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From Securities Regulation Daily, January 4, 2019

Receiver’s claims did not exceed statutory authority

By John M. Jascob, J.D., LL.M.

A receiver appointed under the New Jersey Securities Act did not exceed his statutory authority in bringing arbitration claims on behalf of a failed hedge fund. An intermediate New Jersey appellate court held that a receiver acting on behalf of a defrauded entity may initiate arbitration even if the entity’s investors will ultimately benefit from any assets recouped in arbitration. Accordingly, the ruling of the lower court was affirmed (Interactive Brokers, LLC v. Barry, December 31, 2018, Currier, H.).

FINRA arbitration claims. A New Jersey chancery judge appointed a receiver for Osiris Fund Limited Partnership after the New Jersey Attorney General discovered the fund had operated as a Ponzi scheme, defrauding its investors of more than $6.5 million. The chancery court granted the receiver full statutory powers to perform his duties, including the powers set forth in the New Jersey Securities Act.

Acting as the sole claimant on behalf of Osiris, the receiver then initiated FINRA arbitration proceedings against Osiris’s trading platform, Interactive Brokers, LLC. The receiver alleged, among other things, that Interactive Brokers and one of its employees had aided and abetted the fraud. Interactive Brokers then moved to enjoin the arbitration proceeding, arguing that it was beyond the scope of the receiver’s authority, but the chancery court denied the motion.

Appeal. On appeal, Interactive Brokers reiterated its argument that the FINRA arbitration exceeded the receiver's authority because the receiver had grounded his claims on damages incurred by Osiris's investors, rather than Osiris itself. The appellate court disagreed, citing federal court precedent holding that a receiver can bring a suit to redress injuries suffered by a legal entity even though the entity’s investors will ultimately benefit from the asset recovery.

Here, the statement of claim filed in the arbitration listed Osiris as the sole claimant. The statement of claim charged Interactive Brokers and the employee with aiding and abetting the fraudulent conduct while detailing their substantial participation in the wrongdoing. These were claims that belonged to Osiris, which was harmed when its funds were removed for unauthorized purposes. Accordingly, Osiris was entitled to the return of the unlawfully transferred monies, and the receiver properly wielded his authority under the New Jersey Securities Act.

The case is No. A-4197-17T4.

Attorneys: Kevin H. Marino (Marino, Tortorella & Boyle, P.C.) for Interactive Brokers, LLC. Thomas W. Halm, Jr. (Halm Law Group, LLC) for Richard W. Barry.

Companies: Interactive Brokers, LLC

MainStory: TopStory Arbitration BrokerDealers Enforcement NewsFeed NewJerseyNews

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