Cor Clearing, LLC v. Calissio Res. Grp., Inc.

COR CLEARING, LLC, a Delaware limited liability company; Plaintiff, v. 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.

8:15CV317

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEBRASKA

November 6, 2017

MEMORANDUM AND ORDER

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. Jurisdiction is based on diversity of citizenship under 28 U.S.C. § 1332.

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.

I. 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. 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 orcarrying 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.

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 Release Concerning Self-Regulation (Nov. 18, 2004), available at http://www.sec.gov/rules/concept/34-50700.htm.

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 andrecord 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.

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 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 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. 2004). Most transfer agents, including SST, deposit shares into the DTCC via theDeposit/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. § 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.

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 BeaufortCapital 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...