Prestwick Capital Management Ltd. et al v. Peregrine Financial Group, Inc. et al

Filing 171

MEMORANDUM Opinion and Order Signed by the Honorable Elaine E. Bucklo on 8/25/2011:Mailed notice(mpj, )

IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION

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PRESTWICK CAPITAL MANAGEMENT
LTD., PRESTWICK CAPITAL
MANAGEMENT 2 LTD., and PRESTWICK
CAPITAL MANAGEMENT 3 LTD.,
Plaintiffs,
v.
PEREGRINE FINANCIAL GROUP, INC.,
ACUVEST INC., JOHN LOUIS CAIAZZO,
and PHILIP FRANCIS GREY,
Defendants.

No. 10 C 23

MEMORANDUM OPINION AND ORDER
Plaintiffs

Prestwick

Capital

Management

Ltd.,

Prestwick

Capital Management 2 Ltd., and Prestwick Capital Management 3 Ltd.
(together, “Prestwick”), sued Acuvest Inc. (“Acuvest”) and certain
of

its

principals

Exchange

Act

for

(“CEA”),

commodities
7

U.S.C.

§

fraud

under

1,

seq.

et

the

Commodity

According

to

Prestwick, Acuvest acted as an introducing broker (“IB”) for an
account opened with Peregrine Financial Group, Inc. (“PFG”) in June
2005.

Prestwick alleges that Acuvest engaged in unauthorized

trading in the account, resulting in losses of roughly $4 million.
In addition to its claims against Acuvest, Prestwick seeks to hold
PFG liable for Acuvest’s alleged fraud by virtue of a guarantee
agreement between PFG and Acuvest.

PFG has moved for summary

judgment, arguing that the guarantee agreement was not effective at

the time Acuvest’s fraudulent activity allegedly took place.

For

the reasons discussed below, the motion is granted.
I.
Summary judgment is proper where the “movant shows that there
is no genuine dispute as to any material fact and the movant is
entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(a).
The evidence, and all reasonable inferences therefrom, must be
considered in the light most favorable to the non-moving party.
E.g., Miller v. Illinois Dept. of Transp., 643 F.3d 190, 192 (7th
Cir. 2011).
The dispute between Prestwick and PFG turns almost entirely on
the following provision of the guarantee agreement executed by PFG
and Acuvest in 2004 (“the 2004 agreement”):
PFG guarantees performance by the IB [introducing broker]
of, and shall be jointly and severally liable for, all
obligations of the IB under the Commodity Exchange Act
(“CEA”), as it may be amended from time to time, and the
rules, regulations, and orders which have been or may be
promulgated thereunder with respect to the solicitation
of and transactions involving all commodity customer,
option customer, foreign futures customer, and foreign
options customer accounts of the IB entered into on or
after the effective date of this agreement.
There is no dispute that, under this provision, PFG assumed
liability for fraudulent conduct engaged in by Acuvest.

However,

PFG argues that the 2004 agreement was later terminated and
superseded by a second agreement in 2006 (“the 2006 agreement”).
Under

the

2006

agreement,

Acuvest

acted

as

an

independent

introducing broker, and its obligations were no longer guaranteed
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by PFG.

The 2006 agreement was itself subsequently replaced by a

second guarantee agreement in 2008 (“the 2008 agreement”), under
which PFG once again agreed to guarantee the performance of
Acuvest’s

obligations.

Since

Acuvest’s

alleged

unauthorized

trading took place in 2007 -- when neither the 2004 nor the 2008
guarantee agreement was effective -- PFG argues that it is not
liable for any alleged fraud on Acuvest’s part.
Prestwick does not dispute that the alleged fraud took place
in

2007.

Instead,

it

contests

PFG’s

contention

that

PFG’s

obligations under the 2004 agreement were terminated when PFG and
Acuvest entered into the 2006 agreement. As Prestwick sees it, the
above-quoted provision from the 2004 agreement reads as follows:
“PFG . . . shall be jointly and severally liable for . . . all
obligations of the IB under the Commodity Exchange Act . . . with
respect to the solicitation of and transactions involving all . .
. customer accounts of the IB entered into on or after the
effective date of this agreement.”

In other words, on Prestwick’s

view, PFG is liable for Acuvest’s actions with respect to customer
accounts

that,

like

Prestwick’s,

agreement was in place.

were

opened

while

the

2004

So long as the account was opened while

the 2004 agreement was effective, PFG’s liability as guarantor
persists,

even

with

respect

to

conduct

occurring

after

the

agreement was terminated.
This interpretation of the 2004 agreement is untenable. Under

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Prestwick’s

view,

guarantee

agreements

would

saddle

futures

commission merchants (“FMCs”) such as PFG with perpetual liability
for actions of introducing brokers such as Acuvest.

According to

Prestwick, the only way PFG could have terminated liability for
Accuvest’s conduct would have been to close the accounts opened
while the 2004 agreement was in place and to give investors the
opportunity to open new accounts.

There is no basis for thinking

that the CEA or its attendant regulations require such an onerous
and cumbersome procedure merely in order to terminate a guarantee
agreement.

Prestwick insists that opening and closing accounts in

this fashion is “common practice in the commodities industry,”
Resp. at 8, but it marshals no convincing evidence in support of
this claim.

Prestwick merely cites -- without even so much as a

parenthetical explanation -- two interpretative letters issued by
the Commodity Futures Trading Commission (“CFTC”) in 1994. Putting
to one side questions concerning the degree of deference that such
sources should be accorded, the letters are inapposite.

Neither

letter suggests that it is common practice for FCMs such as PFG to
close and reopen customer accounts after terminating a guarantee
agreement with an IB.

Rather, the letters address questions

concerning the handling of customer accounts when an IB terminates
a guarantee agreement with one FCM and enters into a guarantee
agreement with another.
Other arguments Prestwick advances for its interpretation are

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equally unsupportable. For example, Prestwick seeks to bolster its
position by appealing to the final provision of the 2004 agreement,
which states that “[t]ermination of this Agreement will not affect
the liability of PFG with respect to obligations of the IB incurred
on or before the date . . . this Agreement is terminated.”
Construed

most

naturally,

this

clause

simply

states

that

termination of the agreement would not absolve PFG of liability
resulting from fraudulent activity committed by Acuvest prior to
termination.

As already indicated, however, Acuvest’s alleged

fraud took place after the 2006 agreement had superseded and
terminated

the

2004

agreement.

Hence,

prior

to

the

2004

agreement’s termination, Acuvest had incurred no obligations for
which PFG could be held liable.

Prestwick does not explain why it

believes its view is supported in any way by this provision.

It

merely asserts: “[s]ince the subject account in which Plaintiffs’
funds were lost was opened before the effective date of the
termination, the 2004 Guarantee Agreement covered all transactions
in that account until that account is closed, which . . . happened,
if at all, [only] well after Plaintiffs’ funds were lost in
unauthorized trading.”

Resp. at 8.

This is a restatement of

Prestwick’s position, not an argument in support of it.
Equally
agreement
agreement.

untenable

did

not,

in

is

Prestwick’s

fact,

argument

terminate

or

that

the

2006

replace

the

2004

Here, Prestwick cites the 2006 agreement’s definition

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of “customer” as “a natural person or other entity referred to PFG
by

IB

for

the

purpose

of

opening

a

new

Futures

Investments

brokerage account with PFG or transferring an existing Futures
Investments brokerage account to PFG from another FCM.”

Resp. at

9 (quoting 2006 Agreement at 1) (Prestwick’s emphasis).

According

to Prestwick, “the 2006 IIB Agreement excludes customers with
existing accounts at PFG,” so that “the 2004 Guarantee Agreement
continued to govern old, continuing accounts, and the 2006 IIB
Agreement covered new accounts.”
not follow:

Id.

This argument simply does

the fact that the 2006 agreement covered new accounts

does not mean that the 2004 agreement was not terminated.
contrary,

the

2006

agreement

unequivocally

states:

On the
“[t]his

Agreement supersedes and replaces any and all previous agreements
between IB [Acuvest] and PFG.”

2006 Peregrine Financial Group,

Inc. Clearing Agreement for Independent Introducing Broker (Doc.
148-2) at 13, Ex. B to Decl. Susan O’Meara.

It is difficult to

imagine a clearer way in which the parties could have terminated
the 2004 agreement.
Prestwick warns that PFG’s position run contrary to Congress’s
intent in passing the CEA.
Prestwick

claims,

“an

FCM

“Applying PFG’s interpretation,”
such

as

PFG

can

send

armies

of

disreputable IBs into the market to amass as many investors as they
can with the cloak of the FCM’s guarantee and the guarantee can
simply be terminated a day after the accounts are secured.”
-6-

Resp.

at 6.

According to Prestwick, “[i]t is contrary to the CFTC’s

intent . . . to allow introducing brokers to lure customers to an
FCM with the promise of the security of the guarantee agreement by
an FCM and then terminate the guarantee once the customer has
opened an account and the customer’s only recourse is against a
judgment-proof IB.”

Resp. at 11.

But the CFTC has promulgated regulations designed to address
the problem of judgment-proof IBs.

Specifically, CFTC regulations

require introducing brokers to meet certain net capitalization
requirements (unless they have a guarantee agreement with an FCM).
17 C.F.R. § 1.17(a)(1)(iii) - (a)(3) (“[E]ach person registered as
an introducing broker must maintain adjusted net capital equal to
or in excess of the greatest of: (A) $45,000 [or] (B) The amount of
adjusted net capital required by a registered futures association
of which it is a member.”); see also First American Discount Corp.
v. Commodity Futures Trading Com’n, 222 F.3d 1008, 1013 (D.C. Cir.
2000).

Under

CFTC

regulations,

if

an

IB

cannot

meet

the

capitalization requirements and does not have a guarantee agreement
with an FCM, it is required immediately to cease doing business.
17 C.F.R. § 1.17(a)(5).

These regulations may not have prevented

the alleged fraud perpetrated against Prestwick here.

But if so,

the problem is endemic to the CEA and must be addressed by Congress
or the CFTC; it is not appropriately resolved by asking courts to
impose plainly unreasonable constructions on agreements like the

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one at issue here.
Prestwick’s final argument adverts to the doctrine of equitable
estoppel.

As Illinois courts have explained, equitable estoppel

provides that “[a]n individual may be precluded by his act or
conduct from asserting a right that he may otherwise have where his
statements or conduct induces another to do something that he would
otherwise not have done but for the statements or conduct of the
other.” Baldwin v. Wolff, 690 N.E.2d 632, 635 (Ill. App. Ct. 1998).
“In order to establish equitable estoppel, the party claiming it
must

demonstrate:

(1)

that

the

other

party

misrepresented

or

concealed material facts; (2) that the other party knew at the time
that he or she made the representations that they were untrue; (3)
that

the

party

claiming

estoppel

did

not

know

that

the

representations were untrue when they were made and when they were
acted upon; (4) that the other person intended the party claiming
estoppel would act upon the representations; (5) that the party
claiming estoppel reasonably relied on the representations to his
or her detriment; and (6) that the party claiming estoppel would be
prejudiced by his or her reliance on the representations if the
other person were allowed to deny the truth thereof.”

Maniez v.

Citibank, F.S.B., 937 N.E.2d 237, 24 (Ill. App. Ct. 2010).
Prestwick claims that “PFG affirmatively represented, and knew
that Acuvest represented to prospective commodities investors, that
Acuvest was guaranteed by PFG, a much larger financial institution.”

-8-

Resp. at 12.

Even if this is true, however, it is not clear why it

should warrant the application of equitable estoppel against PFG.
After all, PFG did act as Acuvest’s guarantor while the 2004
agreement was in effect.

During this period, therefore, any

representations that Acuvest was guaranteed by PFG would have been
entirely legitimate.

Prestwick fails to make clear precisely when

the alleged misrepresentations were made. Moreover, while Prestwick
asserts that PFG “affirmatively represented” that it was Acuvest’s
guarantor, it does not explain the nature of the representations.
Prestwick cites Integrated Cards, L.L.C. v. McKillip Indus., Inc.,
No. 06-C-2071, 2008 WL 3286981, at *6 (N.D. Ill. Aug. 8, 2008), for
the proposition that a court may look “to parties’ course of conduct
in analyzing equitable estoppel claim.” Resp. at 12. This suggests
that Prestwick’s complaint has to do with representations implied
in PFG’s actions rather than any express statements made by PFG.
But Prestwick never identifies these alleged non-verbal, affirmative
representations.
Prestwick does argue that PFG never took any steps to inform
Prestwick

that

terminated.

the

guarantee

agreement

with

Acuvest

had

been

But such silence would not constitute an affirmative

representation.

And while Illinois courts have held that a party’s

silence can serve as a basis for applying equitable estoppel, see,
e.g., In re County Treasurer and ex Officio County Collector, 869
N.E.2d 1065, 1083 (Ill. App. Ct. 2007) (“Estoppel may arise from

-9-

silence as well as words.”) (quotation marks omitted), this rule
applies only where the party to be estopped has a duty to disclose
information to, or a special relationship with, the party seeking
estoppel, see, e.g., Marks v. Rueben H. Donnelley, Inc., 636 N.E.2d
825, 832 (Ill. App. Ct. 1994) (“[E]quitable estoppel cannot be based
on a party’s silence unless that party had an affirmative duty to
speak. This duty may arise where there is a special relationship
between the parties.”).

Prestwick does not allege that any such

duty or relationship exists between itself and PFG.
Prestwick requests that it be allowed to take additional
discovery pursuant to Fed. R. Civ. P. 56(d)(2) (“If a nonmovant
shows by affidavit or declaration that, for specified reasons, it
cannot present facts essential to justify its opposition, the court
may . . . allow time to obtain affidavits or declarations or to take
discovery.”).

It asserts that, “[w]ith respect to Plaintiffs’

equitable estoppel claim, Plaintiffs do not have facts essential to
justify

their

opposition

to

PFG’s

motion

due

to

a

lack

of

discovery.” In particular, Prestwick claims that it needs “further
discovery into the representations that Acuvest made regarding its
status as a Guaranteed IB to Cory Dosdall,” Prestwick’s manager at
the time.

Prestwick also says that it needs further discovery

regarding its reliance on Acuvest’s and PFG’s conduct and statements
regarding the 2004 Guarantee Agreement.”
omitted).

Resp. at 13 (citation

According to Prestwick, additional discovery will show

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that Dosdall was told by Acuvest that Acuvest was guaranteed by PFG;
that Dosdall would never have invested in a commodities pool
recommended by Acuvest if he had not been told this information; and
that Dosdall would have immediately withdrawn Prestwick’s funds if
he had known that the 2004 Guarantee Agreement had been terminated.
Although I am given pause by PFG’s lack of cooperation in the
discovery process to date, the fact is that further discovery would
ultimately be of no help to Prestwick.

For in order to make out a

claim for equitable estoppel, Prestwick must show that it relied on
representations made by PFG.

The issues on which Prestwick seeks

additional evidence, however, pertain only to representations made
by Acuvest.

Thus, even if Dosdall were to testify as Prestwick

anticipates, Prestwick still would be unable to show that PFG should
be equitably estopped from arguing that its guarantee agreement with
Acuvest

had

been

terminated.

Prestwick’s

equitable

estoppel

argument fails, therefore, as does its argument that it should be
allowed to take additional discovery under Rule 56(d).
II.
For

these

reasons,

PFG’s

motion

for

summary

judgment

granted.

ENTER ORDER:
____________________________
Elaine E. Bucklo
United States District Judge
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is

Dated: August 25, 2011

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