The opinion of the court was delivered by: Sidney H. Stein, U.S. District Judge.
This contract dispute focuses on the meaning and scope of a release of claims negotiated between Tadiran Communications Ltd. and Credit Suisse Securities (USA) LLC ("CSS"). Plaintiff Elbit Systems Ltd., Tadiran's successor, has sued defendant Credit Suisse Group ("Credit Suisse"), CSS's corporate parent, on claims of securities fraud, common law fraud, and unjust enrichment. Credit Suisse has now moved for summary judgment in its favor on the theory that the release signed by Tadiran extinguished Elbit's claims. Because that release was limited to "known" claims and because a genuine dispute exists about whether Tadiran knew of the alleged fraud, the Court denies Credit Suisse's motion.
Unless noted, the parties do not dispute the following facts.
Tadiran Communications Ltd. was an Israeli company that developed and sold radio equipment for military use. (Def.'s Local Civil Rule 56.1 Statement of Undisputed Facts ("Def.'s 56.1") ¶ 1; Pl.'s Local Civil Rule 56.1 Counterstatement of Undisputed Facts ("Pl.'s 56.1") ¶ 1.) Tadiran "merged with and into" plaintiff Elbit Systems, becoming its successor-in-interest in July 2008. (Compl. ¶ 23.)
Defendant Credit Suisse is a financial holding company with its principal place of business in Switzerland. (Def.'s 56.1 ¶ 4; Pl.'s 56.1 ¶ 4.) CSS, a wholly-owned subsidiary of Credit Suisse, is a registered broker-dealer. (Compl. ¶ 24; Oral Arg. Tr., Feb. 3, 2012.)
B. CSS placed unauthorized securities in Tadiran's account.
In 2004, Tadiran opened a brokerage account with CSS as part of its cash-management strategy and directed CSS to purchase auction rate securities ("ARS") that were backed by government guaranteed paper. (Def.'s 56.1 ¶¶ 5-10; Pl.'s 56.1 ¶¶ 5-10.) At some point, employees of either Credit Suisse or CSS began to purchase ARS that were backed by collateralized debt obligations ("CDO"), instead of being backed by government guaranteed paper. (Def.'s 56.1 ¶ 10; Pl.'s 56.1 ¶ 10.) CSS brokers sent Tadiran trade confirmations that omitted any reference to these securities as CDO-backed ARS. (See Confirmation Emails, Ex. 3 to Decl. of Elisabeth Genn dated April 18, 2011; Dep. of Matthew W. Gorman dated Feb. 1, 2011 at 65:6-11, Ex. 2 to Genn Decl.) At least once, however, CSS sent Tadiran a portfolio statement that included "CDO" in the description of certain ARS. (Ex. 9 to Decl. of Lawrence M. Barnes dated March 21, 2011.)
Tadiran first became aware of a problem with the securities in its brokerage account in the summer of 2007, "when it tried to liquidate its holdings." (Def.'s 56.1 ¶ 14; Pl.'s 56.1 ¶ 14.) By the time Tadiran attempted to do so, however, the market for ARS backed by CDOs "had collapsed and become illiquid." (Def.'s 56.1 ¶ 15; Pl.'s 56.1 ¶ 15.)
Because Tadiran's CFO, Ilan Pacholder, believed that Tadiran held ARS that were backed by government securities, he did not understand why Tadiran was unable to sell its ARS. (Def.'s 56.1 ¶ 15-19; Pl.'s 56.1 ¶¶ 15-19.) He therefore contacted Tadiran's broker-dealer, CSS. In response, CSS dispatched Michael Pease and Kevin Randick, directors in CSS's Corporate Cash Management group, to meet with Tadiran about its account. (Def.'s 56.1 ¶¶ 17-18; Pl.'s 56.1 ¶¶ 17-18.)
By September of 2007, Pachholder understood "that the investments were not what they were supposed to be," (Dep. of Ilan Pacholder dated Feb. 4, 2011 at 50:9-12, Ex. 1 to Genn Decl.), insofar as Tadiran had in fact purchased ARS backed by CDOs instead of ARS backed by government paper. (Def.'s 56.1 ¶ 20; Pl.'s 56.1 ¶ 20.) Importantly, the parties agree that "Tadiran gave CSS instructions to purchase ARS backed by government guaranteed paper," but that either Credit Suisse or CSS "purchased ARS backed by [CDOs]." (Def.'s 56.1 ¶ 10; Pl.'s 56.1 ¶ 10.) By the time Tadiran attempted to liquidate its holdings, "there were no buyers" in the market. (Pachholder Dep. at 51:14-15; Def.'s 56.1 ¶ 15; Pl.'s 56.1 ¶ 15.)
Matthew Gorman, a CSS Managing Director, wrote a Tadiran employee on September 4, 2007 to inform Tadiran that he had "decided to consolidate coverage of client accounts that hold [ARS] with Michael Pease." (Ex. 14 to Genn Decl.; Gorman Dep. at 50:4-23.) At the time, CSS had placed Tadiran's previous contacts, Julian Tzolov and Steven Butler "on administrative leave." (Gorman Dep. at 51:8-19; Pl.'s Local Civil Rule 56.1 Statement of Additional Material Facts ("Pl.'s Additional 56.1") ¶ 1.) Gorman admits that he did not share this information with Tadiran in his September 4 email, nor did he relay the fact that Tzolov and Butler had "misrepresented securities" to Tadiran. (Gorman Dep. at 50:25-51:7, 52:24; Ex. 14 to Genn Decl.) The only "factor" bearing on the personnel switch that Gorman provided in his September 4 email was "turmoil in the market." (Gorman Dep. at 52:16-19.)
CSS did, however, file public Form U5s for Tzolov and Butler. The Financial Industry Regulatory Authority ("FINRA") requires broker-dealers to file Form U5s to "terminate the registration of an individual" when a FINRA-registered employee departs the firm.*fn1 In these Form U5s, CSS indicated that Tzolov and Butler had departed the firm after being accused of "violating investment-related statutes, regulations, rules or industry standards of conduct." (Exs. 16 ¶ 7F(1) & 17 ¶ 7F(1) to Genn Decl.) But CSS marked "no" in response to the question of whether the employee departed after allegations of "fraud or the wrongful taking of property." (Exs. 16 ¶ 7F(2) & 17 ¶ 7F(2) to Genn Decl.)
C. CSS and Tadiran negotiated a settlement.
The parties then reached a resolution of their dispute. The resolution included a release of claims, which was negotiated, agreed upon, and fully executed. (Def.'s 56.1 ¶¶ 37-42; Pl.'s 56.1 ¶¶ 37-42.) On November 14, 2007, Tadiran executed the release and CSS then wired Tadiran the agreed upon amount of $10,383,203.92. (Def.'s 56.1 ¶¶ 41-42; Pl.'s 56.1 ¶¶ 41-42.)
The executed release reads in full as follows:
TO ALL WHOM THESE PRESENTS SHALL COME OR MAY ...