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One-Office Acquisition Puts Broker-Dealer on the Hook for Embezzlement at Prior Firm: National Credit Union Administration vs. Wells Fargo, LLC
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By Sarah G. Anderson

A broker-dealer that purchases only part of another broker-dealer’s business may be liable as the corporate successor of the earlier firm with respect to the part it purchased.

National Credit Union Administration vs. Wells Fargo, LLC, No: 10-cv-00143 (D. Conn., 9/30/15).

The Acquisition and the Embezzlement

The National Credit Union Administration (“NCUA”), in its capacity as liquidating agent for the New London Security Federal Union (“Credit Union”), brought this claim against Wells Fargo in its capacity as the ultimate successor-in-interest of A.G. Edwards (“AGE”). AGE bought the New London, CT office of Moseley Securities, where the Credit Union thought that it maintained an account, when that broker-dealer liquidated its retail brokerage operations. The Credit Union was declared insolvent after it was discovered that its AGE account, containing $11.8 million in assets according to the Credit Union’s long-time broker, Edwin Rachleff, did not exist. An FBI investigation determined that Rachleff acted alone in committing the fraud.

Defendant's Motion

Defendant moves for summary judgment on the grounds that (1) AGE did not become Moseley’s successor-in-interest by virtue of its acquisition of the New London office and (2) the Credit Union sustained no compensable losses while it thought it had an account at AGE, as more money was returned to it than it added to the account. Under Connecticut’s “continuity of enterprise” theory, successor liability exists where the successor maintains the same business with the same employees doing the same jobs, under the same supervisors, working conditions and production processes and produces the same products for the same customers, as held in Chamlink Corp. v. Merritt Extruder Corp., 96 Conn. App. 183, 189 (2006).

Defendant contends that this theory is defeated because AGE acquired only a small amount of Moseley’s business, which was a small portion of AGE’s business, but the Court rejects this argument. AGE acquired 100% of Moseley’s New London office with the same employees who worked at Moseley’s business, and the Court sees no reason why successor liability cannot attach to a smaller unit of a larger business. Since defendant is liable as Moseley’s successor, the Court also rules that its loss causation argument is moot, though defendant is free to demonstrate that plaintiff suffered no loss and plaintiff must prove that it did.

Plaintiff's Motion

Plaintiff moves for summary judgment as to several of Defendant’s affirmative defenses. One of these is that the Credit Union was contributorily negligent in supervising its broker, but the Court rules that this requires the testimony of an expert whose qualifications and opinion the Court is not prepared to judge at this time, but will visit when plaintiff files a motion to preclude his testimony. Defendant also alleges that NCUA paid claims without proper documentation of their validity and that the procedure for paying insurance claims was inadequate because account statements never existed and no AGE account was opened in the name of the Credit Union. The Court grants summary judgment on this defense, because, under federal regulations, account records of an insured credit union are conclusive as to the dividends on which a claim for insurance coverage is founded. The Court is not persuaded that plaintiff should have performed a further level of diligence, as it would undermine the insurance of account holders’ deposits in all credit unions.

(S. Anderson)

(SLC Ref. No. 2015-39-08)

NOTICE: The court decision synopsis published above represents an abbreviated description of the actual decision and is re-printed here for its educational value. The author's effort is to report concisely the substance of the decision or a selected portion of the decision; commentary or analysis is generally reserved for the italicized section at the bottom of the summary. Subscribers to SAC's Online Litigation Alert (SOLA)from which this synopsis is excerpted, have immediate access to the full decision, in addition to the synopsis.

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