Iatarola Intervenors are victims of Defendants' scheme. Defendants misappropriated $75,500 from the five Migliorino Intervenors, and in excess of $700,000 from the twenty Iatarola Intervenors.
B. Defendants' Fraudulent Investment Scheme
Between January 2004 and June 2005, Efrosman solicited more than $5,000,000 from approximately 110 unsophisticated retail investors, by promising to use the money to make investments on each customer's behalf.*fn3 Efrosman recruited prospective investors by telling them that he could secure high rates of return, and minimize risk, on their investments. He supported his claims with falsified account statements.
2. Use of North Fork Bank Accounts
Efrosman directed his customers to wire transfer or deposit their money, for the purposes of investment, into bank accounts at North Fork Bank in the names of AJR Capital and Century Maxim.*fn4 Investors' money was commingled in these accounts.
Throughout the course of his scheme, Efrosman provided investors with fraudulent account statements that reflected substantial returns on their investments. If a customer desired to withdraw her investment and its "profits," Efrosman paid that customer with the recently invested funds of other investors -- in effect, a Ponzi scheme.
Between July 2004 and May 2005, AJR Capital's North Fork Bank account received deposits and wire transfers totaling $4,922,934.54.
3. Nature of Transactions
There is substantial disagreement between the CFTC and the Migliorino Intervenors as to the nature of the transactions Efrosman offered to make on behalf of his customers. The Migliorino Intervenors contend that Efrosman and his agents made clear that all transactions he entered into would be "spot" market transactions, and not futures contracts.*fn5 In contrast, the CFTC maintains that the transactions Efrosman claimed he would make were actually futures contracts according to the CFTC's multi-factor totality of the circumstances test.
At some point in early June 2005, Efrosman fled the country. According to information obtained by the CFTC, Efrosman boarded a cruise ship in Key West, Florida on June 2, 2005. He has not been heard from since.
By the time Efrosman's flight was discovered, the AJR Capital account retained a balance of only $213,485.49. Bank records indicate that Efrosman never made any investments on his customers' behalf, but ...