Fleisig v. ED&F Man Capital Markets, Inc.

Background

Jonathan Fleisig and Condor Alpha Asset Management sued ED&F Man Capital Markets, Inc. (MCM), alleging breach of contract and commercial tort claims arising from their futures-trading relationship. MCM served as Condor’s clearing broker. MCM counterclaimed for breach of contract, indemnification, and attorneys’ fees and costs.

The dispute involved two main events. First, Fleisig allowed Jared Plutzer, an MCM risk officer and Fleisig’s former intern, to trade in a Condor account while Plutzer was still employed by MCM. Fleisig and Plutzer knew that Plutzer was not permitted to trade in an MCM customer account, and they did not tell MCM about the arrangement. Condor lost money from Plutzer’s trading.

Second, Condor suffered substantial trading losses in September 2018 and failed to satisfy a margin call. Fleisig and Condor then entered into agreements with MCM requiring payments, limiting certain trading activity and withdrawals, and requiring the transfer of market-making rebates to the MCM account. After Condor failed to meet those requirements, MCM disabled its trading privileges and liquidated most of the account’s futures positions.

The court held a bench trial on June 28 and 29, 2021. It applied New York law because the parties’ trial submissions relied on that law and no party argued that the Customer Agreement’s Illinois choice-of-law and forum provisions controlled.

Plaintiffs’ Claims Concerning Plutzer’s Trading

The plaintiffs asserted fraud, negligence, breach of fiduciary duty, breach of contract, breach of the duty of good faith and fair dealing, and negligent misrepresentation claims based on Plutzer’s trading.

The court held that these claims were barred by the Customer Agreement’s one-year contractual limitations period. The agreement required any action related to the agreement or transactions under it to be brought within one year after the claim arose. The court found that the relevant conduct occurred no later than June 30, 2017, and that Fleisig knew the material facts about Plutzer’s trading and the resulting losses by then. Because the lawsuit was filed on September 4, 2019, the claims were untimely.

The court also stated that these claims would fail on their merits. It found that Plutzer’s conduct occurred without MCM’s knowledge and outside the scope of his duties as an MCM risk officer. The court further found that Fleisig repeatedly encouraged Plutzer to continue trading despite knowing that MCM prohibited the conduct and that Plutzer needed to conceal it.

Claims Concerning Account Restrictions, Closure, and Liquidation

The plaintiffs also claimed that MCM breached the October 2018 and February 2019 agreements, breached the duty of good faith and fair dealing, breached a fiduciary duty, and made negligent misrepresentations by restricting their trading and later closing and liquidating the account.

The court rejected the contract claims because the agreements left the Customer Agreement in effect. That agreement allowed MCM, in its discretion, to restrict or prohibit trading in Condor’s account and to close the account. The court therefore found that MCM’s actions were authorized by the parties’ contracts.

The court rejected the good-faith-and-fair-dealing claim because it was based on the same conduct as the contract claims. It rejected the fiduciary-duty claim because a clearing broker generally does not owe a fiduciary duty to the owners of securities passing through its hands, and the plaintiffs had not shown that an exception applied. The court also found that the fiduciary-duty claim duplicated the contract claims and that the plaintiffs had not shown misconduct by MCM.

The negligent-misrepresentation claim also failed. The plaintiffs did not show that MCM imposed restrictions beyond those identified in the agreements. In addition, the agreements did not state that their listed restrictions were the only restrictions MCM could impose, and the Customer Agreement allowed MCM to limit the number of transactions and positions in its discretion.

MCM’s Counterclaims

The court found that MCM established its breach-of-contract counterclaims. The Customer Agreement and the October 2018 and February 2019 agreements were binding contracts, and MCM performed its obligations under them.

Condor breached the agreements by failing to satisfy margin calls, failing to pay liabilities remaining after liquidation, failing to reduce the account deficit as required, failing to make required minimum payments, and failing to transfer market-making rebates to the Condor MCM account. The court rejected the plaintiffs’ arguments that their efforts to reduce the deficit excused their noncompliance. The written agreements imposed specific requirements, and the court found that the plaintiffs also transferred substantial rebate funds away from the account instead of using them to reduce the deficit.

The court rejected the plaintiffs’ argument that MCM had orally modified the February 2019 Agreement. The Customer Agreement required changes to be documented in a separate writing, and the court found no sufficient evidence of a written modification. The court also rejected the argument that MCM failed to mitigate its damages, finding that the plaintiffs offered no admissible evidence showing that MCM liquidated the account improperly or that a different liquidation strategy would have reduced the loss.

The court held Condor liable for $1,762,266.57, representing the negative net liquidation value of the account as of April 5, 2021, after accounting for $700,000 recovered from a third-party guarantor. Under Fleisig’s guaranty, the court held Fleisig liable for $803,113.81, the portion of Condor’s liability remaining after the earlier judgment against him.

Attorneys’ Fees, Interest, and Disposition

The court held that the indemnification provisions in the Customer Agreement and the Guaranty clearly required reimbursement of MCM’s attorneys’ fees, costs, and other enforcement expenses. It awarded MCM prejudgment interest at nine percent per year beginning February 28, 2019, the date the court selected as the reasonable intermediate date for calculating interest.

The court entered judgment for MCM and awarded $1,762,266.57 from Condor, $803,113.81 from Fleisig, nine-percent prejudgment interest from February 28, 2019, and attorneys’ fees and costs. A separate scheduling order addressed the calculation of those fees and costs.