Broker-Dealer Litigation - Greenberg Traurig LLP

that the complaint failed to allege that these defendants acted recklessly. Furthermore, plaintiffs’
claim for control person liability under Section 20(a) of the Exchange Act failed as the plaintiffs
failed to plead a primary violation by any person named in the complaint. The court declined to
exercise supplemental jurisdiction over the remaining claims, all of which were Washington state
law and common law claims. Finding any amendment would be futile, the court granted
defendants’ motions to dismiss, dismissing plaintiffs’ federal claims with prejudice.
Litchfield Capital, LLC v. BNY Clearing Services LLC, 2011 U.S. Dist. LEXIS 120207
(S.D.N.Y. Oct. 14, 2011).
Plaintiff, an investment advisory firm, brought suit against defendant bank and a clearing
broker, alleging breach of contract and various tort claims arising from the firm’s transfer of
$5 million worth of cash or bonds into an account established at the bank by a broker-dealer.
When the firm instructed the bank to transfer the contents of the account to another firm, the
bank notified the broker-dealer. When the broker-dealer refused to authorize any transfers from
the account, the bank refused to follow the firm’s directive. The bank brought a motion for
summary judgment alleging that the relationship between the firm and broker-dealer was illegal
and, thus, the firm was not entitled to judicial recourse. Specifically, the bank alleged that the
broker-dealer was seeking a subordinated loan to help it address its regulatory “net capital” needs
under Rule 15(c)(3)-1 of the Securities Exchange Act of 1934. Although the firm denied that the
relationship was as the bank had alleged, it provided no alternative explanation of the
relationship nor did it explain why the broker-dealer filed forms with the NASD consistent with
such a relationship. The court found that the agreement between the firm and the bank was
unenforceable as a matter of public policy, as enforcing it would permit the parties to commit a
fraud on the NASD. The court therefore refused to enforce any agreement between the firm and
the bank and thereby dismissed the firm’s breach of contract claim. The court also dismissed the
firm’s tort claims finding they were duplicative of its breach of contract claims. Accordingly,
the court granted the bank’s motion for summary judgment.
Javitch v. Prudential Sec. Inc., 2011 U.S. Dist. LEXIS 6925 (N.D. Ohio Jan. 25, 2011).
Plaintiff, a court-appointed receiver of two entities that had been controlled by a common
principal, brought suit against defendant clearing broker for conduct related to brokerage
accounts that the principal had entered into in his individual capacity. Upon opening the
accounts, the principal signed the introducing broker’s new account agreement. The agreement
contained an arbitration clause expressly providing that defendant clearing broker was a thirdparty
beneficiary to the agreement, and that the arbitration provision applied to “all matters”
between the principal and defendant clearing broker. Plaintiff argued that the arbitration
provision was void, because it was executed after the court had appointed a receiver for the
entities. The court dismissed this argument because when the agreement was executed the
receiver did not yet have authority over the accounts opened by the principal in his individual
capacity, and defendant clearing broker had no notice of the receivership state. The court
pointed out that the clearing broker performed only recordkeeping and ministerial functions and
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