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Refco Group Ltd., LLC v. Cantor Fitzgerald, L.P.

United States District Court, S.D. New York

October 24, 2014

REFCO GROUP LTD., LLC, Plaintiff,
v.
CANTOR FITZGERALD, L.P., et al., Defendants.

OPINION AND ORDER

HENRY PIMAN, Magistrate Judge.

Refco Group Ltd., LLC ("RGL") commenced this action on behalf of nominal defendants, Cantor Index Holdings, L.P. ("CIH"), Cantor Index LLC ("CILLC"), Cantor Fitzgerald Game Holdings, LLC ("CFGH"), Cantor Index Limited ("CIL"), and Cantor Gaming Limited ("CGL"), as well as on its own behalf, alleging that defendants engaged in self-interested transactions to siphon assets away from the subsidiaries of nominal defendant CIH in which RGL holds a 10% interest. By notice of motion dated September 9, 2014 (Docket Item 58), defendants and non-party Cantor Entertainment Technology, Inc. ("CET")[1] move to quash a subpoena issued by plaintiff to Ernst & Young LLP ("E&Y"), the auditor for a planned initial public offering by CET (the "IPO").[2] For the reasons set forth below, the motion to quash is denied.

I. Background

The facts underlying this action are set forth in detail in the Memorandum Opinion and Order of the Honorable Ronnie Abrams, United States District Judge, dated June 10, 2014, familiarity with which is assumed. Refco Grp. Ltd. v. Cantor Fitzgerald, L.P., 13 Civ. 1654 (RA), 2014 WL 2610608 (S.D.N.Y. June 10, 2014).

Judge Abrams granted defendants' motion to dismiss in part and denied it in part. Refco Grp. Ltd. v. Cantor Fitzgerald, L.P., supra, 2014 WL 2610608 at *44. Plaintiff based its claims on a series of transactions by defendants allegedly designed to appropriate the CIH Entities'[3] assets for the benefit of defendants and to the detriment of the CIH Entities, thereby diminishing the value of the CIH Entities and plaintiff's interest in them (Am. Compl. ¶ 3). Judge Abrams concluded that

[b]ecause demand was futile with respect to certain of the Challenged Transactions (namely, the 2006 License Agreement, the Asset Purchase Agreement, and the 2011 License Agreement) but not others (namely, the closure of Spreadfair, the transfer of CIL's trading activity to CFE, and the increase in related-party fees paid by CIL), only the former transactions [(the "Surviving Challenged Transactions")] may form the basis of RGL's claims.

Refco Grp. Ltd. v. Cantor Fitzgerald, L.P., supra, 2014 WL 2610608 at *13.

A. The Surviving Challenged Transactions

The 2006 License Agreement.[4] On February 7, 2006, CIH's wholly-owned subsidiary and nominal defendant CILLC, and non-party CFPH LLC, [5] granted defendant Cantor G&W (Nevada) L.P. ("Cantor Nevada") a "non-exclusive, non-transferable, perpetual, worldwide, royalty-free right and license" to specific patents and patent applications held by CILLC with consideration for the license to "be determined within a reasonable time [after the grant of the license] pursuant to arms-length negotiations in good faith" (Am. Compl. ¶¶ 83, 85). Defendant Howard W. Lutnick ("Lutnick"), as Chairman and CEO of both CILLC and Cantor Nevada and as Chairman, President and CEO of CFPH LLC, executed the agreement on behalf of all parties (Am. Compl. ¶ 86 & Ex. B).

The Asset Purchase Agreement.[6] On April 30, 2010, nominal defendant CIL (CIH's wholly-owned subsidiary) sold its Financial Fixed Odds ("FFO") business to defendant Cantor Gaming & Wagering Limited ("CGWL (UK)") (Cantor Nevada's wholly-owned subsidiary) (Am. Compl. ¶ 117). The agreement provided for transfer of all of CIL's assets, goodwill and records associated with the FFO business, as well as the transfer of key CIL employees, to CGWL (UK) for £1.00 as consideration, effective as of midnight on February 1, 2010 (Am. Compl. ¶¶ 117-22).

The 2011 License Agreement.[7] In June 2011 CILLC, Cantor Nevada and non-party Shuffle Master, Inc., licensed certain CILLC gambling-related patents to Shuffle Master but directed that royalties and fees derived from those licenses be paid to Cantor Nevada, not CILLC, the licensor (Am. Compl. ¶¶ 129-35). Defendant Lee Amaitis ("Amaitis"), [8] as Executive Managing Director of CILLC and CEO of Cantor Nevada, executed the agreement (Am. Compl. ¶ 130).

B. The Parties' Claims and Defenses

Judge Abrams also interpreted plaintiff's allegations that defendants used "the CIH Entities' intellectual property, including technology and patents, for the benefit of the Cantor Nevada Entities' as... describ[ing] the benefits that accrued to Cantor Nevada as a result of the Challenged Transactions but not [as constituting] an independent Challenged Transaction." Refco Grp. Ltd. v. Cantor Fitzgerald, L.P., supra, 2014 WL 2610608 at *6 n.7.[9] Judge Abrams did not preclude the plaintiff from basing its claims, at least in part, on defendants' use of the CIH entities' intellectual property to benefit Cantor Nevada, as long as that benefit resulted from one of the Surviving Challenged Transactions. Thus, presumably, to the extent plaintiff attributes those alleged benefits to the Surviving Challenged Transactions, it has stated a claim.

Finally, Judge Abrams (1) dismissed defendants CIL, CGWL (UK), CFE and CGL from the action, [10] (2) dismissed four of plaintiff's claims[11] as to all defendants, (3) dismissed plaintiff's claim of aiding and abetting the breach of fiduciary duty as to defendant Stephen M. Merkel ("Merkel")[12] and (4) dismissed plaintiff's claim of unjust enrichment as to all defendants except Cantor Nevada, Lutnick, Merkel and Amaitis. Refco Grp. Ltd. v. Cantor Fitzgerald, L.P., supra, 2014 WL 2610608 at *44. Plaintiff's remaining claims with respect to the Surviving Challenged Transactions are (1) breach of fiduciary duty brought against CIHLLC, Lutnick, Merkel and Amaitis, (2) aiding and abetting the breach of fiduciary duty against all defendants other than CIHLLC and Merkel, (3) unjust enrichment against Cantor Nevada, Lutnick, Merkel and Amaitis, (4) waste of assets against ...


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