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Citigroup Global Markets, Inc. v. VCG Special Opportunities Master Fund Limited

March 10, 2010

CITIGROUP GLOBAL MARKETS, INC., PLAINTIFF-APPELLEE,
v.
VCG SPECIAL OPPORTUNITIES MASTER FUND LIMITED, F/K/A CDO PLUS MASTER FUND LIMITED, DEFENDANT-APPELLANT.



SYLLABUS BY THE COURT

VCG Special Opportunities Master Fund Limited ("VCG") appeals from an order of the United States District Court for the Southern District of New York (Barbara S. Jones, Judge) granting plaintiff-appellee Citigroup Global Markets, Inc.'s ("CGMI") motion for a preliminary injunction and enjoining VCG from proceeding with an arbitration initiated against CGMI before the Financial Industry Regulatory Authority. VCG also appeals the district court's order denying its motion for reconsideration. We hold that this circuit's "serious questions" standard for the consideration of a motion for a preliminary injunction remains valid in the wake of recent Supreme Court opinions clarifying the requirements and burdens placed on a party seeking a preliminary injunction. We further hold that, in applying that standard to CGMI's motion, the district court did not abuse its discretion in granting the requested injunction. We therefore AFFIRM the district court's orders granting the preliminary injunction and denying VCG's motion for reconsideration.

AFFIRMED.

The opinion of the court was delivered by: John M. Walker, Jr., Circuit Judge

Argued: November 24, 2009

Before FEINBERG, WALKER, KATZMANN, Circuit Judges.

VCG Special Opportunities Master Fund Limited ("VCG") appeals from the November 12, 2008 order of the United States District Court for the Southern District of New York (Barbara S. Jones, Judge) granting the plaintiff-appellee Citigroup Global Markets, Inc.'s ("CGMI") motion for a preliminary injunction and enjoining VCG from proceeding with an arbitration initiated against CGMI before the Financial Industry Regulatory Authority ("FINRA"). VCG also appeals from the district court's May 29, 2009 order denying its motion for reconsideration of the preliminary injunction. Because we conclude that the "serious questions" standard for assessing a movant's likelihood of success on the merits remains valid in the wake of recent Supreme Court cases, and because neither the district court's assessment of the facts nor its application of the law supports a finding of abuse of discretion, we AFFIRM as to both orders.

BACKGROUND

On July 17, 2006, VCG, a hedge fund based on the Isle of Jersey, entered into a brokerage services agreement with CGMI. Under the agreement, CGMI was obligated to provide prime brokerage services by clearing and settling trades in fixed income securities for VCG. VCG then entered into a credit default swap agreement with Citibank, N.A. (Citibank) (a sister-affiliate of appellee CGMI under the corporate umbrella of Citigroup, Inc.). VCG alleges that it was a "customer" of CGMI, which allegedly acted as the middleman with respect to the series of transactions culminating in the credit default swap agreement with Citibank. After entering into the swap, Citibank eventually declared a writedown of the assets covered in its credit default swap agreement with VCG, triggering VCG's obligation to pay Citibank a total of $10,000,000.

VCG sued Citibank, seeking a declaration that, by declaring the writedown, Citibank had violated the terms of the parties' credit default swap agreement. The district court found in Citibank's favor and also found that VCG was in breach of the agreement by failing to fulfill its payment obligation. VCG Special Opportunities Master Fund Ltd. v. Citibank, N.A., 594 F. Supp. 2d 334 (S.D.N.Y. 2008), aff'd, No. 08-5707, 2009 WL 4576542 (2d Cir. Dec. 8, 2009).

In addition to litigating its claims against Citibank, VCG began arbitration proceedings against CGMI before the FINRA pursuant to FINRA Rule 12200.*fn1 In response, CGMI filed a complaint in the district court to permanently enjoin the arbitration and for a declaration that CGMI had no obligation to arbitrate with VCG regarding the claims submitted to the FINRA arbitrators. On June 20, 2008, CGMI moved for a temporary restraining order and preliminary injunction against the FINRA arbitration pending a final resolution of CGMI's claims. CGMI asserted that it was not a party to, and did not broker, the VCGCitibank credit default swap. Compl. ¶ 3. Specifically, CGMI argued that VCG was not a "customer" of CGMI for purposes of those transactions and, therefore, CGMI was under no obligation to arbitrate VCG's claims under the FINRA rules.

In opposition to the preliminary injunction motion, VCG submitted a declaration stating that "CGMI recommended and set the terms for" the credit default swap and that VCG's employees had "dealt with several CGMI representatives in connection with the transaction, but most often with Jeff Gapusan, Donald Qu[i]ntin, and Jaime Aldama." Wong Decl. ¶ 7.*fn2 The declaration further stated that "[t]he terms of the contract were negotiated directly with [a] CGMI employee, Jeff Gapusan, who acted as liaison for the trading desk at CGMI." Id. at ¶ 19; see also Gruber Decl., Ex. B (FINRA records listing the three men identified by Wong as the go-betweens on the Citibank deal as employees of CGMI).

In arguing that it had not acted as a middleman for the VCGCitibank credit default swap and that VCG was not its "customer," CGMI contended that the people identified by VCG as its CGMI contacts were acting as agents of Citibank rather than CGMI, though they were formally employed by CGMI at the time of the VCG-Citibank negotiations. Vogeli Decl. ¶ 6. CGMI also submitted a copy of VCG's initial disclosures, from VCG's action against Citibank, in which VCG had listed Jeff Gapusan and Donald Quintin as trading personnel employed by Citibank, not CGMI. Arffa Decl., Ex. 6.*fn3

On November 12, 2008, the district court granted CGMI's motion for a preliminary injunction. In granting the injunction, the district court applied this circuit's long-established standard for the entry of a preliminary injunction, under which the movant is required to show "'irreparable harm absent injunctive relief, and either a likelihood of success on the merits, or a serious question going to the merits to make them a fair ground for trial, with a balance of hardships tipping decidedly in plaintiff's favor.'" Citigroup Global Mkts. Inc. v. VCG Special Opportunities Master Fund Ltd., No. 08-cv-5520, 2008 WL 4891229, at *2 (S.D.N.Y. Nov. 12, 2008) (quoting Almontaser v. N.Y. City Dep't of Educ., 519 F.3d 505, 508 (2d Cir. 2008)). The district court held that CGMI had demonstrated a likelihood of irreparable harm, but had failed to make a showing of "probable success" on the merits based on its claim that there was no customer relationship between CGMI and VCG with respect to the credit default swap transactions. Id. at *2, *4. The district court found, however, that CGMI had provided evidence that raised "serious questions" as to whether VCG was in fact a customer of CGMI with respect to the swap transaction and granted the preliminary injunction on that basis. Id. at *5-*6.

The district court further noted that, while some prior cases have required arbitration under the FINRA rules for claims involving non-securities, those cases "dealt in large part with individual brokers' fraudulent conveyances or investments, where there is a strong policy argument favoring arbitration." Id. The district court concluded that, "in light of the undefined scope of Rule [12200's 'business activities' prerequisite and its application to cases not involving securities transactions,] and the unique set of facts before the Court," CGMI had presented legal and factual issues that made its assertions a "fair ground for litigation." Id. at *6. Finally, the district court found that the balance of hardships tipped decidedly in CGMI's favor given that an injunction would ...


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