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Prestwick Capital Management Ltd., Prestwick Capital Management Ltd v. Peregrine Financial Group

August 25, 2011

PRESTWICK CAPITAL MANAGEMENT LTD., PRESTWICK CAPITAL MANAGEMENT LTD.,
AND PRESTWICK CAPITAL MANAGEMENT LTD.,
PLAINTIFFS,
v.
PEREGRINE FINANCIAL GROUP, INC., ACUVEST INC.,
JOHN LOUIS CAIAZZO, AND PHILIP FRANCIS GREY,
DEFENDANTS.



The opinion of the court was delivered by: Elaine E. Bucklo United States District Judge

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 for commodities fraud under the Commodity Exchange Act ("CEA"), 7 U.S.C. § 1, et seq. 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 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, were opened while the 2004 agreement was in place. 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 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 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 untenable is Prestwick's argument that the 2006 agreement did not, in fact, terminate or replace the 2004 agreement. Here, Prestwick cites the 2006 agreement's definition 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." Id. This argument simply does not follow: the fact that the 2006 agreement covered new accounts does not mean that the 2004 agreement was not terminated. On the contrary, the 2006 agreement unequivocally states: "[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. "Applying PFG's interpretation," Prestwick claims, "an FCM 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." 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 ...


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