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Marion v. TDI Inc

January 4, 2010

DAVID H. MARION, AS RECEIVER FOR BENTLEY FINANCIAL SERVICES, INC.
v.
TDI INC, (F/K/A TRADERS AND DEALERS, INCORPORATED, F/K/A TDI, INCORPORATED, F/K/A THE TRADING DESK, INC. AND F/K/A U.S. CENTRAL SECURITIES, INC.; SOUTHEASTERN SECURITIES INC.; SFG FINANCIAL SERVICES, INC.; PENINSULA BANK; THEODORE BENGHIAT; CASTO EDWIN RIVERA; JERRY MANNING; JOHN STRINE; JEFFREY WILSON; JOSEPH MARZOUCA
v.
SANFORD GOLDFINE; S.D. GOLDFINE & CO.; (THIRD-PARTY DEFENDANTS)
DAVID H. MARION, AS RECEIVER FOR BENTLEY FINANCIAL SERVICES, INC.
v.
S.D. GOLDFINE & COMPANY; SANFORD GOLDFINE; JEFFREY WILSON; JERRY MANNING; JOSEPH MARZOUCA; THEODORE BENGHIAT; PENINSULA BANK; CASTO EDWIN RIVERA; SFG FINANCIAL SERVICES, INC.; SOUTHEASTERN SECURITIES, INC.; JOHN STRINE; THE TRADING DESK, INC. D/B/A TDI, INC.; PENINSULA BANK; JOSEPH MARZOUCA, APPELLANTS (NO. 06-5173)
DAVID H. MARION, AS RECEIVER FOR BENTLEY FINANCIAL SERVICES, INC.
v.
TDI INC, (F/K/A TRADERS AND DEALERS, INCORPORATED, F/K/A TDI, INCORPORATED, F/K/A THE TRADING DESK, INC. AND F/K/A U.S. CENTRAL SECURITIES, INC.; SOUTHEASTERN SECURITIES INC.; SFG FINANCIAL SERVICES, INC.; PENINSULA BANK; THEODORE BENGHIAT; CASTO EDWIN RIVERA; JERRY MANNING; JOHN STRINE; JEFFREY WILSON; JOSEPH MARZOUCA
v.
SANFORD GOLDFINE; S.D. GOLDFINE & CO.; (THIRD-PARTY DEFENDANTS)
DAVID H. MARION, AS RECEIVER FOR BENTLEY FINANCIAL SERVICES, INC.
v.
S.D. GOLDFINE & COMPANY; SANFORD GOLDFINE; JEFFREY WILSON; JERRY MANNING; JOSEPH MARZOUCA; THEODORE BENGHIAT; JERRY MANNING; JOSEPH MARZOUCA; PENINSULA BANK; CASTO EDWIN RIVERA; SFG FINANCIAL SERVICES, INC.; SOUTHEASTERN SECURITIES, INC.; JOHN STRINE; THE TRADING DESK, INC. D/B/A TDI, INC.; SOUTHEASTERN SECURITIES, INC.; SFG FINANCIAL SERVICES, INC.; THEODORE BENGHIAT, APPELLANTS (NO. 06-5196)
DAVID H. MARION, AS RECEIVER FOR BENTLEY FINANCIAL SERVICES, INC., APPELLANT (NO. 07-1010)
v.
TDI INC, (F/K/A TRADERS AND DEALERS, INCORPORATED, F/K/A TDI, INCORPORATED, F/K/A THE TRADING DESK, INC. AND F/K/A U.S. CENTRAL SECURITIES, INC.; SOUTHEASTERN SECURITIES INC.; SFG FINANCIAL SERVICES, INC.; PENINSULA BANK; THEODORE BENGHIAT; CASTO EDWIN RIVERA; JERRY MANNING; JOHN STRINE; JEFFREY WILSON; JOSEPH MARZOUCA
v.
SANFORD GOLDFINE; S.D. GOLDFINE & CO.; (THIRD-PARTY DEFENDANTS)
DAVID H. MARION, AS RECEIVER FOR BENTLEY FINANCIAL SERVICES, INC.
v.
S.D. GOLDFINE & COMPANY; SANFORD GOLDFINE; JEFFREY WILSON; JERRY MANNING; JOSEPH MARZOUCA; THEODORE BENGHIAT; JERRY MANNING; JOSEPH MARZOUCA; PENINSULA BANK; CASTO EDWIN RIVERA; SFG FINANCIAL SERVICES, INC.; SOUTHEASTERN SECURITIES, INC.; JOHN STRINE; THE TRADING DESK, INC. D/B/A TDI, INC.; DAVID H. MARION, AS RECEIVER FOR BENTLEY FINANCIAL SERVICES, INC.
v.
TDI INC, (F/K/A TRADERS AND DEALERS, INCORPORATED, F/K/A TDI, INCORPORATED, F/K/A THE TRADING DESK, INC. AND F/K/A U.S. CENTRAL SECURITIES, INC.; SOUTHEASTERN SECURITIES INC.; SFG FINANCIAL SERVICES, INC.; PENINSULA BANK; THEODORE BENGHIAT; CASTO EDWIN RIVERA; JERRY MANNING; JOHN STRINE; JEFFREY WILSON; JOSEPH MARZOUCA
v.
SANFORD GOLDFINE; S.D. GOLDFINE & CO.; (THIRD-PARTY DEFENDANTS)
DAVID H. MARION, AS RECEIVER FOR BENTLEY FINANCIAL SERVICES, INC.
v.
S.D. GOLDFINE & COMPANY; SANFORD GOLDFINE; JEFFREY WILSON; JERRY MANNING; JOSEPH MARZOUCA; THEODORE BENGHIAT; PENINSULA BANK; CASTO EDWIN RIVERA; SFG FINANCIAL SERVICES, INC.; SOUTHEASTERN SECURITIES, INC.; JOHN STRINE; THE TRADING DESK, INC. D/B/A TDI, INC.; PENINSULA BANK; JOSEPH MARZOUCA, APPELLANTS (NO. 07-3398)
DAVID H. MARION, AS RECEIVER FOR BENTLEY FINANCIAL SERVICES, INC.
v.
TDI INC, (F/K/A TRADERS AND DEALERS, INCORPORATED, F/K/A TDI, INCORPORATED, F/K/A THE TRADING DESK, INC. AND F/K/A U.S. CENTRAL SECURITIES, INC.; SOUTHEASTERN SECURITIES INC.; SFG FINANCIAL SERVICES, INC.; PENINSULA BANK; THEODORE BENGHIAT; CASTO EDWIN RIVERA; JERRY MANNING; JOHN STRINE; JEFFREY WILSON; JOSEPH MARZOUCA
v.
SANFORD GOLDFINE; S.D. GOLDFINE & CO.; (THIRD-PARTY DEFENDANTS)
DAVID H. MARION, AS RECEIVER FOR BENTLEY FINANCIAL SERVICES, INC.
v.
S.D. GOLDFINE & COMPANY; SANFORD GOLDFINE; JEFFREY WILSON; JERRY MANNING; JOSEPH MARZOUCA; THEODORE BENGHIAT; PENINSULA BANK; CASTO EDWIN RIVERA; SFG FINANCIAL SERVICES, INC.; SOUTHEASTERN SECURITIES, INC.; JOHN STRINE; THE TRADING DESK, INC. D/B/A TDI, INC.; SOUTHEASTERN SECURITIES, INC.; SFG FINANCIAL SERVICES, INC.; THEODORE BENGHIAT, APPELLANTS (NO. 07-3416)



Appeal from the United States District Court for the Eastern District of Pennsylvania (D.C. Civil Action Nos. 02-cv-07032/76) District Judge: Honorable John P. Fullam, (D.C. No. 02-cv-07032, 02-cv-07076, 02-cv-07032, 02-cv-07076, 02-cv-07032, 02-cv-07076, 02-cv-07032, 02-cv-07076, 02-cv 07032 & 02-cv-07076).

The opinion of the court was delivered by: Ambro, Circuit Judge

PRECEDENTIAL

Argued December 1, 2008

Before: AMBRO, WEIS, and VAN ANTWERPEN, Circuit Judges.

OPINION OF THE COURT

A receiver for a corporation through which a Ponzi scheme was run brought suit against various third-parties alleged to have assisted the scheme, ultimately winning a multi-million-dollar jury verdict. The receiver's theory of the case was that the defendants, in concert with the corporation's chief officer, had harmed the corporation by saddling it with additional liability to the scheme's victims. Following a verdict in the receiver's favor, the defendants unsuccessfully moved for judgment as a matter of law, arguing, among other things, that the receiver lacked standing to bring the claims submitted to the jury and that the evidence was insufficient to support the jury's verdict. We agree with the receiver that, under our case law, he had standing to bring the claims presented to the jury. But we agree with the defendants that they cannot be liable to the corporation on the facts presented at trial. Accordingly, we vacate the District Court's denial of the defendants' post-trial motion for judgment of law and remand with instructions to enter judgment in their favor.

I. Facts and Procedural History

A. The Bentley Scheme

In 1986, Robert Bentley established Bentley Financial Services, Inc. ("BFS"), a Pennsylvania corporation, through which he brokered bank-issued certificates of deposit (CDs).*fn1 In 1993, Bentley formed the Entrust Group ("Entrust"), a Pennsylvania sole proprietorship, to act as custodian on BFSbrokered transactions. In the CD-selling industry, the broker is responsible for connecting CDs available for purchase from banks with particular investors. The custodian then collects the money from each investor, wires it to the issuing bank and holds onto the CD, while issuing a "safekeeping receipt" to the investor indicating that it has title to the CD held by the custodian.

The CD seller's profit (often called the "spread") comes from the difference between the terms of the CD purchased from the bank and the terms on which the CD is sold to the investor. In a simple case, a CD offered by a bank might provide a 5% interest rate on a two-year maturity, which the broker would then offer to the investor as a two-year CD at 4.5% interest, taking the interest-rate difference as profit.

A more complex, and risky, way a CD broker can profit is by mismatching maturity dates. In one form of maturity mismatching,*fn2 a broker locks in a particular interest rate for a long-term CD and then, rather than selling it as a long-term CD to an investor, sells it as a series of short-term CDs, hoping to profit from the difference between the market rate for interest in short-term CDs and the long-term rate the broker locked in.*fn3 However, if a purchaser of one of these short-term CDs wants the investment back at the end of the shortened maturity period (rather than rolling over the investment), the broker cannot simply get the principal back from the bank from whom the broker purchased the long-term CD. In those circumstances, the broker typically has three options: (1) find another investor for a new short-term CD and return the outgoing investor's principal from the proceeds of that sale; (2) "warehouse" the long-term CD with a cooperating bank that agrees to purchase the long-term CD temporarily until an investor for a new short-term CD can be found, thus allowing the broker to pay the outgoing investor out of the money loaned by the cooperating bank; or (3) require the investor to stay locked in to the long-term CD until its actual maturity date or until a substitute investor can be found to provide the money to pay the outgoing investor. This form of mismatching is legal as long as the mismatch is disclosed to the investor (including the fact that the investor may not be able to reclaim its principal at the maturity date stated in the investment contract).

Bentley's operation deviated from the standard business model described above in at least two crucial respects.*fn4 First, and most dramatically, in 1996 Bentley started selling fictitious CDs. As his own custodian, he could fool investors by issuing bogus safekeeping receipts. According to Bentley, the decision to sell fake CDs traced back to 1994 or 1995, when Entrust obtained a $2 million credit line, secured by commissions, for cash flow management. In an act that Bentley would later describe as rooted in impatience, he forged his accountant's signature in a letter certifying the collateral. The bank discovered the forgery in 1996 and called the balance on the credit line, threatening Bentley's business. To repay the loan, Bentley created and sold the fictitious CDs. Because Bentley used the proceeds of the sales to pay down the loan-rather than to purchase CDs that would generate interest while retaining the initial investment-he could only pay the investors the interest and principal owed on the fake CDs by obtaining money from new investors (money that, in turn, could not all be used to buy new CDs).

That was the birth of Bentley's Ponzi scheme.*fn5 His ability to meet his obligations to past investors depended on his ability to obtain money from new investors, forcing Bentley to continue the scheme or default.

Trying to escape the financial hole he was digging, Bentley pursued a strategy of aggressive maturity mismatching. He purchased long-term CDs, hoping that, if interest rates on short-term CDs went down, he could generate enough from the mismatch that he would no longer need to sell fictitious CDs to meet his obligations as they came due.

That led to a second way in which Bentley's enterprise deviated from an above-board CD brokerage operation. Because Bentley's customer base comprised primarily conservative investors such as credit unions, he failed to disclose the mismatching.*fn6 Thus, investors who purchased mismatched short-term CDs did not know they were actually purchasing interests in long-term CDs. If such an investor wanted its principal back at the end of the stated (that is, shortened) maturity date, Bentley could not force the investor to stay with the long-term CD without revealing its true nature. Instead, he quickly had to find some way to generate the cash necessary to return the principal, often (when he guessed wrong about the direction of interest rates) by selling another mismatched short-term CD to a new investor at a higher rate of interest than the one he initially got from the bank on the long-term CD.

Thus, though Bentley was in fact purchasing CDs-rather than simply recycling, or embezzling, the money he obtained from investors-his scheme still embodied some of the classic features of a Ponzi. In many cases, investors were not purchasing what they thought they were purchasing. Either (as in the case of the fictitious CDs) there was no underlying CD, or (as in the case of the CDs used as part of Bentley's mismatching strategy) the terms of the underlying CD did not match what had been disclosed to the investor. And Bentley's ability to make good on his obligations to his investors depended in significant part on his finding new investors.

B. Benghiat and Marzouca

This appeal centers on the relationship between Bentley's scheme and two figures who would later become defendants in this case-Ted Benghiat and Joseph Marzouca. Benghiat owned two Florida firms-(1) SFG Financial, Inc. ("SFG"), a CD broker with whom BFS frequently served as a co-broker (with SFG acting as the "wholesale broker," locating available CDs from banks, and BFS acting as the "retail broker," connecting those CDs to particular clients); and (2) Southeastern Securities, Inc. ("SSI"), a securities firm. Marzouca was Vice-President of Peninsula Bank, a Florida bank that had an ongoing relationship with SFG as a warehouser of its CDs, and that later served as a custodian (along with Entrust) on a number of BFS's sales. When Peninsula Bank and Entrust worked together as custodians, Peninsula Bank acted as the "superior custodian," while Entrust acted as the "sub-custodian." That means that Peninsula Bank would purchase the CD from the bank and hold it, while issuing a safekeeping receipt to Entrust, which would then issue a separate safekeeping receipt to the investor. Graphically depicted, the relationship between the issuing banks, SFG, Peninsula Bank and Bentley's two firms (BFS and Entrust) went as follows:

Banks  (CD Issuers)  SFG (Benghiat) (Wholesale Broker)Peninsula Bank (Marzouca) (Superior Custodian) BFS (Bentley) (Retail Broker)Entrust (Bentley) (Sub-Custodian)

The primary issue in dispute at trial was whether, and to what extent, Benghiat and Marzouca knew about Bentley's scheme. Bentley testified that Benghiat knew Bentley was mismatching maturities without telling his investors and had urged him to disclose it (he did not), but Bentley did not claim to have told either Benghiat or Marzouca directly about his sale of fake CDs. What is undisputed is that (knowingly or not) Benghiat and Marzouca helped the scheme stay afloat in at least two ways. First, Bentley's investors would sometimes call issuing banks listed on their safekeeping receipts to confirm that the banks really issued the CDs. Because the banks only knew the identities of the superior custodians to which they issued the CDs, they referred questions to Marzouca at Peninsula Bank. He forwarded them ...


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