Oral Contract Propels Lynx Capital Into Trading Black Hole

October 28, 2019

It's said that speed kills. On Wall Street, speed supposedly gives you an edge. The faster you get data, the better informed your trades. The faster you enter your trades, the better your execution. The need for speed permeates the markets, and there are companies that sell you speed. Of course, the faster you go, the more apt you are to make mistakes -- which often prompts lots of lawsuits and lawyers, which, go figure, slows everything down to a crawl. See how this all came together in a recent lawsuit.

Lynx Helps Traders

If you visit the website for Lynx Capital Partners of NJ, LLC 
https://www.lynxtrading.com/index.php, you will come across the following:

Over the last decade automated trading has become a mainstay of the US equity and future markets. We here at Lynx have been building and testing automated trading strategies since 2002. Our success comes from a intimate understanding of how to effectively integrate well-formed quantitative strategies with the latest in low latency infrastructure. From sophisticated order entry & execution algorithms managed by traders to fully automated black-box strategies Lynx helps traders take their ideas from inception to execution.

In the high-speed world of trading that has become Wall Street, Lynx helps market participants get into the ever-faster race. Unfortunately, as trading approaches the speed of light, so does the increase in lawsuits. Sadly, Lynx Capital flew too near a Wall Street black hole and got sucked into a lawsuit, albeit of its own design. Lynx Capital Partners of NJ, LLC, Plaintiff, v. Bardown Capital LLC, Bayes Capital LLC, BCM Holdings LLC, Douglas Sanzone, John Geraci, and John Grifonetti, Defendants (Opinion/Order, Supreme Court of the State of New York, New York County, 650722 / October 21, 2019) (the "NYS Opinion")

The 2014 Original Agreement

With that in mind, we come upon a Routing System License Agreement (the "Original Agreement") dated August 13, 2014, which purports to be between Lynx and Bayes Capital, LLC. The Original Agreement sets out the terms by which Lynx licensed a securities order routing system to Bates, and, in part, includes these section:

License Fees. BC [Bayes] shall pay LC [Lynx] the license fees specified on Annex A, as may be amended from time to time by the written agreement of the parties (the "License Fees"). The License Fees be payable monthly, in arrears, pro rata for any partial monthly period. The License Fees will be payable within ten (10) business days of the end of each calendar month. [Lynx] shall be solely responsible for all costs and fees relating to any connection the Routing System maintains with any market center, including, but not limited to, connection to national securities exchanges and alternative trading system ("Connectivity Fees"). Connectivity Fees shall include, but are not limited to, charges relating to the implementation and maintenance of any FIX connections as well as the costs of any market data feeds utilized by the Routing System (id., at 3).

at Pages 1 - 2 of the NYS Opinion

February 2019 Complaint

On February 5, 2019, Plaintiff Lynx Capital filed a Complaint in the above-referenced lawsuit alleging breaches of contract, and of good faith and fair dealing; quantum meruit; promissory estoppel; unjust enrichment; fraudulent conveyance; violation of New York Debtor and Creditor Law; and tortious interference with an existing contract. At issue was "Annex A" to the Original Agreement, which set the license fee at $30,000 a month. Apparently, the parties needed to tweak the Original Agreement, and tweak they did. 

The 2016 Plain-Old "Agreement"

Pursuant to a September 5, 2016, letter, Lynx waived its $30,000 monthly licensing fee for the first six months of 2016. Thereafter, via a January 31, 2017 memo on Bayes Capital letterhead, the parties apparently acknowledged that the monthly licensing fee was revised to $100,000 per month. As of January 31, 2017, we're going to refer to the Original Agreement and its purported written amendments as just the plain, old "Agreement." As alleged by Plaintiff Lynx, at this point in time, Lynx also believed that the Defendants (operators of a regulated broker-dealer) had "expressly agreed to pay over 90 percent of its cash flow resulting from the business generated through the Plaintiff's software product . . ." at page 2 of the NYS Opinion

Defendant Bardown and out

In responding to the Complaint, the Defendants filed a Motion to Dismiss. Preliminarily, Defendants argued that Bardown Capital is not a party to the Agreement and Plaintiff failed to prove that the party is an alter ego of Defendant Bayes. In addressing Defendants' argument, the Court found that:

In the complaint, the Plaintiff does not plead facts that support the inference of a sham entity created to defraud investors and creditors. The complaint merely sets forth the conclusory allegations that (i) the assets of Bayes were used to fund operations of Bardown, (ii) Bayes was undercapitalized, and (iii) the individual Defendants exerted control over Bayes and Bardown (NYSCEF Doc. No. 1, ¶ ¶ 43-47). In addition, the Defendants argue that Bardown has a different ownership structure than Bayes in that a 40% owner of Bardown is not a member of Bayes and Bardown was a market-maker on the Philadelphia Stock Exchange registered with the SEC - and not FINRA like Bayes. In their opposition papers, the Plaintiff notes that "[o]n information and belief, the independent investor referenced in the Defendants' motion to dismiss was not a member of Bardown at the time of the transfers" (NYSCEF Doc. No. 22, at 21, fn 8). This fact, even if true, does not save the claim against Bardown or provide the missing factual basis to support a veil piercing claim. If anything, standing alone, this fact if true only suggests a payout prior to the investment by such 40% investor. Accordingly, the Defendants' motion to dismiss the complaint as against Bardown is granted. 

at Page 4 of the NYS Opinion

Not Worth the Paper It's Not Written On!

Next, Defendants attack the allegation that there was a breach of contract by arguing that this cause of action is wrongly premised on an unenforceable oral contract. In arguing this point, the Defendants assert that:

[(i)] the Agreement unambiguously requires all amendments to be in writing, (ii) certain amendments were executed by the parties from time to time, (iii) the license fee provision was heavily negotiated by sophisticated parties and the profit sharing arrangement which the Plaintiff alleges was specifically rejected by the Defendants (see NYSCEF Doc. No. 12 [attaching a redline copy of the Original Agreement striking language in the draft which would otherwise have codified the agreement that the Plaintiff seeks to enforce]), (iv) if the court looks at extrinsic evidence offered by the Plaintiff (which extrinsic evidence the Defendants argue should not be examined by the court because the contract is not ambiguous), such evidence confirms not, undermines the terms of the Agreement, and finally (v) that the Alleged Oral Agreement the Plaintiff urges this court to accept, would in any event, be unlawful pursuant to FINRA Rule 2040(a) and the Securities and Exchange Act of 1934 § 15 (a)(l), 15 USC§ 780 (2015). In its opposition papers, the Plaintiff argues that the Agreement does not contain an integration clause, the Agreement is ambiguous and ancillary documents suggest a course of dealing that the Agreement included the Alleged Oral Agreement. The Plaintiff's argument is unavailing. 

at Page 5 of the NYS Opinion

SIDE BAR: This is a pertinent portion of the redlined agreement:

BC shall pay LC "Routing System License Fees," payable monthly in arrears ("Monthly License Fee"). The parties will use the first three months of trading to evaluate the software and finalize the Monthly License Fee. The Monthly License Fee will be payable "within 10 days of the end of each month in arrears for the previous month. . .Within ten (10) calendar days before or after the commencement of a new calendar three month period, either party may request a "reset" of the Monthly License Fee that was established based on the previous three month period. Upon such request, the parties shall negotiate in good faith the reset of the Monthly License Fee based upon the following factors, among others, BC' s usage of the Routing System during the past three month period, revenue and net income to BC based on BC' s usage of the Routing System, Routing System uptime/downtime, miscellaneous execution and clearing costs incurred by BC, and any credits and rebates that BC has received as a result of trading activities through the Routing System during the previous completed three month period. If the parties cannot agree upon the reset of the Monthly License Fee, either party can terminate the Agreement as provided below. Furthermore, the parties hereby ratify and expressly approve any payments, payments' timing and payments' methodology that the parties engaged on and before the execution of this Agreement. [emphasis added] (NYSCEF Doc. No. 12, at 3). 

at Page 6 of the NYS Opinion

In dismissing Plaintiff's breach of contract cause, the Court declined to accept that any enforceable Oral Agreement had come into effect -- and opted to maintain the validity of the written Agreement as in full force and effect. In offering its rationale, the Court explained in part that:

[T]o the extent that the Plaintiff wanted the use and effect on Bayes' business to form part of the compensation due the Plaintiff, they requested that the effect on revenue and income (i.e., and not cash flow - and certainly not 90% of the cash flow) form a consideration of any reset of the License Fee itself (i.e., and not as a separate oral agreement for 90% of the cash flow as they now allege and urge this court to accept as a cognizable theory of recovery on which they should be permitted to proceed) - which consideration to be included in the Agreement Bayes expressly rejected (as per the strike-through in the Draft Agreement). 

at Page 7 of the NYS Opinion

A Matter of Proof (or lack)

As to the Plaintiff's allegation that Defendants had engaged in a fraudulent conveyance in violation of NYS Debtor and Creditor Law, the Court found that the Complaint lacked specificity by having failed to identify with requisite particularly what was transferred or when -- clearly a fatal flaw if ever there was one! In setting the standard of proof, the Court admonished Plaintiff that:

[A]s it is difficult to prove actual intent of fraud, the plaintiff may rely on "badges of fraud" to support the case, including: (1) a close relationship between the parties to the alleged fraudulent transaction, (2) a questionable transfer not in the usual course of business, (3) inadequacy of the consideration, ( 4) the transferor's knowledge of the creditor's claim and the inability to pay it, and ( 5) and retention of control of the property by the transferor after the conveyance (id., at 528-29). . . .

at Page 9 of the NYS Opinion

Dismissed Without Prejudice

Perhaps tossing the Plaintiff a breadcrumb of concession, the Court noted that:

[D]uring oral argument, the Plaintiff indicated it possessed facts to meet the heightened pleading standard (which alleged facts were not included in the complaint) and requested dismissal of the fraud claims be without prejudice. Accordingly, the Defendants' motion to dismiss the sixth and seventh causes of action is granted without prejudice. 

at Page 9 of the NYS Opinion

Tortious Interference -- Not Enough Proof

Finally, in striking down Plaintiff's allegations about tortious interference, the Court offers this analysis and rationale in part:

The complaint alleges that: 

90. On information and belief, Bardown, Sanzone, Garaci and Grifonetti intentionally induced Bayes to breach the terms of the ORCC License Agreement by distributing funds rightfully owed to Lynx to Bardown, BCM, Sanzone, Geraci, and Grifonetti (and/or entities owned or controlled by them). 

91. As a result of Bardown, Sanzone, Geraci, and Grifonetti's actions, Bayes did not have the necessary funds to pay Lynx the funds owed to Lynx. As a result, Lynx suffered damages in the amount of approximately $1.7 million (NYSCEF Doc. No. 1, iJ 90-91). 

According the Plaintiff every favorable inference, the causation element is simply not adequately pled. The complaint merely contains the above conclusory allegations that Bardown, Sanzone, Garaci and Grifonetti intentionally induced Bayes to breach the Agreement. This is simply not enough as it relates to what these defendants allegedly did or how what they did allegedly caused Bayes' breach. Accordingly, the Defendants' motion to dismiss the eighth cause of action is granted. 

at Page 10 of the NYS Opinion

Accordingly, the Court dismissed Plaintiff's Complaint but provided Lynx with 14 days to serve and file an Amended Complaint.