An irreverent Wall Street Blog
Schemes From a California Restaurant
December 7, 2020
We got a restaurant owner and several customers, and one of the customers, Felix, a stockbroker, has a son, Derek, also a stockbroker, who runs a sports ticket business. I'll take fries with that. Also a dill pickle. Oh, and I'd like a side order of promissory notes from Felix's kid Victor. $1.2 million in losses later, the check arrives and the finger-pointing begins.
A Tangled Mess of Litigation
In NYLIFE Securities, LLC, Plaintiff, v. Ron Duhame, Uliyan Koytchev Koev, and Kamran Sotoodeh, Defendants (Order, United States District Court for the Northern District of California ("NDCA"), 20-CV-07413, December 3, 2020)
http://brokeandbroker.com/PDF/NYLIFEOrderNDCA201203.pdf, the Court provides the following under "Background" [Ed: footnotes omitted]:
http://brokeandbroker.com/PDF/NYLIFEOrderNDCA201203.pdf, the Court provides the following under "Background" [Ed: footnotes omitted]:
On August 17, 2020, Defendants initiated FINRA arbitration proceedings against NYLIFE and its former registered agent Felix Chu. (Complaint at ¶ 11. ) In the statement of claim, Defendants contend that they were regular customers of Koev's restaurant, the Little Red Bistro in Pleasant Hill. (Id. at ¶ 12.) Felix Chu was also a regular customer at the restaurant and befriended Defendants. (Dkt. Nos. 12-2, 17-1 at ¶ 14 (Statement of Claim and Amended Statement).) Felix repeatedly boasted about his son Derek's successful sports ticket resale business. (Complaint at ¶ 13; Dkt. Nos. 12-2, 17-1 at ¶¶ 14-17.) According to Felix, Derek would purchase tickets for luxury suites in Oracle Arena in Oakland, California and in the Staples Center in Los Angeles, California and resell them for significant profits. (Dkt. Nos. 12-2, 17-1 at ¶ 16.) Felix represented that an investment in Derek's business would "generate annual returns of 15% or more and was a safe investment." (Id. at ¶ 17.) Between 2016 and 2018, Defendants invested in a series of promissory notes issued by Derek. (Id. at ¶¶ 19-27.) In addition, in July 2017, Koev entered into a joint venture with Derek and his company Suitelife Norcal, LLC. (Id. at ¶ 28.) Defendants later discovered that "the promissory note scheme possesses all the traditional indicia of a Ponzi scheme." (Id. at ¶ 35.) Defendants claim to have lost $1,215,000 through their investments with Derek Chu. (Complaint at ¶ 16.)Defendants' FINRA statement of claim contains ten claims against Plaintiff and Felix for among other things breach of fiduciary duty, negligence, fraud, and violation of federal and state securities laws. (Dkt. Nos. 12-2, 17-1 at ¶¶ 68-115.) Defendants contend that Plaintiff is vicariously liable for the acts and omissions of its then employee (Felix). (Id. at ¶ 7.) Derek had also been a broker with NYLIFE Securities until 2015 when he was terminated for "engaging in the illicit sale of unapproved outside investments." (Id. at ¶¶ 37-38.) He was barred from the securities industry for life later that year. (Id. at ¶ 39.) In 2019, NYLIFE also terminated Felix, and in March 2020 he was barred from the securities industry for life. (Id. at ¶¶ 41-45.) The statement of claim contends that Felix "recommended the promissory note investments and other investments at issue, and recommended the [Defendants] invest with his son, Derek Chu, without obtaining NYLIFE'S required approval." (Id. at ¶ 53.) Because the investments were unapproved, "NYLIFE did not conduct any required due diligence on the investments" and they were "unsuitable." (Id. at ¶ 54.) According to the statement of claim, NYLIFE Securities is liable because it had a "legal obligation" to supervise Felix and ensure his compliance with securities laws and because it "fail[ed] to detect and terminate CHU'S illicit conduct, Claimants invested in fraudulent promissory notes and lost their entire investment." (Id. at ¶ 59.)In October 2020, Plaintiff filed this action seeking declaratory and injunctive relief enjoining Defendants from further arbitration proceedings against NYLIFE Securities. (Dkt. No. 1.) Less than a week after filing this action, Plaintiff filed the now pending motion for preliminary injunction seeking to enjoin the FINRA arbitration proceedings. (Dkt. No. 12.) Following submission of Defendants' opposition brief and before the reply brief was filed, Defendants filed an unopposed motion to supplement the exhibits it offered in opposition to the motion proffering a letter from FINRA to Defendants. (Dkt. No. 19.) Given Plaintiff's non-opposition, Defendant's motion to supplement is GRANTED.
Okay . . . so, y'know, the "Background" sort of offers us a wonderful three paragraph summation of Defendants' pickle. Felix Chu seems to have touted his son, Derek, to the Defendants (the victimized investors). Those Defendants invested in Derek's promissory note investment, which, wasn't so much an investment as what the investors seem to belatedly view as a scheme. Now, those victims are looking around at the landscape, hoping to find someone or some company with deep enough pockets to cover their losses and, lo and behold, NYLIFE Securities immediately comes into view and under the crosshairs. Frankly, given the allegations, it's tough to criticize the victims for seeking some compensation from Chu's employer. On the other hand, it's also tough to figure out exactly what NYLIFE should have or could have done to prevent the financial carnage.
Felix S. Chu (the Father): Background
According to online FINRA BrokerCheck disclosures as of December 7, 2020, Felix S. Chu was first registered in 1994 with FINRA member firm NYLIFE Securities LLC, and he was also employed as an insurance agent from April 1990 by New York Life Insurance Company.
Felix S. Chu: Settled Disputes
The BrokerCheck disclosures under "Customer Dispute - Settled" disclose that on October 11, 2019, NYLIFE Securities was served with pleadings as follows:
A FINRA Arbitration Statement of Claim based upon the following allegations:Plaintiff alleges that beginning in March 2016 until September 2018, she and her late husband were misled into purchasing promissory notes for a total of $305,000.00. Plaintiff further alleges that they were misled into remitting a check for $75,000 to purchase what they believed to be additional insurance. Plaintiffs are seeking compensatory damages in excess of $380,000, lost income, interest, punitive damages and attorneys' fees.
It appears that on August 20, 2020, that NYLFIE Securities entered into a settlement of the above for $125,000.
Felix S. Chu: Pending Disputes
The BrokerCheck disclosures under "Customer Dispute - Pending" disclose that on August 19, 2020, NYLIFE Securities was served with pleadings as follows:
A Complaint filed in the Superior Court of California seeking $836,950 in damages plus punitive damages, interest, and attorneys' fees based upon the following allegations:Plaintiffs allege that beginning in 2015, they were misled into purchasing promissory notes. Plaintiffs are seeking the return of principal, interest, punitive damages and attorneys' fees.It appears that on November 3, 2020, NYLFIE Securities entered into a partial settlement of the above with "Germaine Ly is the only plaintiff who is party to this settlement." The names of the other Plaintiff(s) is not set forth on BrokerCheck.A FINRA Arbitration Statement of Claim based upon the following allegations:Claimants allege that beginning in or around September 2016 until May 2018, they were misled into purchasing promissory notes and/or entering into Joint Ventures for a total of $1,215,000 and that the principal and interest due were not fully paid. Claimants seek rescission, compensatory damages, interest, punitive damages, costs and attorneys' fees.
Felix S. Chu: FINRA Bar
BrokerCheck further discloses that Chu was suspended by FINRA on December 4, 2019, for failing to respond to the regulator's request for information; and, thereafter, on March 9, 2020, he was barred pursuant to FINRA Rule 9552(h).
Derek V. Chu (the Son): Background
According to online FINRA BrokerCheck disclosures as of December 7, 2020, Derek V. Chu was first registered in 2004 with FINRA member firm NYLIFE Securities LLC and he was also employed as an insurance agent from October 2002 by New York Life Insurance Company.
Derek V. Chu: Settled Disputes
The BrokerCheck disclosures under "Customer Dispute - Pending" disclose that on August 19, 2020, NYLIFE Securities was served with pleadings as follows:
A Complaint filed in the Superior Court of California seeking $836,950 in damages plus punitive damages, interest, and attorneys' fees based upon the following allegations:Plaintiffs allege that beginning in 2015, they were misled into purchasing promissory notes. Plaintiffs are seeking the return of principal, interest, punitive damages and attorneys' fees.
Derek V. Chu: FINRA Bar
For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, Derek V. Chu submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Derek V. Chu, Respondent (FINRA AWC 2018059035701)
https://www.finra.org/sites/default/files/fda_documents/2015044848301
_FDA_JMX1539%20%282019-1563052766338%29.pdf In accordance with the terms of the AWC, FINRA imposed upon Derek V. Chu a Bar from associating with any FINRA member in any capacity. The "FACTS AND VIOLATIVE CONDUCT" section of the AWC alleges that:
On April 10, 2015, during the course of FINRA's investigation into allegations that Chu exceeded the scope of his approved outside business activity by soliciting investments and/or promissory notes, FINRA requested, pursuant to FINRA Rule 8210, that Chu provide documents and information no later than April 24,2015. By letter dated April 15, 2015, Chu provided staff with a partial response to staff's April 10th Rule 8210 letter. On May 4,2015, during a telephone call with Chu, FINRA requested the outstanding items not produced in Chu's April 15, 2015 response. Pursuant to an email to FINRA on May 4,2015, Chu informed staff that he would not cooperate with FINRA's investigation. By refusing to produce the documents and information as requested pursuant to FINRA Rule 8210, Chu violated FINRA Rules 8210 and 2010.
NYLIFE Motion for a Preliminary Injunction
Wow . . . we're all sort of breathless at this point even though it seems that we've only just begun but, you know, we got a few beginnings in FINRA Arbitration and in state court, and somehow we wound up in federal court. For NDCA, the issue before it is NYLIFES's Motion for a Preliminary Injunction of Defendants' FINRA arbitration. In parsing through the parties' arguments, NDCA notes the fairly standard four-part threshold test:
at Page 3 of the NDCA OrderPlaintiffs must show that (1) they are likely to succeed on the merits, (2) they are likely to 'suffer irreparable harm' without relief, (3) the balance of equities tips in their favor, and (4) an injunction is in the public interest[;]" when "the government is a party, these last two factors merge.
Success on the Merits
In first tackling the success-on-the-merits issue, NDCA notes that FINRA Rule 12200 would require parties to arbitrate Rule 12200, parties "must" arbitrate if:
- Arbitration under the Code is either:
(1) Required by a written agreement, or
(2) Requested by the customer; - The dispute is between a customer and a member or associated person of a member; and
- The dispute arises in connection with the business activities of the member or the associated person, except disputes involving the insurance business activities of a member that is also an insurance company.
Additionally, NDCA notes the very expansive definition of a "customer" as set forth in FINRA Rule 0160: Definitions:
(4) "Customer"The term "customer" shall not include a broker or dealer.
In adopting a more refined jurisprudence on the issue, NDCA notes that it abides by the Ninth Circuit's definition that:
"a 'customer' is a non-broker and non-dealer who purchases commodities or services from a FINRA member in the course of the member's FINRA-regulated business activities, i.e., the member's investment banking and securities business activities." . . .
Success on the Merits
In plugging Defendants' arguments into the Ninth Circuit's definition of "customer," NDCA then finds as follows on the issue of NYLIFE's success on the merits:
The issue here, then, is whether Defendants purchased commodities or services from NYLIFE's associated person Felix Chu in the course of NYLIFE's FINRA-regulated business activities. The answer is no. First, the record does not support a finding that Defendants purchased anything from NYLIFE or Felix Chu, that is, that they were customers of NYLIFE or Felix Chu. Defendants had no relationship whatsoever with NYLIFE and Felix Chu was merely a friend from a local café who recommended a bad investment. Second, the record does not support a finding that the investments Defendants made in Felix Chu's son's business were part of NYLIFE's FINRA-regulated business activities. NYLIFE has offered unrebutted evidence that the type of investment made by Defendants is not one NYLIFE offers. Indeed, there is nothing in the record that supports a finding that Felix Chu even made it falsely appear as if the investment had some relationship with NYLIFE. See Berthel Fisher & Co. Fin. Servs., Inc. v. Frandino, No. CV-12-02165-PHX-NVW, 2013 WL 2036655, at *5 (D. Ariz. May 14, 2013) ("An investor is most likely a customer of the associated person if the latter acts as a broker, providing advice regarding investments and facilitating the sale of securities to the investor, and if the associated person acted as a representative of the FINRA member"). Thus, NYLIFE has shown that it is likely to succeed on its claim that Rule 12200 does not apply and Defendants have no right to compel NYLIFE to arbitration.. . .As Defendants did not purchase the promissory notes or any other service from NYLIFE's associated person-Felix Chu-and there is no showing that Felix Chu somehow suggested that that there was some relationship between Defendants' investment and NYLIFE, NYLIFE has demonstrated a likelihood of success on the merits of its claim that Defendants were not its customer or the customer of an associated person for purposes of FINRA Rule 12200. Plaintiff has thus met its burden of showing a likelihood of success
at Pages 5 - 7 of the NDCA Order
Sweeping Away the Threshold
Having found that NYLIFE met its burden of showing its likelihood of success, NDCA makes short shrift of the three remaining prongs of the threshold test. The Court finds that NYLIFE would suffer irreparable harm if forced to participate in a FINRA arbitration when the disputes at issue and not subject to a arbitration agreement. Similarly, the Court found that the "balance of equities" weighed in NYLIFE"s favor, and that no public interest would be furthered by permitting the arbitration to proceed.
NDCA Enjoins FINRA Arbitration
Accordingly, NDCA granted NYLIFE's Motion for a Preliminary Injunction and enjoined the Defendants' from pursuing their FINRA arbitration against NYLIFE Securities.
Bill Singer's Comment
Truly an uncomfortable fact pattern for both consumer advocates and the industry. It sort of feels like someone or some firm should compensate the victims, but that feeling is not uncommon when we consider the plight of many victims who lost a bundle on dubious investments. Reduced to its basics, in this case, we have a bunch of guys sitting around a restaurant table shootin' the breeze. As many a father would, Felix talks about his brilliant son while asking one of the other patrons to pass the ketchup. At some point, the victims invest with Derek. Clearly, a lousy investment of somewhat epic proportions. Pass me two sugars, please . . . no, not that, don't they have any of those brown cane sugar packets? Doesn't appear that NYLIFE knew about Derek's promissory note sideline. Should the firm? Perhaps, but that was for the angry investors to prove and as the courts saw it, they came up short with the necessary proof. How y'all wanna split this check -- just sayin' but, you two guys had pie and I didn't.
From the high to the low to
The end of the show
For the rest of their lives
They couldn't go back to
The greasers
The best they could do was
Pick up the pieces