United States District Court, D. Nebraska
COR CLEARING, LLC, a Delaware limited liability company; Plaintiff,
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; Defendants.
MEMORANDUM AND ORDER
F. Bataillon Senior United States District Judge
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.
an action for declaratory relief, unjust enrichment, fraud,
and conversion in connection with a securities transaction.
Jurisdiction is based on diversity of citizenship under 28
U.S.C. § 1332.
COR alleges that defendants Calissio Resources Group, Inc.
(“Calissio”), Adam Carter, 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.
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
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.
COR is an independent clearing and settlement firm. Clearing
firms generally handle the back-office details of securities
transactions between broker-dealers. A broker-dealer is an
individual or firm that trades securities. A clearing or
carrying firm also maintains custody of securities and assets
such as cash. An introducing firm accepts orders to trade but
has an arrangement with a clearing or carrying firm to
maintain custody of the securities account. Generally,
introducing 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.
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.
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
Release Concerning Self-Regulation (Nov. 18, 2004), available
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 procedures.
indirect holding system is a system in which securities are
not physical securities represented by certificates, but are
represented as “book entries” in a securities
account. 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 Fed.Appx. 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. Article 8 of the U.C.C. was revised in
1994 and has been adopted in Nebraska. Neb. Rev. Stat. §
8-101 et seq.
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. 2004). Most
transfer agents, including SST, deposit shares into the DTCC
via the 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.
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. § 78q-1(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 defendants.
agents are also subject to provisions of the U.C.C. of the
state in which the issuer is incorporated. 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.
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 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.
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.
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
Fed.Appx. 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
DTCC implements the allocations of due bills under UPC 11140.
The 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
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.
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. 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.
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
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.
Filing No. 260-12, Index of Evid., Ex. K. 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. 290-20, 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. The Annual 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. 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
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.
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).
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.
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
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
shareholder. 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.
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