United States District Court, S.D. New York
[Copyrighted Material Omitted]
[Copyrighted Material Omitted]
[Copyrighted Material Omitted]
Michael T. Brody, Jenner & Block LLP, Chicago, IL, Katya T.P. Jestin, Brian Jason Fischer, Elizabeth Austin Edmondson, Jenner & Block LLP, New York, NY, for Plaintiff.
Andrew L. Frey, Mark Hanchet, Mayer Brown LLP, New York, NY, Michele Odorizzi, Mayer Brown LLP, Chicago, IL, for Defendant.
OPINION & ORDER
SIDNEY H. STEIN, District Judge.
This securities fraud action hinges on the presence of an agency relationship between a broker-dealer and its corporate parent. Plaintiff Elbit Systems Ltd. has sued defendant Credit Suisse Group (" CSG" ) for securities fraud, aiding and abetting common law fraud, and unjust enrichment. Elbit seeks to hold CSG liable for the conduct of two brokers at its subsidiary, Credit Suisse Securities (USA) LLC (" CSS" ). CSG has now moved to dismiss the Complaint on the theory that, in essence, Elbit should have sued CSS directly. To this end, CSG contends that it is not a " control person" of CSS, nor is CSS its agent. Because Elbit has adequately alleged that CSS acted with actual authority as CSG's agent, however, the Court denies CSG's motion to dismiss.
The following facts are as alleged in the Complaint and are taken as true solely for the purposes of this motion.
A. The parties
Plaintiff Elbit Systems Ltd. is a publicly-traded Israeli defense electronics corporation that is the successor-in-interest to Tadiran Communications Ltd.  (Compl. ¶¶ 22-23.) CSG is a major global banking institution with six primary offices, including one in New York City. CSG is also the ultimate corporate parent of CSS, a broker-dealer. ( Id. ¶ 24.) CSG has three " global divisions," including Private Banking. ( Id. ¶ 25.) The Private Banking division includes the Corporate Cash Management Group. ( Id. ) Notwithstanding the distinction between CSG and CSS, Elbit conflates the two entities by referring to them both simply as " Credit Suisse." ( See id. ¶ 1.) Certain uses of " Credit Suisse" reflect the business or marketing choices of CSS or CSG. Others reflect Elbit's pleading strategy.
B. The alleged fraud
Tadiran opened an account with either CSS or CSG after a sales pitch by " a broker from Credit Suisse's Corporate Cash Management Group." (Compl. ¶ 26.) The initial written presentations made to Tadiran bore the " Credit Suisse" name and the CSG logo. ( Id. ¶ 77(d).) The broker advertised investments in auction rate securities (ARS) that would be " safe, liquid, and guaranteed by the United States government." ( Id. ¶ 27.) The broker
never mentioned that ARS auctions could fail and instead represented that " investors could freely liquidate their holdings." ( Id. ) The broker did not mention collateralized debt obligations (" CDOs" ) or credit-linked note (" CLN" ) securities. ( Id. )
For its part, Tadiran told the unidentified CSS or CSG representative that " liquidity and capital preservation were critical" and that it would accept " a lower yield" on its investments in exchange. ( Id. ¶ 28.) The representative stated that ARS offered Tadiran " a very liquid marketplace" and " no fluctuation in principal value." ( Id. ¶ 27.) Persuaded, Tadiran created a Corporate Cash Management account, selected the " most conservative of the five investment objectives" ( id. ¶ 28), and transferred $31,000,000 to the account ( id. ¶ 30).
Initially, " Credit Suisse" followed Tadiran's instructions and purchased primarily ARS backed by federally guaranteed student loans. Beginning in early 2007, however, either CSG or CSS began to replace ARS backed by federally guaranteed student loans with ARS backed by CDO or CLN securities. ( Id. ¶ 34.) The cash managers purchased these securities even though Tadiran had allegedly " explicitly declined" CSS's or CSG's offer to discuss CDOs because Tadiran " had determined that CDOs carried an unacceptable degree of risk." (Compl. ¶ 35.) Nonetheless, by late July 2007, Tadiran's account contained " the very worst ARS on the market." ( Id. ¶ 37.)
Neither CSS nor CSG ever disclosed that one of them had shifted Tadiran's investments away from ARS backed by federally guaranteed student loans to ARS backed by CDOs and CLNs. Instead, Tadiran's brokers sent " doctored email confirmations" ( id. ¶ 36) and inventory listings to Tadiran " from which the term ‘ CDO’ was purposefully omitted and replaced with the term, ‘ Funding’ " ( id. ¶ 43). CSS or CSG also " deliberately concealed the fraud." ( Id. ¶ 36.) Neither CSG nor CSS ever sent " prospectuses and product information" concerning the securities in Tadiran's account. ( Id. ¶ 51.) Neither CSG nor CSS ever provided Tadiran with access to " daily, real-time online information" about its holdings. ( Id. ¶ 54.)
The auctions for the securities in Tadiran's account began to fail in August 2007. (Compl. ¶ 38.) Neither CSS nor CSG alerted Tadiran to the failed auctions. Instead, Tadiran's brokers increased Tadiran's holdings of " toxic assets" after the auctions first failed-transferring at least one $1.95 million credit-linked note from another customer's account to Tadiran's account. ( Id. ) The note failed at auction within a matter of days.
Tadiran discovered that it held risky CDO— and CLN-backed securities only after the market for such securities had begun to collapse. ( Id. ¶¶ 38-39.) Tadiran instructed its brokers to liquidate its entire portfolio " once ARS auctions began to fail in August 2007." ( Id. ¶ 41.) CSS or CSG then sold everything other than CDO— and CLN-backed securities. Those securities could not be sold and remain unsold, at least as of the filing of the Complaint. ( Id. ¶ 41.) In the end, the losses in Elbit's Corporate Cash Management account totaled nearly $16 million. ( Id. ¶ 1.)
C. The cover-up
Elbit further contends that the " auction failures ... did not mark the end of Credit Suisse's fraudulent scheme." ( Id. ¶ 65.) Rather, the scheme continued as a " cover up" designed to " conceal the fraudulent scheme as a whole" and " to blame [Corporate Cash Management] clients for what had happened." ( Id. ¶¶ 65-66.)
For example, CSS or CSG " continued to misrepresent the securities to Tadiran and other victims." ( Id. ¶ 66.) CSS or CSG also " misrepresented to Tadiran the whereabouts of the Corporate Cash Management Group directors who had handed the account," saying they were busy or away, when in fact they had been " placed on administrative leave owing to the investigation of their fraudulent sales practices." ( Id. ¶ 67.) At the end of August 2007, Matthew Gorman, head of CSS's New York office, contacted Tadiran to assure it that " the security was merely experiencing temporary illiquidity and was likely to retain its full value." ( Id. ¶ 68.) Gorman shortly thereafter informed Tadiran that its account would no longer be handled by its former brokers, Julian Tzolov and Eric Butler, but would instead be handled by " one of our most experienced cash managers" because of the " turmoil in the market." ( Id. ¶ 69 (quotation marks omitted).)
Gorman's statement allegedly was misleading. According to the Complaint, Tzolov and Butler had departed " Credit Suisse" after having been accused of defrauding customers. ( Id. ¶¶ 70-71.) Despite that fact, the FINRA Form U-5s for Tzolov and Butler filed by CSS did not indicate that Tzolov and Butler had left CSS after being accused of fraud or that " Credit Suisse" had launched an investigation into Tzolov and Butler's conduct. ( Id. ¶¶ 69-72.)
CSG's role in the aftermath of the fraud " was to keep the fraudulent scheme hidden from the public, the federal authorities, and from the victims themselves, for as long as possible." ( Id. ¶ 72.) Thus, CSG did not correct an October 2007 Wall Street Journal story that quoted either Tzolov's or Butler's attorney to the effect that only one misleading email had been sent, even though CSG knew the attorney's comment to be false. " Credit Suisse" instead said that it was still reviewing the matter. ( Id. ) But in July 2008, " Credit Suisse" admitted in a Wall Street Journal story that it had detected " prohibited activity" by two brokers nearly a year before. ( Id. )
D. The relationship between CSS and CSG
CSG wholly owns CSS. ( Id. ¶ 77(a).) It incorporates CSS's financial statements into its own. ( Id. ) CSG holds itself out as " an integrated global bank" ( id. ¶ 77(c)) that operates through " three global divisions-private banking, investment banking, and asset management" ( id. ¶ 77(e) (quotations omitted)). CSG " describes its operations in cities including New York as its local offices." ( Id. ¶ 77(f) (quotations omitted).) It also lists as one of its " Main Offices" the New York office of Credit Suisse Securities. ( Id. ¶ 77(f).) The CEO of Credit Suisse Group's investment bank served as a CEO and Board Member for Credit Suisse Securities; the CEO of Asset Management and Credit Suisse ...