United States District Court, S.D. New York
For Citigroup Global Markets Inc., Plaintiff: Daniel Mumford Perry, LEAD ATTORNEY, Jed Mastren Schwartz, Scott Alexander Edelman, Milbank, Tweed, Hadley & McCloy LLP, New york, NY.
For Ghazi Abdullah Abbar, as temporary administrators of the estate of Abdullah Mahmoud Abbar, shall be substituted for Decedent, Ajial Leveraged Feeder Holdings Limited, Amatra Leveraged Feeder Holdings, Limited, Amavest Holdings Limited, Gama Investment Holdings Limited, Christine Woodhouse, as temporary administrators of the estate of Abdullah Mahmoud Abbar, shall be substituted for Decedent, Defendants: John G. Rich, Rich & Intelisano, LLP 2, New York, NY.
For Christine Woodhouse, Amatra Leveraged Feeder Holdings, Limited, Ghazi Abdullah Abbar, Ajial Leveraged Feeder Holdings Limited, Gama Investment Holdings Limited, Amavest Holdings Limited, Counter Claimants: John G. Rich, Rich & Intelisano, LLP 2, New York, NY.
For Citigroup Global Markets Inc., Counter Defendant: Daniel Mumford Perry, LEAD ATTORNEY, Jed Mastren Schwartz, Scott Alexander Edelman, Milbank, Tweed, Hadley & McCloy LLP, New york, NY.
LOUIS L. STANTON, U.S. D. J.
Defendant Ghazi Abbar arranged the investment of his family's wealth with affiliates of Citigroup, Inc. (" Citigroup" ), a large multinational financial services provider with numerous business divisions and offices worldwide. The investments performed poorly, and Sheikh Abbar, whom I shall call Mr. Abbar in accordance with American usage, asserts that Citigroup is responsible. It is not the function of this proceeding to adjudicate those claims, but simply to determine whether he can compel arbitration of them here.
Mr. Abbar claims a right to arbitrate his dispute against a separately incorporated component of Citigroup, Citigroup Global Markets, Inc. (" CGMI" ). CGMI has brought this proceeding to enjoin his doing so. So far, that issue has given rise to a year and a half of litigation with depositions, discovery, travel, and extensive preparations for the trial which we are now completing on its ninth day.
Rule 12200 of the Code of Arbitration Procedure of the Financial Industry Regulatory Authority (known as FINRA) requires FINRA members (including CGMI) to arbitrate disputes at the request of their customer. The defendants led by Mr. Abbar filed a claim with FINRA seeking its arbitration over CGMI's claimed mishandling of the investments. CGMI denies the defendants were its customers. It says they were customers of a different Citigroup business entity called Citigroup Global Markets, Ltd. (" CGML" ) located in London. CGMI filed this suit and moved to preliminarily enjoin the arbitration of this dispute before FINRA. The hearing on that motion was consolidated with this trial on the merits under Fed.R.Civ.P. 65(a) (2).
For the reasons which follow, the injunction is granted.
In late 2005 to early 2006, Ghazi Abbar's private banker Mohanned Noor changed employment from Deutsche Bank to Citigroup Private Bank in Geneva, and sought to bring the Abbar family's business with him. In the following months, Abbar family trusts (through defendant investment vehicles Amatra Leveraged Feeder Holdings, Ltd. and Ajial Leveraged Feeder Holdings, Ltd.) purchased option agreements in London from Citigroup Global Markets, Ltd. (" CGML" ), in a transaction which provided the Abbars with " leverage" substantially increasing the size of their hedge fund investments, and included forum
selection and choice-of-law clauses directing the resolution of disputes in the courts of England and under English law.
Under the structure of the options transaction, " reference funds" owned by CGML, controlled by CGMI, and managed by Ghazi Abbar held the Abbars' hedge fund investments, which were increased by " leverage" funds extended by CGML in exchange for a form of interest payment. CGML owned the economic interest in the reference funds, and CGMI the voting interest. The funds hired Ghazi Abbar as their " Investment Advisor," establishing a mechanism for him to select the funds' investments, subject to CGMI's approval.
The options entitled the Abbar trusts to the value of the assets held in the reference funds, less the leverage funds and accumulated interest, and CGML extended the leverage on a non-recourse basis. CGML's ownership of the reference funds secured its position in the transaction: it would only lose money if the value of the reference funds' hedge fund holdings fell enough to impair the then value of the leverage funds (the " gap risk" ).
The process of structuring and negotiating the options required substantial work by CGMI personnel and frequent communications between them and Mr. Abbar. After closing, CGMI employees continued to monitor the risk to CGML and helped prepare monthly reports on the status of the funds. As owner of the voting shares of the reference funds, CGMI reviewed and approved the investment recommendations submitted by Ghazi Abbar as the funds' Investment Advisor, and assisted Mr. Abbar and his agents in completing the submission procedures.
CGMI personnel devised the structure of the options transaction because such " fund derivatives" were within their specialty, whereas CGML's London traders typically arranged investments in different financial products. CGMI personnel were familiar with working with colleagues employed by other business divisions, and regarded that as part of their service of CGMI.
That arrangement was understood and in fact desired by Mr. Abbar. He paid little attention to which Citigroup legal entity happened to employ the bankers working with him. He wanted his Swiss banker Noor " to be able to walk the corridors of the entire Citigroup," and to " have access to the entirety of Citigroup through" Noor " wherever the best people were." Mr. Abbar himself interacted with employees of numerous Citigroup divisions and offices located in Geneva and London, as well as in New York.
That practice was documented internally, albeit episodically, in intra-Citigroup business arrangements, was formalized on significant occasions in powers of attorney (including one which granted a CGMI managing director authority to sign the transaction confirmations on CGML's behalf), and given economic effect by systems for accounting adjustments to reflect the value of services performed by Citigroup affiliates for other Citigroup affiliates.
That is consistent with CGMI's involvement in the transaction after closing. In assisting with the preparation of monthly reports, CGMI employees helped satisfy CGML's contractual obligation to provide such reports. They performed due diligence on hedge fund assets to determine the appropriate amount of leverage CGML should extend on the investments, in light of the risk to CGML's funds. With its power as the voting shareholder, CGMI exercised control over the reference funds' investment decisions to protect CGML's economic interest, more than to provide Mr. Abbar with beneficial services, overriding
his own wishes as Investment ...