Chaney v. Dreyfus Service Corp., No. 08-60555, 2010 U.S. App. LEXIS 1572 (5^th Cir. 1/25/10).  FRCP (Rule 56 “Summary Judgment”) * Account Administration (Wire Transfers) * Negligence, Actionable * U.S. Statutes Interpreted (18 U.S.C. §1962(d) “RICO” Act) * Insurance Issues * Trusts/Estates/Receiverships * Culpability Standards (Ought to Know; Imputed Knowledge) * Statutory Definitions (“Customer”).  Court affirming summary judgment in favor of broker dealer on RICO claims and certain tort claims brought by receivers of defrauded insurance companies, but vacating summary judgment as to tort claims involving accounts of insurance companies on basis that determination of claims involved fact issues as to whether broker-dealer properly discharged its duties.

This appeal arises out of a case brought by receivers of seven insurance companies (the “Receivers”), whose assets were looted through a complex fraud scheme perpetrated by Martin Frankel (“Frankel”) and certain co-conspirators.   Frankel’s scheme involved the purchase of insurance companies with funds acquired fraudulently from investors and the fraudulent transfer of millions of the insurance companies’ assets to Swiss accounts under Frankel’s control.  Frankel accomplished the fraudulent transfers through brokerage accounts maintained at Dreyfus Service Corporation (“DSC”), a registered broker-dealer. Using an alias, Frankel opened at DSC a “master account” in the name of LNS, Inc., and certain “sub-accounts,” five of which were in the name of LNS, Inc., and five of which were in the name of the insurance companies.  Over a period of years, Frankel transferred approximately $200 million in assets of the insurance companies from the DSC accounts to his Swiss accounts through a pattern of large purchases and rapid redemptions to offshore accounts via standing wire instructions.  Frankel’s fraud was eventually discovered and the insurance companies placed in receivership.  The Receivers sued a number of parties, including DSC, against whom the Receivers asserted claims of negligence and a RICO conspiracy claim.  The District Court granted summary judgment in favor of DSC on all claims, and the Receivers appealed.  On appeal, the Receivers argue that summary judgment in favor of DSC on the negligence claims was in error, because DSC’s failure to monitor for suspicious activity or verify redemption authority breached duties of care owed by DSC to the insurance companies, causing their losses.  The Court first determines that the insurance companies, as named owners of the DSC “sub-accounts,” were “customers” to whom DSC owed duties of care under New York tort law.  Next, the Court rejects the Receivers’ arguments that, even though the insurance companies were not customers of DSC with respect to accounts in the name of LNS, Inc., DSC should be liable to the insurance companies for misappropriations in the LNS accounts, because DSC “ought to have known” that LNS was a fiduciary of the insurance companies with respect to such funds.  On that point, the Court concludes that DSC had no reason to know that LNS controlled the funds as a fiduciary and refuses to impose upon DSC the obligation to monitor non-fiduciary accounts for suspicious activity.  Turning to the issue of whether DSC breached its duty of care owed to the insurance companies as “customers” of the sub-accounts, the Court notes that, even though the sub-accounts were non-discretionary, DSC owed some duty to the insurance companies to determine if the redemptions Frankel made in the insurance companies’ accounts were authorized.  The Court finds that determination of whether DSC breached this duty involves triable issues of fact and vacates the lower court’s grant of summary judgment on this issue.  Finally, the Court finds no basis to reverse the grant of summary judgment in favor of DSC on the Receivers’ RICO conspiracy claims, observing that the Receivers presented no theory by which DSC could be properly charged with knowledge of Frankel’s fraudulent activities.  (J. Ballard) (SLC Ref. No. 2010-09-08, 3/1/10)  (CLICK HERE to order copy of decision)