Interactive Brokers, LLC v. Barry, 457 N.J. Super. 357 (App. Div. 2018). This final post of 2018 features an opinion issued today by Judge Currier. The case arose out of a Ponzi scheme perpetrated by a hedge fund founded by Peter Zuck called Osiris Fund Limited Partnership. “Osiris operated through the securities trading platform of plaintiff Interactive Brokers, LLC (Interactive), and plaintiff Kevin Michael Fisher, as an Interactive employee, assisted Osiris in using Interactive’s platform.”
The New Jersey Attorney General sued Zuck and Osiris, and a consent order was entered under which Zuck would pay restitution of $7,564,273. Defendant Richard Barry was appointed as Receiver for Osiris, with “full statutory powers” to “take title to all real and personal property of [Osiris] … including causes of action and all such assets obtained in the future, and undertake all actions necessary or appropriate to maintain optimal value of these assets, including liquidation of any such assets.”
Barry, as “the sole claimant acting on behalf of Osiris,” filed a FINRA arbitration claim against Interactive and Fisher pursuant to an arbitration clause contained in the Customer Agreement that Interactive and Zuck had signed on behalf of Osiris. Plaintiffs then sued in the Chancery Division to enjoin the FINRA proceeding and for a declaration that Barry had exceeded his powers as Receiver in bringing the FINRA case because that matter was based “on the damages incurred by Osiris’s investors, rather than Osiris itself.” Barry cross-moved to compel arbitration before FINRA.
The Chancery Division denied injunctive relief, ordered FINRA arbitration, and dismissed the case, finding that the claims in the FINRA matter “[were] brought on behalf of Osiris Fund itself, not Osiris Fund’s investors.” Plaintiffs appealed, but today the Appellate Division affirmed the ruling below.
Judge Currier noted the different standards of review that governed the two issues: the propriety of the denial of an injunction and the appropriateness of arbitration. As to the former, the standard of review was whether there was an abuse of discretion, meaning that the Chancery Division acted “without a rational explication, inexplicably departed from established practices, or rested on an impermissible basis.”
Citing analogous federal cases, Judge Currier agreed that the FINRA claim was properly brought on behalf of Osiris, even though its investors would ultimately benefit. The FINRA case “charges plaintiffs with aiding and abetting Zuck in his fraudulent conduct and details their substantial participation in the wrongdoing. These are claims that belong to Osiris, which was harmed when its funds were removed for unauthorized purposes. It is entitled to the return of the unlawfully transferred monies. The Receiver cannot be deprived of standing to pursue Osiris’s legal remedies, even if the defrauded investors become the recipients of the recovered assets.”
The arbitrability issue, in contrast, required de novo review. But because “Osiris is the customer under the [Customer] Agreement, not Osiris’s investors,” and Barry had “brought claims on behalf of Osiris and not the investors,” those claims were properly before FINRA.