COR Clearing, LLC v. Calissio Resources Group, Inc. et al
MEMORANDUM AND ORDER that Defendant Signature Stock Transfer, Inc.'s motion for summary judgment (Filing No. 237) is granted; Defendants National Financial Services, LLC's, TD Ameritrade Clearing, Inc.'s, E-Trade Clearing, LLC' ;s, and Scottrade, Inc.'s joint motion for summary judgment (Filing No. 255) is granted; Plaintiff COR Clearing Inc.'s motion for partial summary judgment (Filing No. 258) is denied; The parties' pending motions in limine (Filing No. 266 and Filing No. 270) are denied as moot; A judgment of dismissal will issue this date. Ordered by Senior Judge Joseph F. Bataillon. (ADB)
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEBRASKA
COR CLEARING, LLC, a Delaware limited
MEMORANDUM AND ORDER
CALISSIO RESOURCES GROUP, INC., a
Nevada corporation; ADAM CARTER, an
individual; SIGNATURE STOCK
TRANSFER, INC., a Texas corporation;
DOES 1-50, TD AMERITRADE
CLEARING, INC., a Nebraska corporation;
NATIONAL FINANCIAL SERVICES LLC, a
Delaware limited liability company;
SCOTTRADE, INC., an Arizona
corporation; and E-TRADE CLEARING,
LLC, a Delaware limited liability company;
This matter is before the court on a motion for summary judgment filed by
defendant Signature Stock Transfer, Inc. (“SST”), Filing No. 237; a joint motion for
summary judgment filed by defendants National Financial Services, LLC, TD Ameritrade
Clearing, Inc. (“TDAC”), E-Trade Clearing, LLC, and Scottrade, Inc. (collectively, the
“broker defendants”), Filing No. 255; and a motion for partial summary judgment filed by
plaintiff COR Clearing, LLC (“COR”), Filing No. 258. The court heard oral argument on
the motions on October 17, 2017, and October 23, 2017.
This is an action for declaratory relief, unjust enrichment, fraud, and conversion
in connection with a securities transaction.
citizenship under 28 U.S.C. § 1332.
Jurisdiction is based on diversity of
Essentially, COR alleges that defendants Calissio Resources Group, Inc.
(“Calissio”), Adam Carter1, and SST perpetrated a fraud on COR, the securities clearing
system, and the marketplace by exploiting a weakness in clearing procedures in
connection with Calissio stock. It seeks to recover funds debited from its account as a
result of the allegedly fraudulent dividend scheme. COR asserts claims for fraud under
Nebraska law against Calissio, Carter, and SST, and asserts claims for unjust
enrichment and conversion against the broker defendants. Default judgment has been
entered against Calissio. See Filing No. 109.
COR moves for summary judgment on its claim for conversion against the broker
defendants. The broker defendants, in turn, move for a summary judgment of dismissal
on all of COR’s claims against them. SST moves for a summary judgment of dismissal
on COR’s fraud claim.
BACKGROUND AND OVERVIEW
The remaining claims in this dispute involve several financial services industry
organizations that operate within the financial markets and the indirect holding system.
An overall understanding of that generally-automated system, the rules that govern it,
and the parties’ respective roles in the system is necessary at the outset. Securities
transactions are governed by both state and federal law.
Plaintiff COR is an independent clearing and settlement firm.
generally handle the back-office details of securities transactions between brokerdealers. A broker-dealer is an individual or firm that trades securities. A clearing or
The record shows Carter was never served. See Filing No. 10, Summons Issued.
carrying firm also maintains custody of securities and assets such as cash.
introducing firm accepts orders to trade but has an arrangement with a clearing or
carrying firm to maintain custody of the securities account.
broker-dealers interact with the end client, while a clearing broker is responsible for the
confirmation, receipt, settlement, delivery and record-keeping tasks involved in
processing securities transactions.
The broker defendants are all financial institutions that provide clearing services
to their affiliated introducing broker-dealers (e.g., defendant TDAC provides custody and
clearing services for clients of TD Ameritrade).
COR’s principal business is the
provision of custody and settlement services to introducing broker-dealers. It provides
such services to introducing broker J.H. Darbie & Co. (“J.H. Darbie”). J.H. Darbie has a
clearing contract with COR.
Brokers and securities transactions are generally regulated under the Securities
Exchange Act of 1934 by the Financial Industry Regulatory Authority (“FINRA”). See 15
U.S.C. § 78q–1(a)(1). FINRA is a non-governmental self-regulatory organization that
regulates member broker defendants and exchange markets.
Every firm and broker
that sells securities to the public in the United States must be licensed and registered by
FINRA. See Release, Sec. & Exch. Comm'n, S.E.C. Release No. 34-50700, Concept
The Depository Trust and Clearing Corporation (“DTCC”) is the Securities and
Exchange Commission (“SEC”) approved central clearing firm for the vast majority of
shares traded in United States markets. It functions as a clearing house to process and
record trades, settle trades, issue reports to the broker-dealers, and electronically
transfer funds and shares.
Plaintiff COR Clearing and the defendant brokers are
participant members of the DTCC. As participants, they have agreed to abide by DTCC
The indirect holding system is a system in which securities are not physical
securities represented by certificates, but are represented as “book entries” in a
See Chase Inv. Servs. Corp. v. Law Offices of Jon Divens &
Assocs., LLC, 748 F. Supp. 2d 1145, 1167 (C.D. Cal. 2010), aff'd, 491 F. App'x 793 (9th
Cir. 2012); 6 Thomas Lee Hazen, Treatise on the Law of Securities Regulation § 23:1.
The indirect holding system is governed by Article 8 of the Uniform Commercial Code
(“U.C.C.”), which, in turn, relies on definitions in federal securities laws. See, e.g., Neb.
Rev. Stat. § 8-101 et seq.2
Article 8 of the U.C.C. was revised in 1994 and has been
adopted in Nebraska. Neb. Rev. Stat. § 8-101 et seq.
Defendant Calissio is the issuer of the stock (CRGP) shares at issue. Defendant
SST is Calissio’s transfer agent.
Transfer agents record changes of ownership,
maintain the issuer's security holder records, cancel and issue certificates, distribute
and tabulate proxies, and distribute dividends.
See Sec.& Exch. Comm’n, S.E.C.
Release No. 34-76743, Comments on Concept Release: Transfer Agent Regulations,
2016 WL 2652241 at *2 (April 13, 2016); see also 12 William Meade Fletcher et al.,
Fletcher Cyclopedia of the Law of Private Corporations § 5485 (perm. ed., rev. vol.
Most transfer agents, including SST, deposit shares into the DTCC via the
Stock transfers were at one time governed by common law, but were later codified by the
Uniform Stock Transfer Act, which has since been superseded by Article 8 of the Uniform Commercial
Code. 6 Thomas Lee Hazen, Treatise on the Law of Securities Regulation § 23:7.
Deposit/Withdrawal at Custodian (“DWAC”) system, which is a computerized system for
automatic transfers of cash and securities that permits DTCC participants to request the
movement of shares to or from the issuer's transfer agent electronically.
Transfer agents are required to register with the SEC or a bank regulatory
agency under Section 17A of the Securities Exchange Act of 1934, 15 U.S.C.A. § 78q1(c).
See also 17 C.F.R. § 240.17A.
They are not part of FINRA, nor are they
participants of the DTCC, but are registered with the DTCC as long as the issuer the
transfer agent represents is a participant with the DTCC. There is no self-regulatory
agency that governs transfer agents the way FINRA governs brokers and broker
Transfer agents are also subject to provisions of the U.C.C. of the state in which
the issuer is incorporated.3 Comments on Concept Release, 2016 WL 2652241, at *2.
Article 8 Part 3 of the U.C.C. covers transfer of certificated and uncertificated securities
and the rights and obligations of transfer agents. See generally U.C.C. § 8-301 et seq.
(Am. Law. & Inst. & Unif. Law Comm’n 1994); e.g., Neb. Rev. Stat. § 8-301 et seq.
In addition to J.H. Darbie and the DTCC, several other entities are tangentially
connected to the transactions at issue herein but are not parties. Those are Alpine
Securities Corporation (“Alpine”), another financial services firm that suffered losses in
connection with Calissio stock, and Nobilis Consulting, LLC (“Nobilis”) and Beaufort
Under the U.C.C., unless otherwise agreed, the laws of the issuer's state of incorporation
govern the rights of securities holders, transferors, and transferees vis-a-vis the issuer. 6 Thomas Lee
Hazen, Treatise on the Law of Securities Regulation § 23:7; See U.C.C. § 8–110(a); In re County of
Orange, 219 B.R. 543, 550 (Bankr. C.D. Cal. 1997). That fact is of no consequence, however, since the
relevant U.C.C. provisions in the relevant states are substantively the same as those in Nebraska.
Capital Partners, LLC (“Beaufort”), who are investors who held promissory notes on
Calissio’s debt and later converted that debt to shares of Calissio stock. J.H. Darbie is
Nobilis’s and Beaufort’s introducing broker, who uses COR for clearing and settlement.
FINRA is authorized by the S.E.C. to adopt and administer the Uniform Practice
Code (“UPC”), “the rules and regulations governing [over-the-counter] secondary
market securities transactions.” In re THCR/LP Corp., No. 04-46898/JHW, 2006 WL
530148 at *4 (Bankr. D. N.J. Feb. 17, 2006).
FINRA rules regulate payment of
dividends. In re Arctic Glacier Int'l, Inc., No. 12-10605(KG), 2016 WL 3920855, at *5
(Bankr. D. Del. July 13, 2016), aff'd, 255 F. Supp. 3d 534 (D. Del. 2017). Under UPC
11140, FINRA determines which shareholders are entitled to a distribution by setting
two dates: the “record date” and the “ex-dividend date” or “ex-date.” Id. at *6; see In re
THCR/LP Corp., No. 04-46898/JHW, 2006 WL 530148 at *5; National Association of
Securities Dealers (“NASD”) (now FINRA) Notice to Members 00–54 (August 2000).
The record date is fixed by the issuer and determines the holders of equity securities
who are entitled to receive dividends or other distributions. See Arctic Glacier, 2016
WL 3920855, at *6 (emphasis omitted). The “ex-date” is “‘the date on and after which
the security is traded without a specific dividend or distribution.’” Id. (quoting UPC Rule
11120(c); see In re THCR/LP Corp., 2006 WL 530148 at *5. “‘Taken together, these
two dates delimit the timeframe during which a security, when sold, carries with it from
the seller to the buyer the right to receive a distribution’” which is known in the industry
as a “due bill.” Arctic Glacier, 2016 WL 3920855, at *6 (quoting In re THCR/LP Corp.,
2006 WL 530148 at *5); see UPC Rule 11140.
Ordinarily, the ex-date precedes the record date, but a dividend or distribution
that is twenty-percent or more of the value of the subject security qualifies as a “special
dividend,” and the ex-date is set by FINRA as the first business day following the
payable date. See NASD Notice to Members 00-54 (August 2000). If the record date
precedes the ex-date, and the security is sold during the period between the two, the
stock “carries with it the right to receive a distribution, a ‘due bill,’ from the seller to the
buyer.” Karathansis v. THCR/LP Corp., No. CIV. 06-1591(RMB), 2007 WL 1234975, at
*4 (D.N.J. Apr. 25, 2007), aff'd sub nom. In re THCR/LP Corp., 298 F. App'x 120 (3d Cir.
2008); see FINRA Uniform Practice Advisory (UPC # 55-13) (December 19, 2013);
NASD Notice to Members 00–54 (August 2000) (noting that a due bill is a promissory
note for the dividends that is attached to a stock that is traded between the record date
and the ex- date); Silco, Inc. v. United States, 779 F.2d 282, 284 (5th Cir. 1986).
The DTCC implements the allocations of due bills under UPC 11140.
DTCC’s interim accounting process automates the settlement of due bills. The process
entails capturing on a daily basis all the trade settlements that include due bills and then
debiting and crediting the accounts of member firms in order to pass the dividend
proceeds to the appropriate party.
Each security is assigned a Committee on Uniform Securities Identification
Procedures (“CUSIP”) number.
A CUSIP number is a unique nine-character
alpha/numeric code to a security by Standard and Poor’s Corporation. The number is
used to expedite clearance and settlement. A CUSIP number is assigned to each issue
and may need to be changed when there is a Corporate Action.
The facts are not in serious dispute. The following facts are gleaned from the
parties’ respective statements of uncontroverted facts and from the exhibits submitted in
connection with the motions. See Filing No. 238, SST Brief at 3-7; Filing No. 249,
COR’s Brief at 4-15 Filing No. 277, SST Reply Brief at 2-5; Filing No. 256, Brokers’ Brief
at 5-14; Filing No. 289, COR’s Brief at 4-23; Filing No. 296, Brokers’ Reply brief at 4-14;
Filing No. 259, COR’s Brief at 3-13; Filing No. 284, Brokers’ Brief at 5-13; Filing No.
299, COR’s Reply Brief at 39-53; Filing Nos. 239, 250, 260, 261, 278, 285, 290, Indices
of Evid. The record shows that Calissio is an issuer of penny stock in a corporation
engaged in mining activities in Mexico.4 Calissio had a contractual relationship with
SST as its transfer agent. SST became Calissio’s transfer agent in roughly 2001. Filing
No. 250-2, Index of Evid., Ex. A, Deposition of Jason Bogutski at 6.
On June 1, 2015, Calissio announced a “stock repurchase program of up to 1.5
million of the Company’s outstanding common shares.” Filing No. 290-20, Index of
Evid., Ex. R, Calissio Annual Information Disclosure at 13. On June 16, 2015, Calissio
issued a press release, announcing the company’s
first quarterly cash dividend of approximately USD$1.3 million, or
USD$0.011 per common share of the Company (each a "Common
Share"), payable on or about August 17, 2015 to the holders of the issued
and outstanding Common Shares as of the close of business on June 30,
2015. The Board also approved a special stock dividend of 3% payable
August 17, 2015 to shareholders of record at the close of business on
June 30, 2015.
A “penny stock,” is a stock that typically trades outside of the major market exchanges at a
relatively low price and has a small market capitalization.
Filing No. 260-12, Index of Evid., Ex. K.5 The Calissio Board of Directors’ Statement of
Consent states that “the Company hereby authorizes a $0.011 per common regular
share (free trading share) cash dividend to its shareholders. The dividend shall have a
record date of June 30, 2015, an ex-dividend date of June 26, 2015 and a payment date
of August 17, 2015.” Filing No. 250-9, Index of Evid., Ex. H. People who owned CRGP
shares on the record date were to be paid the dividend. Calissio’s Annual Information
Disclosure also states that [a]s of June 30, 2015, Calissio had 129,460,000 issued and
outstanding shares of common stock with a par value of $.01 per share. Filing No. 29020, Index of Evid., Ex. R.
The Annual Information Disclosure also shows that
“[e]ffective on October 6, 2014 the Company changed its name to Calissio Resources
Group, Inc. having new CUSIP number of 130 88P 102.”
Id. at 2.
Information Disclosure listed the following restriction on the transfer of securities: “As of
June 30, 2015, other than 27,179,423 shares of its common stock that are free-trading,
all the other 102,280,577 shares are restricted and subject to Rule 144.6 The combined
total of free trading and restricted shares issued and outstanding on June 30, 2015 are
129,460,000.” Id. at 4. On August 18, 2015, FINRA issued an ex-date determination of
August 19, 2015, with respect to the Calissio dividend. Filing No. 261-2, Index. of Evid.,
Ex. A, Answers to Requests for Admission at 14.
As discussed above, because the amount of the dividend that was announced by Calissio
exceeded twenty-five percent of the price at which Calissio stock was trading at the time, it was
categorized as a “special dividend” subject to the rule establishing the ex-date as following the payable
Rule 144 deals with sales of restricted securities. See 17 C.F.R. § 230.144.
The record shows that investors Nobilis and Beaufort had earlier loaned money
to Calissio and held promissory notes for the debts.
Between July 29, 2015, and
August 19, 2015, Nobilis and Beaufort converted that debt to equity. Filing No. 261-2,
Index of Evid., Ex. A, Answers to Requests for Admission at 14-15. Calissio issued new
shares as a result of the debt-to-equity conversion through its transfer agent, SST, who
admits that it records the issuance of shares by its customer companies, maintains
records of an issuer’s stock and bond holders, records changes of ownership, issues or
cancels certificates, and resolves problems arising from lost, destroyed, or stolen
certificates. See Filing No. 278-1, Ex. 32, FINRA FAQs.
As a result of converting the debt to equity, Nobilis obtained 327 million CRGP
shares, and Beaufort obtained 90 million CRGP shares. Filing No. 261-2, Answers to
Requests for Admission at 14-15. Nobilis and Beaufort were customers of J.H. Darbie,
who was an introducing or correspondent broker who used COR as its clearing and
settlement firm. COR Clearing admits that it approved the new shares for deposit on its
platform. COR’s client acknowledgement form, which is included in each tranche of
each conversion of debt to equity, COR states that sales of the securities “may not be
permitted by [COR] until such time that [COR] is satisfied that they are eligible for sale
and transfer, without fear of impairment or violation of law or industry rule.” Filing No.
239, Index of Evid., Exs. 1B-12B. COR acknowledges it has a duty to prevent fraud
generally, as well as to conduct anti-money-laundering reviews. Filing No. 278-6, Index
of Evid., Deposition of Carlos Salas at 37; see also Filing No. 83, Transcript of Hearing
dated Nov. 10, 2015 at 42-45 (Salas testimony acknowledging duties to conduct a
heightened review under FINRA Notice to Members 09-05).
As part of its review under FINRA Notice 09-05, COR reviewed certain
documentation relating to a conversion of shares. Filing No. 239, Exs. 1-12. COR
provides its correspondent brokers with a Heightened Risk Securities Correspondent
Guidebook and Heightened Risk Securities Deposit Document Requirements Checklist.
Filing No. 278-3. After that review, COR deposited with the DTCC at least 340 million
new shares of CBPB, thus permitting the shares to be traded. COR cleared shares that
were sold by J.H. Darbie on behalf of Darbies’s customers, Nobilis and Beaufort.
Evidence shows that the supporting paperwork submitted to COR by its
correspondent broker Darbie was factually inaccurate. See Filing No. 239, Exs. 1-12.
The supporting documents show that Darbie’s customers listed number of shares for
each tranche of each conversion was under 10% of total shares but the aggregate was
in excess of 10%. Id. Responses to COR’s heightened risk security questionnaire
show a possible Rule 144 violation and indicia that Calissio was a shell corporation
given its lack of assets and business activity. Id.
With respect to the Calissio shares issued in July and August 2015, SST
prepared a form stock certificate in accordance with its written internal procedures once
it received an issuance resolution and attorney opinion.
Filing No. 278-4, Ex. 35,
Affidavit of Jason Bogutski; Filing No. 278-5, Procedures. It reviewed the issuance
resolution and the respective attorney opinions and found all shares issued during that
time frame were free trading shares, consistent with other similar shares. Filing No.
278-4, Ex. 35, Affidavit of Jason Bogutski.
SST reviewed a DWAC placed by the
clearing firm COR, noted the number of shares that matched the number for each issue
per the issuance resolution and opinion letter received and DWAC forms completed by
The number of shares matched the number of shares shown on
DTCC system placed by COR and SST completed the DWAC and SST was able to
complete the DWAC. Id.
The evidence establishes that Calissio instructed its transfer agent, SST, to issue
the new shares with the same CUSIP number that was used for pre-record date shares.
The parties agree that shares of stock that are issued after the announced record date
for a dividend do not qualify for the dividend. The evidence also shows that the issuer
generally requests a CUSIP, although a transfer agent can request one if instructed to
or authorized by the issuer.
The parties agree that DTCC’s automated interim accounting system treated the
post-record date shares the same as pre-record date shares and attached due bills to
all shares on deposit at DTCC. Because all Calissio shares on deposit with DTCC
during the period June 1 to August 21, 2015 had the same CUSIP, DTCC considered
them as fungible within DTCC’s system.
Pursuant to its procedures, DTCC allocated debits and credits for the due bills on
the purchases and sales of CRGP shares. Only roughly 20% of the available Calissio
shares were eligible for the dividend, but DTCC made payments on all shares on its
system and not just those entitled to dividends. DTCC levied due bills on sellers’ shares
and paid the proceeds to the member firms that represented purchasers.
debited COR in the approximate amount of 3.7 million dollars.
allocated credits to the broker defendants for customers who had purchased the
Calissio shares carrying a due bill. These included the defendant broker defendants.
In total, $4,685,330.43 in credits were allocated by DTCC for dividends on the
purchases of the Calissio shares. Of that amount, $934,193.35 was allocated to TD
Ameritrade; $812,105.51 was allocated to NFS; $1,278,507.38 was allocated to ETrade; and $712,659.94 was allocated to Scottrade. The balance was allocated to
sixty-nine other clearing or broker defendants that are not parties to this action. The
broker defendants credited the payments to the end customer accounts on their
COR subsequently debited the J.H. Darbie accounts of Beaufort and Nobilis for
the amounts attributable to the Calissio shares Nobilis and Beaufort had sold,
recovering approximately $700,000 each from those accounts. COR later took action to
recover the roughly $3.7 million from J.H. Darbie and its customers, Nobilis and
Beaufort, through FINRA arbitration.
The record shows COR has settled with J.H.
Darbie and J.H. Darbie has agreed to pay COR approximately $1.7 Million. It has an
arbitration award against Nobilis and arbitration with Beaufort is pending.
Summary Judgment Standards
Summary judgment is appropriate when, viewing the facts and inferences in the
light most favorable to the nonmoving party, “the pleadings, the discovery and
disclosure materials on file, and any affidavits show that there is no genuine issue as to
any material fact and that the movant is entitled to judgment as a matter of law.” Fed.
R. Civ. P. 56(c)(2). The plain language of Rule 56(c) mandates the entry of summary
judgment, after adequate time for discovery and upon motion, against a party who fails
to make a showing sufficient to establish the existence of an element essential to that
party’s case, and on which that party will bear the burden of proof at trial. Celotex Corp.
v. Catrett, 477 U.S. 317, 322 (1986). “The movant ‘bears the initial responsibility of
informing the district court of the basis for its motion,’ and must identify ‘those portions
of [the record] . . . which it believes demonstrate the absence of a genuine issue of
material fact.’” Torgerson v. City of Rochester, 643 F.3d 1031, 1042, (8th Cir. 2011) (en
banc) (quoting Celotex, 477 U.S. at 323). If the movant does so, “the nonmovant must
respond by submitting evidentiary materials that set out ‘specific facts showing that
there is a genuine issue for trial.’” Id. (quoting Celotex, 477 U.S. at 324). A “genuine”
issue of material fact exists when “there is sufficient evidence favoring the nonmoving
party for a jury to return a verdict for that party.”
Anderson v. Liberty Lobby, Inc., 477
U.S. 242, 243 (1986).
The evidence must be viewed in the light most favorable to the nonmoving party,
giving the nonmoving party the benefit of all reasonable inferences. Kenney v. Swift
Transp., Inc., 347 F.3d 1041, 1044 (8th Cir. 2003). “Where the unresolved issues are
primarily legal rather than factual, summary judgment is particularly appropriate.”
Koehn v. Indian Hills Cmty. Coll., 371 F.3d 394, 396 (8th Cir. 2004).
FINRA Regulatory Notice 09-05 identifies situations in which broker-dealers and
associated persons (“firms”) should conduct a searching inquiry to comply with their
regulatory obligations under the federal securities laws and FINRA rules. The notice
reminds firms of their responsibilities to ensure that they comply with the federal
securities laws and FINRA rules when participating in unregistered resales of restricted
The notice obligates firms to take reasonable steps to ensure that the
company issuing shares is not a shell corporation. FINRA Regulatory Notice 90-05
(Jan. 2009) at 5. “Failure to conduct appropriate inquiry and respond to red flags may
have consequences under both the federal securities laws and [anti-money laundering]
requirements.” Id. at 9. The regulatory notice further provides:
FINRA, the SEC and the courts have repeatedly held that firms cannot
rely on outside counsel, clearing firms, transfer agents, issuers, or issuer’s
counsel to discharge their obligations to undertake an inquiry. Moreover,
the fact that securities have been issued by a transfer agent without a
restrictive legend, or have been put into trading status by a clearing firm,
does not mean that those securities can be resold immediately and
without limitation under the Securities Act.
Id. However, as a matter of law, a transfer agent whose sole involvement is to issue
shares without restriction as directed in reliance on attorney opinions is insufficient to
hold it liable in a fraudulent stock scheme. S.E.C. v. CMKM Diamonds, Inc., 729 F.3d
1248, 1258‐1259 (9th Cir. 2013).
“Conversion is any unauthorized or wrongful act of dominion exerted over
another's personal property which deprives the owner of his property permanently or for
an indefinite period of time.” Roth v. Farmers Mut. Ins. Co., 371 N.W.2d 289, 291 (Neb.
1985). “The plaintiff in an action for conversion must allege facts showing a right to
immediate possession of the property at the time of the conversion.” PWA Farms v.
North Platte State Bank, 371 N.W.2d 102, 105 (Neb. 1985); see also Cattle Nat. Bank of
Seward v. York State Bank & Tr. Co., 428 N.W.2d 624, 627 (Neb. 1988).
In order to recover on a claim for unjust enrichment, a plaintiff must prove that
“(1) the defendant received property or money from the plaintiff; (2) the defendant
retained possession of the property; and, (3) the defendant in justice and fairness ought
to pay the money to the plaintiff.” Kanne v. Visa U.S.A., Inc., 272 Neb. 489, 501, 723
N.W.2d 293, 302 (2006) (affirming dismissal on the plaintiffs’ unjust enrichment claim
“because [the plaintiffs] do not and cannot allege that [defendants] unjustly obtained or
retained any money from [the plaintiffs]”).
In order to prove fraud or misrepresentation under Nebraska law, plaintiffs must
prove: (1) that a representation was made; (2) that the representation was false; (3)
that when made, the representation was known to be false or made recklessly without
knowledge of its truth and as a positive assertion; (4) that it was made with the intention
that the plaintiff should rely upon it; (5) that the plaintiff did so rely; and (6) that he or she
suffered damage as a result. Freeman v. Hoffman La Roche, Inc., 618 N.W.2d 827,
844-45 (Neb. 2000). False representations must be the proximate cause of the damage
before a party may recover. Huffman v. Poore, 569 N.W.2d 549, 560 (Neb. Ct. App.
Absent information that should put a recipient on notice that a representation
may be false, a person may generally rely on the truth of another's representation.
deNourie & Yost Homes, LLC v. Frost, 854 N.W.2d 298, 314 (Neb. 2014) (quoting
Omaha Nat. Bank v. Mfrs. Life Ins. Co., 332 N.W.2d 196, 203 (Neb. 1983)).
intentional misrepresentation cases, a plaintiff fails to exercise ordinary prudence only
when the plaintiff's reliance is wholly unreasonable, given the facts open to the plaintiff's
observation and his or her own skill and experience. Id. “[A] plaintiff ‘may not close his
eyes to what is obviously discoverable by him.’” Id. (quoting Lucky 7 v. THT Realty, 775
N.W.2d 671, 676 (Neb. 2009)).
Uniform Commercial Code
Under the U.C.C. in Nebraska, a security entitlement is created “if a securities
intermediary . . . indicates by book entry that a financial asset has been credited to the
person's securities account” or “receives a financial asset . . . and accepts it for credit to
the person’s securities account.” Neb. Rev. Stat. (U.C.C.) § 8-501(b)(1)&(2).
“securities intermediary” is either a clearing corporation or any person, including a bank
or broker, that in the ordinary course of business maintains securities accounts for
others. Id.; see Neb. Rev. Stat. (U.C.C.) § 8-102(a)(14). Once a securities intermediary
indicates by book entry that a security has been credited to one's account, the account
holder becomes an “entitlement holder” and acquires a securities entitlement against
the securities intermediary. Neb. Rev. Stat. § 8-102(a)(7). The property interests in
“that financial asset held by the securities intermediary are held by the securities
intermediary for the entitlement holders,” and “are not property of the securities
intermediary.” Neb. Rev. Stat. (U.C.C.) § 8-503(a).
“A securities entitlement is ‘a package of personal rights against the securities
intermediary and an interest in the property held by the securities intermediary.’” Chase
Inv. Servs., 748 F. Supp. at 1167; see Neb. Rev. Stat. § 8-102, U.C.C. official cmt. 17.
Part 5 of Revised Article 8 of the Commercial Code defines the rights of the entitlement
holder and the duties of the securities intermediary. Neb. Rev. Stat. § 8-102, U.C.C.
official cmt. 17 (stating “[I]n a sense, then, the entirety of Part 5 is the definition of
security entitlement”). Chief among such rights, the securities intermediary must treat
the entitlement holder as “entitled to the financial asset,” and ensure that the entitlement
holder “receives all of the economic and corporate rights that comprise the financial
asset.” Neb. Rev. Stat. § 8-501, U.C.C. official cmt. 2; Neb. Rev. Stat. § 8-503, U.C.C.
official cmt. 2.
Under Neb. Rev. Stat. (U.C.C.) § 8-102(9), financial asset means
(i) a security;
(ii) an obligation of a person or a share, participation, or other interest in a
person or in property or an enterprise of a person, which is, or is of a type,
dealt in or traded on financial markets, or which is recognized in any area
in which it is issued or dealt in as a medium for investment; or
(iii) any property that is held by a securities intermediary for another
person in a securities account if the securities intermediary has expressly
agreed with the other person that the property is to be treated as a
financial asset under this article. As context requires, the term means
either the interest itself or the means by which a person's claim to it is
evidenced, including a certificated or uncertificated security, a security
certificate, or a security entitlement.
Neb. Rev. Stat. § UCC § 8-102 (9). A securities intermediary is to take action to obtain
any payments or distributions made by the issuer of the financial asset. Neb. Rev. Stat.
(U.C.C.) § 8-505(a).
As a general proposition, under the U.C.C., brokers are immunized from liability
“in connection with their activities as conduits for the transfer of securities on behalf of
their customers.” Decker v. Yorkton Sec., Inc., 106 Cal. App. 4th 1315, 1320–21 (2003)
(interpreting a California U.C.C. provision identical to Nebraska’s). Absent any collusion
with a wrongdoer,
[a] securities intermediary that has transferred a financial asset pursuant
to an effective entitlement order, or a broker or other agent or bailee that
has dealt with a financial asset at the direction of its customer or principal,
is not liable to a person having an adverse claim to the financial asset.
Neb. Rev. Stat. § 8-115. “[A] broker will not be liable even if it ‘has notice that someone
asserts a claim to a customer's securities or security entitlements,’ because ‘the firm
should not be placed in the position of having to make a legal judgment about the
validity of the claim at the risk of liability either to its customer or to the third party for
guessing wrong.’” Id. at 1321 (quoting Cal. Com.Code § 8115 cmt. 3, which mirrors
Neb. Rev. Stat. (U.C.C.) § 8-115 official cmt. 3). Section 8-115 “embodies one of the
fundamental principles of the article 8 indirect holding system rules—that a securities
intermediary owes duties only to its own entitlement holders.” Neb. Rev. Stat. (U.C.C.) §
8-115, official cmt. 4.
The securities intermediary or broker may be held liable to an adverse claimant
only if it took action after being served with a restraining order or other legal process, it
acted in collusion with a wrongdoer in violating the rights of an adverse claimant, or in
the case of a security certificate that has been stolen, it acted with notice of the adverse
claim. Neb. Rev. Stat. (U.C.C.) § 8-115(1)-(3); see id., official cmt 5 (stating “[i]f the
conduct of a securities intermediary or a broker or other agent or bailee rises to a level
of complicity in the wrongdoing of its customer or principal, the policies that favor
protection against liability do not apply.”). Under Neb. Rev. Stat. (U.C.C.) § 8-115(2),
“Knowledge that the action of the customer is wrongful is a necessary but not sufficient
condition of the collusion test.” Id., official cmt. 5. Further,
The aspect of the role of securities intermediaries and brokers that article
8 deals with is the clerical or ministerial role of implementing and recording
the securities transactions that their customers conduct. Faithful
performance of this role consists of following the instructions of the
customer. It is not the role of the record keeper to police whether the
transactions recorded are appropriate, so mere awareness that the
customer may be acting wrongfully does not itself constitute collusion.
An intermediary or broker is not insulated from liability, however, “in egregious
cases where its action goes beyond the ordinary standards of the business of
implementing and recording transactions, and reaches a level of affirmative misconduct
in assisting the customer in the commission of a wrong.” Id. The collusion exception
does not apply if the defendant allegedly ignored red flags but took no affirmative steps
to commit the wrong. See, e.g., H & R Block Fin. Advisors, Inc. v. Express Scripts, Inc.,
426 F.Supp.2d 656, 661–63 (E.D. Mich. 2006) (interpreting Michigan U.C.C.). A broker
is not protected under § 8-115 in the face of evidence that he had not only ignored red
flags but “blatantly ignored and suppressed conclusive evidence” that a customer did
not own the stock at issue. H & R Block, No. 05–73306, 2006 WL 2125226, at *6 (E.D.
Mich. July 27, 2006) (involving redemption of a mistakenly-issued stock certificate worth
over $7 million).
Under the Nebraska U.C.C., investors in the indirect and direct holding system
are protected from adverse claims, “whether framed in conversion, replevin,
constructive trust, equitable lien, or other theory,” if they acquire a security entitlement
for value and without notice of the adverse claim. See Neb. Rev. Stat. (U.C.C.) §§ 8303; 8-502. The U.C.C. in Nebraska also makes it explicit that a securities intermediary
that receives a financial asset and establishes a security entitlement in respect thereof
in favor of an entitlement holder is a “purchaser” of the financial asset that the securities
intermediary received and gives value by incurring obligations to its own entitlement
holder. See Neb. Rev. Stat. (U.C.C.) § 8-116, official cmt. 1.
Article 8 Part 4 of the U.C.C. covers registration of securities. Neb. Rev. Stat.
(U.C.C.) § 8-401 – § 8-407. Under Neb. Rev. Stat. (U.C.C.) § 8-407, a transfer agent is
liable to the owner of a security for the wrongful registration of that security. See Neb.
Rev. Stat. (U.C.C.) § 8-407, official cmt. 1. “The transfer agent must pass on and
satisfy himself as to the validity and propriety of the transfer, and the transfer agent is
generally held liable for the improper issue and transfer of certificates, both to the
corporation and to persons injured.” Ferer v. Erickson & Sederstrom, P.C., 718 N.W.2d
501, 506 (Neb.), opinion supplemented on overruling of reh'g, 759 N.W.2d 75 (Neb.
The court first finds that the dispute between the parties involves questions of
law. The salient facts are not in any real dispute. The claims between the parties to
this lawsuit can be resolved as a matter of law and summary judgment is proper.
Plaintiff COR seeks partial summary judgment against the broker defendants on
its claim for conversion. The broker defendants argue that COR’s claims are barred by
operation of law under two provisions of the Nebraska Uniform Commercial Code, Neb.
Rev. Stat. (U.C.C.) §§ 8-502 and 8-115 (U.C.C.). Alternatively, the broker defendants
argue that the plaintiff has not established that they wrongfully converted COR’s
property to their own use because it was passed on to their customers.
In response, COR argues that U.C.C. § 8-115 does not apply because a transfer
of money, and not securities, is involved. COR further argues it has established the
requisite elements of conversion and is entitled to judgment in its favor on the claim.
The court finds COR’s motion for summary judgment on its conversion claim
should be denied. First, COR has not established the elements of a conversion claim.
The evidence shows that the brokers did not have possession, dominion, or control over
the payments on the due bill credits. It is undisputed that the DTCC assessed and
allocated the due bill credits and the brokers immediately credited the payments to their
customers or clients, the purchasers of the shares.
Under the Nebraska U.C.C.,
property interests in financial assets held by a securities intermediary are held by the
securities intermediaries “for the entitlement holders,” and “are not property of the
securities intermediary.” Neb. Rev. Stat. (U.C.C.) § 8-503(a). Further, the brokers’
possession of the assets was fleeting. Also, COR has not shown that it had any right to
immediate possession of the due bills at issue.
Most importantly, however, the evidence shows as a matter of law that the
brokers are immunized from liability by virtue of the operation of Neb. Rev. Stat.
(U.C.C.) §§ 8-115 and 8-502. COR has not alleged or shown any collusion between the
alleged fraudster, Calissio, and the brokers so as to come within the exception covered
under Neb. Rev. Stat. (U.C.C.) § 8-115(2). There is similarly no notice that the brokers
were on notice of any potential adverse claims.
The court rejects COR’s contention that the U.C.C. provisions do not come into
play because the due bills are not financial assets under the U.C.C. The due bills
represent distributions from an issuer that a shareholder would be entitled to receive,
and a securities intermediary would be obliged to obtain and deliver to the shareholder
under federal securities laws and the U.C.C. The dividend/distribution is part of the
economic and corporate rights that comprise the financial asset. Accordingly, the court
finds COR’s motion for summary judgment on its conversion claim should be denied.
Broker Defendants’ Motion
The broker defendants move for summary judgment on all of COR’s claims
against them—unjust enrichment, conversion, and imposition of a constructive trust.
They again argue that COR’s claims are barred by operation of law under two
provisions of the Nebraska Uniform Commercial Code, Neb. Rev. Stat. (U.C.C.) §§ 8502 and 8-115 (U.C.C.). They assert those provisions render them immune from suit for
unjust enrichment as well as conversion. Further they argue that the imposition of a
constructive trust is a remedy dependent on a finding of unjust enrichment and not a
freestanding claim. Further they argue that undisputed evidence shows that the broker
defendants have not received, benefitted from, or retained any money or property from
COR so as to be liable for either conversion or unjust enrichment. In response, COR
again argues that the U.C.C. provisions do not apply because a transfer of money, not
securities, is involved.
For the reasons stated above in connection with COR’s motion, the court finds
that the brokers’ motion should be granted with respect to COR’s conversion claim. The
brokers have shown that they are protected from liability under the relevant U.C.C.
provisions. The U.C.C. provides protection to a securities intermediary from an adverse
claim whether framed as a claim for conversion or for imposition of an equitable lien or
constructive trust. An unjust enrichment claim is an equitable claim for determination by
the court, resulting in imposition of a constructive trust and would come within the
purview of the immunity afforded under the U.C.C. Accordingly, the claim is barred as a
matter of law under the U.C.C. and the brokers are entitled to a judgment of dismissal.
Alternatively, the court finds there is no evidence that the broker defendants were
unjustly enriched by the turn of events at issue. Based on the undisputed evidence
before the court, the court is unable to find that in justice and fairness the brokers
should pay money to COR. The plaintiff has not established that the brokers received
or retained any property rightfully belonging to the plaintiff nor have they shown that, if
they had, the brokers “in justice and fairness” should pay it to COR.
The undisputed evidence before the court shows that, as between the broker
defendants and COR, the broker defendants are no more culpable or responsible for
the losses at issue than COR. Recovery from the broker defendants is not proper under
these facts. The evidence shows that the losses at issue were occasioned by the
DTCC’s automated system assigning due bills to shares of stock that were not entitled
to a dividend because they were issued after the record date, but were assigned the
same CUSIP number as the earlier-issued shares. The issuer, Calissio, is the party
responsible for the CUSIP and bears the ultimate responsibility for the resulting mix-up.
FINRA regulations, however, place an inquiry obligation on securities firms before they
accept certain securities. COR’s president testified at a hearing in this case that it had
procedures for such review. The documentation produced by COR’s correspondent
broker, Darbie, was apparently submitted as part of COR’s attempted fulfillment of its
FINRA 90-05 obligations. Those materials signified several red flags.
As the clearing broker for Darbie, COR was aware at all times that the securities
it accepted for deposit to the DTCC, ultimately sold by Nobilis and Beaufort, were
issued after the record date. COR required its customers, Beaufort, Nobilis, and Darbie
to prepare Heightened Risk Security packets in order to satisfy COR’s obligations under
FINRA Regulatory Notice 09-05. In its review of those materials, COR failed to spot red
flags in connection with the debt-to-equity conversions.
There is evidence to support the conclusion that COR’s own actions created the
conditions that the DTCC interim accounting system utilized in processing the Calissio
dividend due bills and resulted in the debit to COR on those due bills. The broker
defendants did not have knowledge of the supporting facts contained in the documents
submitted to COR by Darbie. COR was the only clearing firm member of DTCC that
had knowledge of the facts connected to the debt-to-equity conversion by Nobilis and
Beaufort that resulted in the issuance of the new shares.
Evidence suggests COR knew the details of the dividend announced by Calissio
and was the only clearing firm aware of the data that on its face appears inaccurate or
false on the paperwork it received and approved—including misrepresentations as to
number of shares held, acquisition dates, holding periods, ability to acquire more
shares, beneficial rights, etc.—and was the only clearing firm privy to the suspect selling
activity of Nobilis and Beaufort. In any event, COR was in a better position to protect
itself, and the market, than the defendant brokers were.
Under these circumstances, the equities do not favor COR and the court would
not be inclined to find any unjust enrichment by the defendant brokers.
evidence shows that COR has utilized the remedies available to it under its contracts
with its correspondent broker Darbie, has debited the accounts of Nobilis and Beaufort,
and has availed itself of FINRA’s arbitration procedures. It appears that COR’s
remedies lie with Calissio, Carter, Darbie, Nobilis, and Beaufort. The collectability of
any recovery from those entities is not an issue that this court should consider in
connection with the claims between the parties presently before the court. Nothing “in
fairness and justice” indicates that COR should recover from the defendant brokers or
their end customers. Accordingly, the court finds the defendant brokers are entitled to
judgment on the unjust enrichment claim. The imposition of a constructive trust is a
remedy which requires that COR first establish the elements of its underlying claims, so
the plaintiff’s purported claim for constructive trust is also subject to dismissal.
Defendant Signature Stock Transfer, Inc. (“SST”) also moves for summary
judgment on COR’s claims for fraud, unjust enrichment, and a declaratory judgment.7 It
argues that COR has not shown that SST had the required state of mind to support a
claim of fraud, nor has it shown any reliance on SST’s representations. Also, SST
argues there is no evidence that SST received or retained any of the alleged $4 million
in dividend credits that comprise the supposed windfall that is the basis of COR’s unjust
enrichment claim. SST asserts that it is not a DTCC participant and had neither the
ability nor responsibility to notify DTCC of any dividend issues in advance of the pay
date, nor is it covered by FINRA. Further it argues that COR knew as much if not more
COR has not asserted a conversion claim against defendant SST.
than SST as it pertained to this matter and acted in conscious disregard of red flags in
connection with Calissio, the dividend, and the debt-to-equity transaction.
The court agrees with SST’s assessment that a transfer agent’s duties are
generally administrative in nature.
There is no evidence that SST had any actual
knowledge that anything was amiss in the transactions at issue. A transfer agent is
responsible for recording changes of ownership of securities and the like. A transfer
agent has duties imposed by the SEC to ensure the recording is accurate and can fulfill
that duty by relying on corporate resolutions and attorney opinions. Transfer agents are
not governed by FINRA and are not subject to the inquiry obligations imposed under
FINRA Regulatory Notice 09-05. SST has contractual obligations to Calissio, not to
At oral argument, COR’s counsel suggested that its theory of recovery is based
on the principal/agent relationship between Calissio and SST, suggesting that its
principal Calissio’s awareness of material misrepresentations to the market could
somehow be imputed to SST. There is no authority for that position. Counsel also
argued that SST acted in reckless disregard of the truth in failing to correct the alleged
misstatements. The elements of a fraud claim, however, require an intent to defraud.
Evidence that amounts to negligence, even gross negligence, will not suffice.
evidence suggests that SST may have been at most negligent in connection with the
transaction, but there is no evidence of intent to defraud.
Further, COR cannot show that it reasonably relied on any alleged
misstatements by SST. COR was in possession of the same information as SST. Even
assuming that SST made material misstatements, which the evidence does not support,
COR had information that would have put it on notice that the information may have
been false or misleading, so as to make any reliance on such statements “wholly
unreasonable, given the facts open to [COR’s] observation and [its] own skill and
See deNourie & Yost Homes, LLC, 854 N.W.2d at 314. The evidence
shows COR failed to exercise reasonable prudence and effectively “close[d its] eyes to
what [was] obviously discoverable by [it].” Id. (internal quotation omitted).
Although a transfer agent can be liable under the U.C.C. for wrongful registration
of a security under Neb. Rev. Stat. (U.C.C.) § 8-407, COR made no claim under the
U.C.C. and there is no allegation or evidence that the registration was wrongful, invalid
or improper. There is no evidence that SST did anything other than that which it was
instructed to do.
With respect to the unjust enrichment claim, there is no evidence that SST has
been unjustly enriched, and for the reasons stated above with respect to the broker
defendants, the court finds the equities do not favor COR on that claim. Accordingly,
the court finds SST’s motion for summary judgment should be granted.
IT IS ORDERED:
Defendant Signature Stock Transfer, Inc.’s motion for summary judgment
(Filing No. 237) is granted;
Defendants National Financial Services, LLC’s, TD Ameritrade Clearing,
Inc.’s, E-Trade Clearing, LLC’s, and Scottrade, Inc.’s joint motion for summary judgment
(Filing No. 255) is granted;
Plaintiff COR Clearing Inc.’s motion for partial summary judgment (Filing
No. 258) is denied;
The parties’ pending motions in limine (Filing No. 266 and Filing No. 270)
are denied as moot;
A judgment of dismissal will issue this date.
Dated this 6th day of November, 2017.
BY THE COURT:
s/ Joseph F. Bataillon
Senior United States District Judge
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