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Eisen v. Venulum Ltd.

United States District Court, W.D. New York

March 27, 2017

BERNARD M. EISEN, Plaintiff,
v.
VENULUM LTD., GILES CADMAN, individually, MARK TROTTER, individually, and PHILLIP SERRIEN, individually, Defendants.

          DECISION AND ORDER

          Elizabeth A. Wolford, United States District Judge

         I. Introduction

         Bernard M. Eisen ("Plaintiff), a citizen and resident of New York, filed this action on June 8, 2016, claiming violations of both the Securities Act of 1933 ("the '33 Act") and the Securities Act of 1934 ("the '34 Act"), and related state-law claims of unconscionability, fraud, civil conspiracy, and intentional infliction of emotional distress. (Dkt. 1). Plaintiffs claims arise out of Plaintiffs investment with Venulum Ltd. ("Venulum"), and involve actions by Venulum's principal, Giles Cadman ("Cadman"), and two Venulum employees, Mark Trotter ("Trotter"), and Phillip Serrien ("Serrien") (together "Defendants"). (Id.). Venulum Ltd. is a corporation incorporated in the British Virgin Islands ("BVI"), with its principal place of business in Toronto, Canada. (Id. at 1). Cadman resides in the United Kingdom. (Id. at 2). Trotter and Serrien reside in Canada. (Id.).

         Before the Court is Defendants' motion to compel arbitration. (Dkt. 7). The Court received briefing from the parties, heard oral arguments, and received supplemental briefing following oral argument. (Dkt. 7; Dkt. 11; Dkt. 13; Dkt. 18; Dkt. 20; Dkt. 21; Dkt. 22). Because the arbitration provisions are substantively unconscionable and would require Plaintiff to forego his rights and remedies under the applicable securities laws of the United States, the motion to compel arbitration is denied.

         II. Factual Background[1]

         A. The First Contract

         Plaintiff first invested with Venulum in 2007, after repeated phone calls from Defendant Serrien to Plaintiffs home in Williamsville, New York. (Dkt. 1 at 3-4). Serrien was soliciting investments in wine, in which, according to Serrien, Venulum "possessed a high degree of experience and sophistication." (Id. at 3). Serrien promised Plaintiff an 8% return on his investment. (Id.). After an initial agreement via phone to invest $1, 000 in 2007, Plaintiff made a number of additional investments with Venulum. (Id. at 4). Plaintiff alleges he was not provided sufficient documentation to piece together the fair market value of his account, the true nature of his investment, or the criteria Venulum used to evaluate the suitability of possible investments, all violations of federal securities laws. (Id. at 4-5).

         On October 7, 2008, Plaintiff entered into a wine purchase contract with Venulum (the "First Contract")- (Id. at 5). The First Contract contained an arbitration clause which required that any dispute arising under the contract be:

referred to binding arbitration in the British Virgin Islands applying British Virgin Islands law: Such arbitration shall be before one arbitrator appointed by [Plaintiff], one arbitrator appointed by Venulum Ltd. and one arbitrator appointed by such two arbitrators, if either or both of them considers it appropriate: The Arbitrators' costs will be borne equally by [Plaintiff] and Venulum Ltd.: The arbitration shall take place in accordance with the Rules of the International Chamber of Commerce.
If the claim to be arbitrated is a claim by [Plaintiff], then unless [Plaintiffs] arbitrator is appointed within six months of the dispute arising, such claim shall be deemed to be absolutely released, waived and barred and Venulum shall be discharged from all liability.

(Dkt. 1-2 at 5).

         "Between October 7, 2008, and March 16, 2010, Plaintiff invested approximately $122, 480.64 under the [First Contract]." (Dkt. 1 at 6). Serrien represented to Plaintiff that Plaintiff could liquidate his holdings at any time with 10-days' notice. (Id. at 4).

         B. The Second Contract

         In "early 2010, " Plaintiff told Serrien that he wished to liquidate his holdings. (Id. at 6). Thereafter, Defendant Trotter became Plaintiffs main contact at Venulum, and Plaintiff no longer had any contact with Serrien. (Id.). Trotter told Plaintiff that he could not liquidate the account in the manner described by Serrien. (Id.). Trotter told Plaintiff that Plaintiff could liquidate his investment only if Plaintiff signed a second investment contract (the "Second Contract"), which Plaintiff did on March 16, 2010. (Id.). Plaintiff was told that he would lose "all or substantially all of his investment of $122, 480" unless he signed the Second Contract. (Id. at 7). Trotter explained that if Plaintiff invested an additional $100, 000, he would be entitled to the return of the previously invested $122, 480. (Id.). Plaintiff invested the additional $100, 000 ahead of the contract's schedule, in an attempt to liquidate the $122, 480 as quickly as possible. (Id. at 8).

         The Second Contract, like the First, contained an arbitration clause:

In the event that any dispute whatsoever arises between the Parties in relation to or in any way in connection with this Agreement, the Parties hereby agree that such dispute shall be referred to binding arbitration in the British Virgin Islands applying British Virgin Islands law. Such arbitration shall be before an arbitrator appointed by Venulum. The arbitration shall take place in accordance with the Rules of the International Chamber of Commerce.

(See Dkt. 1-3 at 3).

         C. Venulum's SEC Violations

         The Securities and Exchange Commission ("SEC") charged Venulum and Cadman with violations of the '33 Act on February 15, 2012, alleging that Venulum "raised approximately $22, 000, 000 through the unregistered offerings of (a) investment contracts involving interests in fine wines; and (b) promissory notes from which proceeds were used as working capital for Venulum Ltd., Venulum Inc., and other businesses affiliated with Giles Cadman." Sec. & Exch. Comm'n v. Venulum Inc. et al, 3:12-cv-00477-N, Dkt. 1, at *1 (N.D. Tex. Feb. 15, 2012). They were alleged to have solicited investments through an instrument which constituted a "security" without registering with the SEC, in violation of §§ 5(a) and 5(c) of the '33 Act. Id. at *4. By consent, Venulum Inc., Venulum Ltd., and Giles Cadman were "permanently restrained and enjoined from violating Section 5 of the Securities Act" by selling any security in the United States without registering with the SEC. Sec. & Exch. Comm'n, 3:12-cv-00477- N, Dkt. 11, Dkt. 12, Dkt. 13 (N.D. Tex. Feb. 27, 2012). Thereafter, Venulum entered into similar consent decrees with state regulators in South Carolina and Wisconsin. (Dkt. 1-5; Dkt. 1-6).

         Plaintiff alleges that Trotter was prohibited by a 1998 Wisconsin state order from selling securities in Wisconsin without registering under state law. (Dkt. 1-8 at 4). A purported order by the Wisconsin Securities Commission states that Trotter had violated state securities laws "by transacting business in Wisconsin as a securities agent without a license." (Id. at 3).

         On July 10, 2013, to comply with the Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 852 (2010), the SEC adopted the so-called "Bad Actor" disqualification provisions under Regulation D of the '33 Act. See Sec. & Exch. Comm'n, Disqualification of Felons and Other "Bad Actors" from Rule 506 Offerings and Related Disclosure Requirements (Sept. 19, 2013) [hereinafter "Sec. & Exch. Comm'n, Bad Actor Disclosure Requirements"], available <atf https://www. sec.gov/info/smallbus/secg/bad-actor-small-entity-compliance-guide.htm.

         Any "covered" person who "has a relevant criminal conviction, regulatory or court order or other disqualifying event that occurred on or after September 23, 2013, " is disqualified from relying on certain exemptions from compliance with the '33 Act in the sale of securities to accredited investors. Id.; 17 C.F.R. § 230.506 (Regulation D Rule 506). Covered individuals include securities issuers, the directors of an issuer, and "persons compensated for soliciting investors." Sec. & Exch. Comm'n, Bad Actor Disclosure Requirements. Disqualifying events include court injunctions and restraining orders arising in connection with the purchase or sale of a security that are in effect at the time of the sale of the security and that were entered within the previous five years. Id. Disqualifications under final orders of state regulators are also disqualifying events. Id.

         "Disqualification will not arise as a result of disqualifying events that occurred before September 23, 2013, " but those events must be disclosed to investors in writing before the sale of a security under Rule 506. Id. Rule 506 allows exceptions from the requirement to register a security with the SEC before sale. See 17 C.F.R. § 230.506. However, "Rule 506 is unavailable to an issuer that fails to provide the required disclosure, unless the issuer is able to demonstrate that it did not know and, in the exercise of reasonable care, could not have known that a disqualifying event was required to be disclosed." Id.

         Plaintiff alleges that Venulum, Cadman, and Trotter were covered persons under the Bad Actor provision of the '33 Act, that they had disqualifying events at the time of the sale of the investment securities to Plaintiff, and that they failed to disclose the disqualifying events to Plaintiff. (Dkt. 1 at 12-13). Plaintiff also alleges that none of the Defendants were registered as broker-dealers under SEC regulations, and, therefore, they were not registered to sell securities in the United States. (Id. at 13).

         D. The Third Contract

         Plaintiff became aware of the SEC Consent Order in October 2013, and thereafter requested a return of his investment and liquidation of his account. (Id.). According to Plaintiff, Trotter required Plaintiff to enter into yet another contract (the "Third Contract") before Plaintiff could get any of his money back from Venulum. (Id.). "Trotter threatened the complete loss of Plaintiffs investment, which at the time was over $200, 000." (Id.). Plaintiff signed the Third Contract on October 3, 2013, "under the extreme duress of losing his entire investment." (Id.).

         The Third Contract, like the others, included an arbitration clause:

In the event that any dispute whatsoever arises between [Plaintiff] and [Venulum] in relation to or in any way in connection with the Contract, [Plaintiff] and [Venulum] hereby agree that such dispute shall be finally settled by binding arbitration in the British Virgin Islands applying British Virgin Islands law in accordance with the Rules of Arbitration of the International Chamber of Commerce ("ICC Rules"). Such arbitration shall be conducted before a panel of three (3) arbitrators, one of whom shall be appointed by [Plaintiff], one of whom shall be appointed by [Venulum] and the third arbitrator shall be appointed by the other arbitrators so chosen. If the arbitrators chosen by the parties ("Party Arbitrator(s)") fail to agree upon the appointment of the third arbitrator within one month after the second Party Arbitrator is appointed, the third arbitrator shall be appointed in accordance with the ICC Rules. If a claim arising under the Contract may be arbitrated by [Plaintiff], then, unless [Plaintiffs] arbitrator is appointed within 6 months of the issuance of the request for arbitration, such claim arising under the Contract shall be deemed to be absolutely released, waived and barred and [Venulum] shall be discharged from all liability. If the claim to be arbitrated is asserted by [Venulum], then, unless [Plaintiffs] arbitrator is appointed within 6 months of the issuance of the request for arbitration, the arbitration shall be determined by a single arbitrator appointed in accordance with the ICC Rules. Each party to the arbitration proceeding shall be responsible for ...

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