TD Ameritrade, Inc. v. Kelley
1:15-cv-00714-PAC
S.D.N.Y.Aug 1, 2016Background
- Kelley purchased 152,380 Bancorp (CUSIP X106) shares through TD Ameritrade in August 2005 after DTC had placed a global lock on X106 shares; he requested a physical certificate in 2012 and Ameritrade refused due to the DTC lock.
- DTC placed a global lock on Bancorp X106 shares in August 2005 after corporate-identity fraud; the SEC later revoked registration of Bancorp securities under Exchange Act §12(j) in 2009; a separate class of X205 shares was issued in 2006 under a §3(a)(10) exemption in connection with a settlement.
- Kelley sought and won a FINRA simplified-arbitration award ordering Ameritrade to deliver a physical certificate for his 152,380 shares; Ameritrade paid the monetary award but moved to vacate the delivery requirement as impossible or illegal.
- Ameritrade argued three possible compliance routes were barred: (1) buying market shares for Kelley (allegedly illegal under §12(j)), (2) delivering Kelley’s original X106 paper certificate (impossible while DTC’s global lock applies), and (3) procuring newly-issued §3(a)(10) exempt shares from Bancorp (procedurally and substantively inapplicable because the proposed issuance would be cash-only).
- Magistrate Judge Maas recommended vacating the award to the extent it compelled Ameritrade to effect any transaction in Bancorp shares while the SEC revocation remains in force, but required Ameritrade to continue making good-faith efforts to transfer a certificate if and when legal and practical barriers are removed; Kelley’s request for a §3(a)(10) fairness hearing was denied.
Issues
| Issue | Plaintiff's Argument (Kelley) | Defendant's Argument (Ameritrade) | Held |
|---|---|---|---|
| Whether the FINRA award requiring delivery of a physical certificate can be enforced | Kelley: Ameritrade can and must deliver a physical certificate (or procure equivalent shares), including via §3(a)(10) issuance of X205 shares | Ameritrade: Delivery is either impossible (DTC global lock) or illegal (Exchange Act §12(j) bars transactions in revoked securities); §3(a)(10) inapplicable here | Court: Award vacated in part — Ameritrade cannot be compelled to transact in Bancorp stock while SEC revocation/global lock exist; must make good-faith efforts and comply if/when lawful and possible |
| Whether Ameritrade may purchase Bancorp shares on the open market for Kelley | Kelley: X205 shares exempt under §3(a)(10) mean purchase is lawful | Ameritrade: §12(j) of Exchange Act prohibits brokers from effecting transactions in revoked securities; §3(a)(10) exemption under Securities Act does not negate Exchange Act restrictions | Court: Agreed with Ameritrade — §12(j) bars broker transactions in revoked securities; market purchase is illegal while revocation stands |
| Whether Ameritrade can transfer Kelley’s original X106 certificate | Kelley: His shares were acquired after the DTC lock so they cannot be held at DTC; physical certificate transfer is possible | Ameritrade: Shares are in DTC custody via CNS settlement and subject to global lock; it cannot force DTC to withdraw a certificate | Court: Agreed with Ameritrade — transfer of a physical certificate is impossible while DTC’s global lock applies |
| Whether a court fairness hearing under §3(a)(10) should permit issuance of new exempt shares | Kelley: Requests court fairness hearing so Bancorp can issue §3(a)(10) exempt shares to satisfy award | Ameritrade: §3(a)(10) is procedurally inapplicable here (issuer must seek exemption), and proposed issuance would be a cash-only transfer inconsistent with §3(a)(10) requirements | Court: Denied Kelley’s motion — §3(a)(10) inapplicable because proposed transaction would be cash-only and Bancorp is not a participant seeking the exemption |
Key Cases Cited
- Diapulse Corp. of Am. v. Carba, 626 F.2d 1108 (2d Cir. 1980) (arbitral awards may be set aside if they compel violation of law or impossible acts)
- Scandinavian Reinsurance Co. v. Saint Paul Fire & Marine Ins. Co., 668 F.3d 60 (2d Cir. 2012) (federal courts’ authority to confirm or vacate arbitration awards and the narrow scope of review)
- Porzig v. Dresdner, Kleinwort, Benson, N. Am. LLC, 497 F.3d 133 (2d Cir. 2007) (recognition of strong deference to arbitral awards)
- D.H. Blair & Co. v. Gottdiener, 462 F.3d 95 (2d Cir. 2006) (standards for confirming or vacating arbitration awards under the FAA)
- Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723 (U.S. 1975) (distinguishing the Securities Act’s focus on initial distribution from the Exchange Act’s regulation of post-distribution trading)
- Edge Grp. WAICCS LLC v. Sapir Grp. LLC, 705 F. Supp. 2d 304 (S.D.N.Y. 2010) (impossibility of specific performance where a party cannot perform at the time of relief)