U.S. Commodity Futures Trading Comm'n v. Battoo

66 F.Supp.3d 1095

United States Commodity Futures Trading Commission, Plaintiff

v.Nikolai Simon Battoo et al., Defendants.

No. 12 C 07127

United States District Court, N.D. Illinois, Eastern Division.

Signed September 4, 2014

Andrew Ridenour, United States Commodity Futures Trading Commission, Amanda Leigh Harding, David S. Slovick, Kathleen Banar, Commodity Futures Trading Commission, Washington, DC, Carlin R. Metzger, United States Commodity Futures Trading Commission, Chicago, IL, for Plaintiff.

Anthony Vitullo, Fee, Smith, Sharp & Vitullo, LLP, Dallas, TX, for Plaintiff Don Buford, Jr.

James Arthur McGurk, Law Offices of James A. McGurk, P.C., Chicago, IL, for Movant Collette Guerra.

Deborah L. Thorne, Alison C. Conlon, Barnes & Thornburg, Anthony George Stamato, Kaye Scholer LLC, Emily L. Seymore, Eric H. Sussman, Paul Hastings LLP, Chicago, IL, Alexander S. Lorenzo, Alston & Bird LLP, New York, NY, Robert McPherson Spalding, Kaye Scholer LLP, Chicago, IL, Suzanne Novella Boyd, William S. Sugden, Alston & Bird LLP, Atlanta, GA, for Receiver.

Michael F. Cockson, Faegre Baker Daniels, Minneapolis, MN, Trina K. Taylor, Faegre Baker Daniels LLP, Chicago, IL, for Intervenor.

Order

Honorable EDMOND E. CHANG, United States District Judge

As directed in the Court's February 6, 2014 Minute Entry [R. 256], Hadley Chilton and John Greenwood, in their capacity as Joint Liquidators (the “BVI Liquidators”) of the BVI Funds,¹ have filed a motion to modify [R. 255] the Preliminary Injunction [R. 22]. For the reasons stated below, the BVI Liquidators' motion is denied.

I. Background²

On September 27, 2012, the Court entered an order granting the Commodity Futures Trading Commission's (CFTC) motion for a preliminary injunction. R. 22, Prelim. Inj. To preserve the status quo, protect Defendants' alleged victims from further loss and damage, and to minimize the danger of further violations of the law by Defendants, the Court also appointed and authorized a Receiver to “[t]ake exclusive custody, control, and possession of all Receivership Assets and other funds, property, and assets of, in the possession of, or under the control of the Defendants....” Id. ¶¶ 41–42.

To date, the Receiver has seized the following assets from accounts in the names of various BVI Funds:

The Whitebox Assets: $1,169,713.37 in cash held by EFG Private Bank (Channel Islands) Limited in Guernsey, Channel Islands in accounts owned by Phi R Master. R. 255, BVI Liquidators' Mot. to Modify, Exh. A, BVI Compl. at 2.

The Quantitative Assets: $5,654,032.67 in cash held by EFG Private Bank (Channel Islands) Limited in Guernsey, Channel Islands in accounts owned by Phi R Master. Id.

The Newedge Assets: $8,812,871.06 in cash held by Newedge USA, LLC in accounts in the name of Phi R Master, FuturesOne Innovative, and Futures One Class O. Id. at 3. The Phi R Master account contained $2,750,155.44. R. 273–66, Kane Aff., Exh. 65. The FuturesOne Innovative accounts contained $1,689,602.12. R. 273, Kane Aff. ¶ 96. The FuturesOne Class O account contained $4,510,071.60. Id.

The Reed Smith Assets: $10,981,901.91 in proceeds from a litigation settlement held in a client trust account at the London law office of the law firm Reed Smith, LLP. BVI Compl. at 3. Reed Smith held the funds in the name of BC Capital Group Limited, which prosecuted the case on behalf of Anchor, Galaxy, and FuturesOne Diversified. BVI Compl. at 3.

On behalf of the BVI Funds, the BVI Liquidators now dispute whether these assets (for convenience's sake, the “Disputed Assets”) were properly seized.Id. at 2.

II. Analysis

Reduced to its essential terms, the Receiver's interest in the Disputed Assets derives from the following transactions: (1) Defendants invested Private International Wealth Management (PIWM) investor money with a broker/dealer called Alliance Investment Management, Ltd.,³ (2) Alliance, in turn, invested that money in certain BVI Funds by buying shares of those funds—specifically, Alliance held 37.83% of Anchor's participating shares, 10.35% of Galaxy's participating shares, and 17.33% of FuturesOne Diversified's participating shares; and (3) the BVI Funds invested in (or, in the case of the Reed Smith assets, were entitled to) the Disputed Assets,⁴ as described above. Id. at 9–53. From here, the parties disagree sharply as to what part of the Disputed Assets are legitimately subject to receivership.

The BVI Liquidators contend that the Disputed Assets, in their entirety, should be turned over to the BVI Liquidators for liquidation. They argue that, as “distinct legal entities, organized in different jurisdictions, with separate investors, all of whom have separate investment expectations,” the BC Capital Entities and the BVI Funds should not be treated interchangeably. Id . at 5. In the same vein, they contend that the BVI Funds' assets should not be pooled, in a “global fund,” with the BC Capital Entities' assets for distribution to victims of Defendants' fraud. Instead, the Disputed Assets should be turned over to the BVI Liquidators, at which point the Receiver may make a claim to whatever distribution Alliance would be entitled to receive based on its ownership interests in certain BVI Funds. Id. at 2–3, 11.

The CFTC, in contrast, argues that the Disputed Assets in their entirety should remain Receivership Assets. It contends that Defendants so extensively commingled PIWM investor funds with BVI funds as to blur all distinction between them. R. 282, CFTC Response Br. at 12–14. Specifically, it argues that PIWM and BVI funds were commingled when Alliance invested in and received purported returns from the BVI Funds, and were further commingled through intra fund transfers between certain share classes within the BVI Funds, and inter fund transfers amongst the BVI Funds themselves. Id. ; R. 272, CFTC Statement of Fact ¶ 43. As a result, the CFTC argues that “all of the Disputed Assets are tainted by Defendants' fraud and must be distributed to all victims of the fraud on a pro rata basis.” CFTC Response Br. at 14.

In its brief, the CFTC makes five arguments as to why the BVI Liquidators' motion to modify should be denied: (1) the Disputed Assets are Receivership Assets under the preliminary injunction and the Court's order directing turnover of the Whitebox Assets; (2) the motion to modify the preliminary injunction is procedurally defective; (3) the BVI Liquidators have not provided any evidence or legal authority to support their motion; (4) the CFTC and the Receiver have presented substantial evidence and legal authority to preserve the current scope of the injunction; and (5) maintaining the preliminary injunction in its current form is in the public interest. The CFTC's second argument, regarding the procedural soundness of the BVI Liquidators' motion, is insubstantial and a footnote is enough to explain why.⁵ The remaining arguments are addressed in turn.

A. The Preliminary Injunction and Whitebox Turnover Order

The CFTC argues that, in addition to Alliance's ownership interest in the Disputed Assets via investment in the BVI Funds, the Disputed Assets are also properly Receivership Assets as a function of Battoo's control over them. It is undisputed that Battoo acted as an “investment advisor” or “senior investment advisor” to each of the BVI Funds, giving him discretionary authority to invest each Fund's assets. BVI Compl. ¶¶ 37 (Anchor), 84 (Galaxy), 135 (FuturesOne Diversified), 183 (FuturesOne Innovative), 218 (Phi R Master). In fact, the record shows that Battoo was the only one who could make investment decisions on behalf of each Fund. CFTC Statement of Fact ¶¶ 66 (Anchor); 80 (FuturesOne Diversified); 93 (FuturesOne Innovative); 103–05 (Galaxy); 124 (Phi R Master). And, in addition to holding an advisory position with each Fund, Battoo also controlled the voting shares of each Fund. See id. ¶¶ 63 (Anchor); 76 (FuturesOne Diversified); 89 (FuturesOne Innovative); 103 (Galaxy); 122 (Phi R Master). In light of the many facets of Battoo's control over the BVI Funds, the CFTC contends that the Disputed Assets should fall under the preliminary injunction's freeze over all “assets directly or indirectly owned, beneficially or otherwise, managed or controlled by the Defendants, whether held in their own names or in the names of others (‘Receivership Assets').” Prelim. Inj. ¶¶ 36, 41.

The parties have already exchanged a preliminary round of arguments on this issue: in August 2013, the Receiver filed a motion to compel turnover of the Whitebox Assets (funds held in an EFG account owned by Phi R Master), based on Battoo's control over Phi R Master. R. 185, Whitebox Turnover Mot. ¶¶ 15, 17. The BVI Liquidators did not oppose the turnover at that time, but noted their concern that “the majority, if not all of those assets in the fund, belong to investors who had nothing to do with Battoo.” R. 239, August 15, 2013 Hr'g Tr. at 6:22–24. The Court granted the Receiver's motion for turnover of the Whitebox Assets, subject to the BVI Liquidators' reservation of rights before the distribution phase. Id. at 10:9; 16:23–24.

With regard to the present motion, the CFTC argues that “[a]ll of the Disputed Assets are similarly situated to the Whitebox Assets” in terms of Battoo's control over them, and thus “all of the other Disputed Assets are Receivership Assets under the Preliminary Injunction in its current form.” CFTC Response Br. at 6. The BVI Liquidators argue, in response, that their appointment extinguished Battoo's control over the BVI Funds. R. 305, BVI Reply Br. at 3. Accordingly, they contend that the freeze over those assets should be lifted because the assets are no longer “managed or controlled” by Battoo. Id.

To a limited extent, the BVI Liquidators are correct: Battoo's removal from a position of authority over the BVI Funds alleviates concerns regarding the “withdrawal or misapplication of funds entrusted to the Defendants.” Prelim. Inj. ¶ 42(D). But the extent of Battoo's prior control over the...