United States District Court, W.D. New York
BERNARD M. EISEN, Plaintiff,
VENULUM LTD., GILES CADMAN, individually, MARK TROTTER, individually, and PHILLIP SERRIEN, individually, Defendants.
DECISION AND ORDER
Elizabeth A. Wolford, United States District Judge
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.).
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.
The First Contract
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).
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).
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).
The Second Contract
"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.
Second Contract, like the First, contained an arbitration
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).
Venulum's SEC Violations
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.
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).
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.
"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.
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."
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).
The Third Contract
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.).
Third Contract, like the others, included an arbitration
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