Anatomy of an Explained AAA Award: “Oh, What a Tangled Web We Weave….”
Posted on Categories Arbitration Awards, Broker-Dealer, Securities ArbitrationTags , , ,

Guest author Harry A. Jacobowitz, Esq., analyzes for us an explained AAA Award featuring the largest damages since 2018 and the Arbitrator’s detailed explanation (as requested by the parties) of liability and damages in favor of a hedge fund against its fired portfolio manager. And, while no broker-dealer was held liable, it gave one a media relations black eye.

The explained Award in Carbon Investment Partners LLC v. Bressler, AAA ID #01-18-0001-3401 (Oklahoma City, OK, Apr. 30, 2019), came to our attention when a bankruptcy court denied the respondent a discharge of the damage award. It is quite a tale.

Collapse of a Conservative Hedge Fund

Carbon Investment Partners (“Carbon GP”) was the general partner of Carbon Master Fund, L.P. (“the Fund”), a hedge fund founded in 2016 that held itself out as conservative and market-neutral, focused on equities in the industrial sector, with an emphasis on capital preservation and a requirement that no more than 10% of invested capital be held in any single investment. Lee A. Bressler was a partner of Carbon GP and a founder and chief investment officer of the Fund. He managed the Fund’s investments under the supervision of its chief risk officer, Brandon Bradford. However, the Fund was driven into insolvency by bad investments executed in January and February 2018. Carbon GP and the Fund filed this arbitration against Bressler, alleging that he made unauthorized, unsuitable trades about which he deliberately kept his partners in the dark. Bressler counterclaimed, alleging that the claimants defamed him and owed him indemnification, because his partners did know about the trades and that he made them in the Fund’s interest. 

Risky Business on the Side

The assertions in this and the next paragraph report the sole Arbitrator’s findings in the Award. Carbon opened an account (the “primary account”) with broker-dealer Jefferies LLC. Bressler was to conduct all trades in the primary account, which Bradford monitored. However, in 2017, Bressler incurred losses in trades that violated the Fund’s conservative mandate. In an effort to insulate its limited partners in the most tax-efficient way possible, the Fund placed the securities from these unauthorized trades in “side pocket” accounts (the “side accounts”), in which only Carbon GP’s partners would participate. Instead, Bressler used the side accounts to engage in risky unauthorized trading, including options trading on margin. The end came when he made a series of trades that exceeded the Fund’s assets by up to 3,000% and lost it all.

Hiding the Truth

With Jefferies’ apparent knowledge and assistance, Bressler insulated his side account trading from Bradford’s oversight. When Bressler made gains, he failed to report them and instead pocketed them for his own benefit. He also made a series of other misrepresentations and omissions in order to prevent the Fund and his partners from discovering what he was doing. Later, during the arbitration, Bressler repeatedly disregarded his discovery obligations, “including withholding and spoliating potential sources of evidence,” and when he finally turned over his computer, its hard drive had been wiped clean. In response, the Arbitrator imposed sanctions, dismissing Bressler’s counterclaims and drawing a negative inference that the spoliated evidence would favor the claimants (although the Arbitrator found the evidence so compelling that he did not rely on the adverse inference).

Damages Awarded

The parties stipulated that the Fund lost $10,150,000 in capital. The Arbitrator also awarded almost $2.4 million for an “alleged negative ‘deficiency’ balance” created by the trades, and $118,645 as disgorgement of Bressler’s compensation, yielding a total compensatory damage award of $12,665,301. The Arbitrator also awarded $2.5 million in punitive damages, $1,333,875 in attorney fees and costs, and $296,753 in pre-judgment interest, plus post-judgment interest. The total amount awarded came to just short of $16.8 million. Bressler was also assessed all forum fees.

(ed: *A summary of the bankruptcy decision denying discharge of the debt, which was granted on summary judgment, appears in our sister publication, SAC’s Online Litigation Alert (SOLA 2020-20). Summarizing that decision for SOLA led to our retrieving a copy of the Award for SAC's Award Database. **We searched the Award Database and found no Award in an arbitration brought by either Carbon entity against Jefferies. However, we did find news stories about the Award’s findings concerning Jefferies’ alleged role in Bressler’s misconduct, so it did not escape unscathed from this debacle. ***This summary was authored by Harry A. Jacobowitz, the owner and operator of HAJ Research and Writing LLC, a company specializing in researching and writing on legal issues and related subjects. A graduate of the University of Pennsylvania Law School with more than 30 years of experience in the legal and legal publishing fields, Mr. Jacobowitz is a former manager of SAC’s securities Awards database and currently serves in a consulting capacity to SAC and the Alert. HAJ Research and Writing LLC is available to perform customized searches of the database for SAC subscribers and others. Customized searches may be ordered by emailing searches@sacarbitration.com. Mr. Jacobowitz and his company may also be reached at harryjacobowitz@optimum.net.) (SAC Ref. No. 2020-21-03)

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