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Morgan Stanley & Co, Inc. v. Seghers

October 8, 2010


The opinion of the court was delivered by: Denise Cote, District Judge


Plaintiff Morgan Stanley & Co., Inc. ("Morgan Stanley") seeks a preliminary injunction enjoining the pro se defendant, Conrad P. Seghers ("Seghers"), from pursuing an arbitration action against Morgan Stanley before the Financial Industry Regulatory Authority ("FINRA") in Texas ("the Texas Arbitration"). For the following reasons, the motion is granted.


Morgan Stanley and Seghers have been fighting this legal battle for approximately nine years. In 1999, several hedge funds and related entities run by Seghers and his associates opened accounts in Morgan Stanley's Burbank, California branch. In March 2001, Seghers and his partners accused Morgan Stanley of committing serious errors related to how activity in the funds' accounts was reflected on account statements. They blamed these errors for large losses in the funds' value. In July 2001, Seghers transferred all of the assets in the funds' accounts to a different bank and the accounts were closed. On August 1, 2001, Seghers's attorney wrote Morgan Stanley a letter accusing the bank of making serious errors in handling the accounts and demanding damages of "at least $35 million."*fn1

A. Texas State Court Actions

In December 2001, a major investor in Seghers's hedge funds sued him, his business partners, and the funds in Texas state court for fraud. In August 2002, the Texas court appointed a receiver over two of the funds, which gave the receiver legal authority to maintain suit on behalf of those funds. Several of the funds, including those in receivership, sued Morgan Stanley in Texas state court in mid-2002, and the dispute was compelled to arbitration before the National Association of Securities Dealers ("NASD"). Morgan Stanley and the funds reached a settlement agreement in April 2006.*fn2

B. 2006 SDNY Action

On June 16, 2006, Seghers filed the 2006 SDNY Action against Morgan Stanley.*fn3 In his second amended complaint, he alleged one count of fraud against Morgan Stanley for knowingly and falsely representing that all trades in the funds' accounts were properly placed in accordance with Seghers's instructions; that errors in the account statements were merely errors in the statements, and not in the underlying transactions; and that the value of the funds' assets as reported by Morgan Stanley was correct. Seghers sought $35 million in consequential damages from the fraud. The second count in the second amended complaint alleged destruction of Seghers's business, name and reputation, for which he sought damages of $30 million.*fn4 Morgan Stanley moved to dismiss the second amended complaint on the ground that, inter alia, Seghers's claims were barred by the statute of limitations.

In an Opinion and Order dated May 10, 2007, the Honorable Gerard E. Lynch granted Morgan Stanley's motion to dismiss, finding that Seghers's claims were time-barred. The court applied Texas's four-year statute of limitations to the fraud claim. 2006 SDNY Action, 2007 WL 1404434, at *3. Applying Texas law, the court explained that the four-year period began to run when a plaintiff learned of "a wrongful injury, or of facts that should lead to an investigation." Id. at *4 (citation omitted). The court found that Seghers's August 1, 2001 letter to Morgan Stanley demonstrated that he had sufficient knowledge as of that date to cause him to begin investigating his claim against Morgan Stanley. Id. Judge Lynch found that Seghers's argument that he had not learned of the specific details of the fraud until 2003 or 2004 was "irrelevant" to the statute of limitations analysis because he did know the general cause of his injury in August 2001. Id.

The court also held that the statute of limitations under Texas law was not tolled because Seghers could not demonstrate that the fraud was either "inherently unknowable" or fraudulently concealed from him. Id. at *5 (citation omitted). In fact, Seghers had alleged in his complaint that he had actual knowledge of the fraudulent activity starting in 2001.*fn5 Id.

The second count of the complaint, for intentional destruction of Seghers's business, name, and reputation, was also dismissed as time-barred. The claim was construed as a defamation claim, which is subject to a one-year statute of limitations. Seghers did not dispute that the alleged defamation had occurred more than one year prior to his filing of the lawsuit. Id. at *8. Judgment was entered on May 11, 2007. Seghers, who was represented by counsel in the 2006 SDNY Action, did not appeal.

C. The IHO Arbitration

In June 2007, Integral Hedging Offshore, Ltd. ("IHO"), one of the funds that Seghers founded and whose assets had been traded through the accounts at Morgan Stanley, filed an arbitration action against Morgan Stanley before the NASD. The statement of claim alleged fraud and breach of contract based on the same facts as the 2006 SDNY Action ("IHO Arbitration"). IHO was represented by the same law firm that represented Seghers in the 2006 SDNY Action and the statement of claim in the IHO Arbitration tracked the complaints in the 2006 SDNY Action closely. On August 1, 2007, Morgan Stanley successfully petitioned the New York Supreme Court, New York County to permanently stay and dismiss the IHO Arbitration on the ground that IHO's ...

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