October 17, 2011

Bloomberg: Goldman Sachs Asks Court to Throw Out $20.5 Million Bayou Creditors’ Award

Below is a Bloomberg article about our firm's $20.6 million FINRA arbitration award against Goldman Sachs related to Bayou. It's the largest arbitration award ever rendered against Goldman. The award was confirmed by Judge Rakoff and Goldman filed it's brief to the Second Circuit.

Goldman Sachs Asks Court to Throw Out $20.5 Million Bayou Creditors’ Award
By Bob Van Voris - Oct 15, 2011

Goldman Sachs Group Inc. (GS) filed an appeal seeking to dismiss a $20.5 million arbitration award to creditors of the failed hedge fund firm Bayou Group LLC.

Goldman Sachs asked the U.S. Court of Appeals in Manhattan to overrule a decision by the Financial Industry Regulatory Authority, the independent regulatory group for the securities industry. A federal district judge declined in November 2010 to reverse the Finra award.

The creditors sued Goldman Sachs Execution and Clearing LP in 2008 for its role as the prime broker and clearing broker for Bayou’s hedge funds. They said the Goldman Sachs unit aided a $400 million fraud at Stamford, Connecticut-based Bayou, which filed for bankruptcy in May 2006. Bayou co-founder Samuel Israel pleaded guilty to directing the scheme and is serving a 22-year prison term.

In the November ruling, U.S. District Judge Jed Rakoff in Manhattan said Goldman Sachs failed to show that the arbitration panel had “manifestly disregarded the law” in granting the award.

Goldman Sachs, based in New York, argued in its appeal brief that the Finra panel was wrong in determining that deposits into Bayou’s accounts and internal bookkeeping entries qualified as fraudulent transfers.

John Rich, a lawyer for the Bayou creditors, didn’t immediately return a voice-mail message seeking comment yesterday on the Goldman Sachs filing.
Fellow Inmate

Israel is incarcerated at the same federal prison complex in Butner, North Carolina, as Bernard Madoff, who is serving a 150-year sentence for orchestrating the biggest Ponzi scheme in history.

In addition to a 20-year term for the fraud, Israel’s term was extended by two years after he attempted to make it appear that he had committed suicide by jumping off a bridge on the day he was to report to prison.

The case is Goldman Sachs Execution & Clearing LP v. Official Unsecured Creditors’ Committee of Bayou Group LLC, 10- cv-05622, U.S. District Court, Southern District of New York (Manhattan).

October 14, 2011

WSJ: Goldman Continues to Fight $20.5 Million Award in Pivotal Case

Below is a WSJ article about our firm's $20.6 million FINRA arbitration award against Goldman Sachs related to the Bayou hedge fund fraud. It is the largest arbitration award ever rendered against Goldman. The award was confirmed by Judge Rakoff of the SDNY in November 2010 and Goldman filed it's brief to the Second Circuit this week.

Goldman Continues to Fight $20.5 Million Award in Pivotal Case

NEW YORK—Goldman Sachs Group Inc. is continuing to fight a $20.5 million arbitration award that, while relatively small from the big bank's perspective, has broader implications for Wall Street.

The award stems from Goldman's role as a clearing broker for a failed hedge fund. Goldman filed an appeal Thursday in the U.S. Court of Appeals in the Second Circuit, arguing as it did last fall in district court that the Financial Industry Regulatory Authority arbitration panel that awarded the sum ignored the law.

On the opposite side are the creditors of Bayou Group LLC, which accused Goldman Sachs Execution & Clearing LP of ignoring signs of fraud at the hedge fund run by Samuel Israel III before it imploded in 2005.

A Finra panel awarded the Bayou creditors $20.5 million in June 2010. Goldman sued to vacate the arbitration award in July 2010, but Federal Judge Jed Rakoff confirmed the award in November.

Ross Intelisano, a lawyer for the Bayou creditors at Rich, Intelisano & Katz, said investors are "frustrated" by the delay in receiving their money. "We're looking forward to the Second Circuit reconfirming the arbitration award," he said.

The disputed case comes as regulators are eager to lay blame after the financial crisis exposed rampant cases of Ponzi schemes and other frauds. The $20.5 million award, if it is upheld, could raise the standards of care required by banks that clear trades for hedge funds, lawyers said.

The Securities Industry and Financial Markets Association, an industry group representing Wall Street sided with Goldman in district court last year and plans to file a brief in support of Goldman in the appeal, a spokesman said.

In May, Goldman said the Commodity Futures Trading Commission had "orally advised" it that it faced civil fraud charges over its role clearing trades for an unnamed client. Goldman said it was cooperating.

In that probe, the potential charges concern whether Goldman knew or should have known the client was using customer accounts in transactions with Goldman rather than the client's own accounts.

In the Bayou case, the creditors argued that the hedge fund's depositing of money into its account at Goldman, and then its shuffling around of that money among accounts, constituted transfers to Goldman that could be recovered by investors.

The creditors also accused Goldman of ignoring several warning signs, including suspicious money transfers. About $13.9 million of the award concerns money Bayou moved among its accounts.

Bayou was founded in 1996 and exposed as a $400 million fraud in 2005. Goldman was a prime broker and clearing firm for Bayou from 1999 to 2005. Mr. Israel, who went on the lam briefly, is currently serving a 22-year prison sentence.

Dan Carlson, a San Diego lawyer who represents investors in Finra arbitrations, said the financial crisis has "opened eyes that clearing firms and brokerages need to be doing more due diligence."

Wall Street firms have argued that extra due diligence will slow down business and increase costs. "In imposing liability on Goldman, the arbitrators disregarded the long-recognized principle that a clearing firm cannot be liable for merely processing transactions received from an authorized source," Sifma wrote in its friend of the court brief siding with Goldman in district court last fall.

"If clearing firms were required to analyze trading in introduced accounts," Sifma added, "the speed and efficiency demanded in the contemporary securities markets would not be possible."

October 11, 2011

On Wall Street Article About Firm's $383mm FINRA Claim

Below is an On Wall Street piece about our firm's representation of a Saudi investor in a $383 million FINRA arbitration against Citigroup Global Markets, Inc.

Citigroup Aims to Stop Arbitration From Proceeding
By Lorie Konish, On Wall Street
October 7, 2011

A new lawsuit filed by Citigroup Global Markets Inc. this week against a set of Saudi family investors with a $383 million claim against the firm will determine whether that case can proceed to arbitration.

Citigroup’s suit, dated Oct. 5, is aimed at putting a stop to the arbitration case filed with the Financial Industry Regulatory Authority in August by Abdullah Abbar and Ghazi Abbar, father and son Saudi nationals.

Citigroup claims that the Abbars were not clients of the U.S.-based broker-dealer Citigroup Global Markets Inc., which was named in the arbitration suit the pair filed with the Financial Industry Regulatory Authority in August. Instead, the private equity and hedge fund investments cited in the arbitration—investments the Abbars took part in during the years 2006 and 2007—came from Citigroup entities in the Cayman Islands, Switzerland and United Kingdom, the firm said.

Those entities are not subject to FINRA rules because they are located outside of the United States.

"We are confident this matter will be appropriately resolved when it is reviewed by legal authorities in the jurisdictions that the parties agreed to when they executed their trades,” Citigroup Spokeswoman Natalie Marin stated via email on Wednesday. “Because Citigroup Global Market Inc. was not a party to the trades in question and because the claimants were not customers of Citigroup Global Markets Inc., their claims should not be subject to FINRA arbitration."

But the Abbars, who are represented by New York-based law firm Rich & Intelisano LLP, disagree. The next step will probably be an oral argument over whether there should be a temporary restraining order stopping the arbitration, Ross B. Intelisano, a partner with the law firm, said.

“If we win in arguing to the Southern district that the arbitration should go forward, then the arbitration will go forward or Citigroup may appeal up to the Second Circuit,” Intelisano said. “If we win that, then we’ll have an arbitration.”

Intelisano plans to fight Citigroup’s claims based on the fact that the New York entity and its employees were the ones that sold the Abbars the investments. “We’re arguing that they’re attempting to evade their regulatory responsibility as a registered brokerage firm to arbitrate these disputes if the customer chooses to do so,” Intelisano said.

Clients who bring cases to FINRA also have the option of resolving disputes through mediation.

Another recent case, including UBS AG versus a West Virginia hospital, also called into question the definition of a customer and if a case can proceed to arbitration, Intelisano said. That case was ultimately sent to arbitration.

If the Abbars’ arbitration proceeds, the case will address their initial claims that misconduct by Citigroup Global Markets and its employees “virtually wiped out” the Abbars fortune that totaled about $350 million as of 2005, their August claim said.

The Abbars’ fortune came mostly from food products importing, as well as other businesses including oil investments and travel and tourism. Most of those assets were invested in hedge funds, with other investments in real estate trusts, private bond issues, private equity, public equities and bonds, real estate trusts and venture capital.

The family was wooed to work with Citigroup after a financial advisor they were working with at Deutsche Bank joined that firm. By luring the Abbars to Citigroup, that banker became a top private banker at the firm and the Abbars became one of the firm’s top ten international clients, according to the Abbars’ arbitration filing.

The investments cited in the arbitration dispute include two leveraged option transactions that had a leveraged exposure to multiple hedge funds, as well as another private equity transaction involving a unit trust and related loan.

"The crux of our case is that Citigroup sold a very, very complex product to a wealthy family that was really not appropriate for a non-institutional client," Intelisano said. "Citigroup had previously only sold these complex structures to funds of funds and hedge funds prior to selling it to our clients."

After banks and brokerage firms began selling complex derivative products to individuals and families in addition to the institutions they were originally targeted for around 2006 and 2007, more cases like this could crop up, according to Intelisano.

"I think you will see other cases filed involving retail investors who were improperly sold inappropriate institutional products by banks worldwide,” Intelisano said.

October 11, 2011

Bloomberg: Citi Moves to Stay Customer's $383mm FINRA Claim

Below is a story about CGMI's attempt to stay a $383 million FINRA arbitration filed by our firm related to inappropriate behavior with respect to derivatives, hedge funds, and private equity transactions.

Oct. 6 (Bloomberg) -- A Citigroup Inc. unit sued two Saudi investors seeking to block Financial Industry Regulatory Authority arbitration of their $383 million claim that the bank “wiped out” their family’s wealth.

Abdullah and Ghazi Abbar, a father and son from Jeddah who put family money into hedge funds, have no customer agreements or accounts with Citigroup Global Markets Inc., a New York-based broker dealer that they blame for mismanaging their family’s life savings, according to a complaint the Citigroup unit filed yesterday in federal court in Manhattan.

The Citigroup entities that handled two leveraged option transactions and a private-equity loan for the Abbars are based in the U.K., Switzerland and the Cayman Islands and aren’t subject to arbitration by Finra, a Washington-based brokerage regulator, according to the complaint.

“We are confident this matter will be appropriately resolved when it is reviewed by legal authorities in the jurisdictions that the parties agreed to when they executed their trades,” Natalie Marin, a spokeswoman for New York-based Citigroup, said in an e-mail.

John Rich, an attorney for the Abbars, didn’t immediately return a voice-mail message left after regular business hours seeking comment on the lawsuit.

The Abbars, whose money comes from food products importing, travel and tourism, oil investments and other businesses, were courted by top bank officers, including Chief Executive Officer Vikram Pandit and former global wealth management chief Sallie Krawcheck, to maintain or expand business with the New York- based company, they said in their Finra claim.

‘Gross Misconduct’

“Due to a pattern of gross misconduct by CGMI and its employees and affiliates, from late 2005 to present, the considerable family wealth which the Abbars entrusted to Citigroup has been virtually wiped out,” the Abbars said in the claim they filed with Finra on Aug. 17.

The Abbars said their family was lured to Citigroup in 2006 after their Deutsche Bank AG banker moved to Citi Private Bank Geneva. The Abbars put $343 million of their hedge fund investment assets into a leveraged option swap transaction to which Citigroup’s London affiliate was a last-minute counterparty, a move designed to shield the bank from U.S. regulatory and legal obligations, according to the claim.

Voting Shares

As part of the hedge-fund financing transaction, Citigroup Global Markets had all the voting shares of the entities that held the family’s investments. The bank failed to monitor the investments, which became over-leveraged and totally collapsed in late 2008 when the full force of the financial crisis hit, the Abbars alleged.

“Citigroup took over management of the remaining positions in the hedge fund portfolio and put in place a program for redeeming the entire portfolio,” they said in the Finra claim. “Citigroup will unjustly benefit in the amount of approximately $70 million from redemption of such investments after repayment of the loan and interest.”

The Abbars also set up a credit facility with Citigroup under Cayman law providing for loans of as much as $110 million and were persuaded to use the facility to invest in bank-related private-equity investments. The Citigroup entities involved in the day to day management of the credit deal “were ultimately responsible” to Finra-registered personnel in New York, they said in the claim. They said the credit structure eventually collapsed because of borrowings related to the Citigroup investments.

The Abbars seek damages of $147 million in connection with a credit facility that was set up to pay for capital calls in the family’s private-equity investments. They are also seeking $198 million tied to the hedge fund transaction and recovery of $38 million they injected into the Citigroup deals, according to their claim.

The case is Citigroup Global Markets v. Abbar, 11-6993, U.S. District Court, Southern District of New York (Manhattan).

--With assistance from Donal Griffin and Bob Van Voris in New York. Editors: Peter Blumberg, Andrew Dunn