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COR Clearing, LLC v. Calissio Resources Group, Inc.

United States Court of Appeals, Eighth Circuit

March 13, 2019

COR Clearing, LLC Plaintiff - Appellant
v.
Calissio Resources Group, Inc.; Signature Stock Transfer, Inc.; TD Ameritrade Clearing, Inc.; National Financial Services, LLC; Scottrade, Inc.; E-Trade Clearing, LLC Defendants - Appellees

          Submitted: December 13, 2018

          Appeal from United States District Court for the District of Nebraska - Omaha

          Before LOKEN and ERICKSON, Circuit Judges, and MAGNUSON, [*] District Judge.

          LOKEN, CIRCUIT JUDGE.

         On June 16, 2015, Calissio Resources Group, Inc., an issuer of penny stock engaged in foreign mining activities, announced a first-ever quarterly dividend of 1.1 cents per share, payable August 17 to holders of issued and outstanding Class A common stock on June 30. In this action, COR Clearing, LLC, a securities clearing and settlement firm, seeks to recover losses resulting from this dividend transaction that it has not already recovered in other proceedings. COR accuses Calissio, its president, Adam Carter, and its stock transfer agent, Signature Stock Transfer, Inc. (SST), of fraud, and asserts claims of conversion and unjust enrichment against other securities intermediaries.[1] Carter was not served and did not appear; the district court[2] entered default judgment against Calissio. Following extensive discovery, applying Nebraska law, the court concluded that material facts are not in dispute and granted summary judgment dismissing all claims against SST and the Broker Defendants. COR Clearing, LLC v. Calissio Resources Group, Inc., No. 8:15CV317, 2017 WL 5157607 (D. Neb. Nov. 6, 2017). COR appeals the fraud, conversion, and unjust enrichment rulings.[3] Reviewing the grant of summary judgment de novo, we affirm. See Klaers v. St. Peter, 942 F.2d 535, 537 (8th Cir. 1991) (standard of review).

         I. Background

         The claims at issue arise out of the complex, largely automated procedures used by securities intermediaries to implement transactions in our heavily regulated securities markets, including the payment of dividends declared by publicly held companies. The entire process is premised on an indirect holding system in which participants track transactions as "book entries," rather than physically trading certificates, bonds, and other securities instruments.

         When Calissio announced a large dividend to be paid on August 17 to holders of record on June 30, the rules of the Financial Industry Regulatory Authority ("FINRA"), a non-governmental rule-making organization, governed how the dividend would be paid through book entries in securities intermediaries' investor accounts. In the usual case, FINRA determines the "ex-dividend date" -- the date on and after which a security is traded without a declared dividend -- to be on or before the record date. However, in the case of a large cash dividend, such as in this case, FINRA typically postpones the ex-date until the dividend payment date. See Silco, Inc. v. United States, 779 F.2d 282, 283-84 (5th Cir. 1986). In such cases, the automated system must take into account purchases and sales of shares between those two dates. In that interim, "a security, when sold, carries with it from the seller to the buyer the right to receive a distribution," a right known in the industry as a "due bill." In re Arctic Glacier Int'l, Inc., 2016 WL 3920855, at *6 (Bankr. D. Del. July 13, 2016), aff'd, 255 F.Supp.3d 534 (D. Del. 2017); see Karathansis v. THCR/LP Corp., No. CIV. 06-1591 (RMB), 2007 WL 1234975, at *4 (D.N.J. Apr. 25, 2007), aff'd sub nom. In re THCR/LP Corp., 298 Fed.Appx. 120 (3d Cir. 2008).

         The Depository Trust and Clearing Corporation ("DTC") is a Security and Exchange Commission-approved central clearinghouse for the vast majority of shares listed on public markets. When shares are sold after the record date but before the ex-date, DTC credits purchasers with the dividend and debits sellers by crediting and debiting the DTC accounts of intermediaries such as COR and the Broker Defendants, who in turn credit and debit the accounts of their investor clients. Though now fully automated, those credits and debits are still called due bills.

         In this case, issuer Calissio fixed the record date of June 30. FINRA determined the "ex-dividend date" as August 19, after the August 17 payment date. Between those dates, important, abnormal events took place. First, two holders of Calissio convertible promissory notes, Nobilis and Beaufort ("N&B"), converted the notes to equity, resulting in Calissio issuing over 400 million new common shares to N&B. DTC identifies each issue of shares using a nine-digit alphanumeric "CUSIP" number. At Calissio's instruction, the new shares were issued to N&B with the same CUSIP number as existing shares, despite the fact that the new shares were not eligible to receive the declared dividend because they were issued after its record date. DTC uses CUSIP numbers to automatically allocate dividend disbursements to the intermediary accounts of eligible shareholders.

         N&B brought their newly-issued ineligible shares to market by depositing them with their broker, J.H. Darbie & Co ("Darbie"), before the dividend ex-date. COR as a clearing and settlement firm maintains custody of securities and assets and records trades between brokers. Darbie was a COR broker client. After reviewing their eligibility, COR cleared and deposited at least 340 million new shares into its account with the DTC, permitting them to be publicly traded. Because the new shares had the same CUSIP number as existing Calissio shares, the dividend-ineligible new shares became indistinguishable from eligible existing shares on the DTC clearinghouse platform.

         Before the August 19 ex-date, N&B sold their new shares to public buyers who purchased through brokers and traders. Like COR, the Broker Defendants are clearinghouses that connect brokers to the DTC platform. When investors purchased N&B's new Calissio shares through brokers maintaining accounts with one of the Broker Defendants, like COR they entered the transactions into the DTC. Because the new Calissio shares had the same CUSIP number as existing shares, DTC's automated system treated post-record date new shares the same as pre-record date shares. Thus, on August 17, the dividend payment date, DTC attached due bills to the ineligible new shares sold by N&B before the ex-date. Calissio paid out $298, 000, which presumably was distributed to the accounts of 27 million dividend-eligible shareholders -- roughly 20% of all Calissio shares on deposit. But the DTC due bills debited COR's account some $3.7 million for dividends attributable to N&B's sales of ineligible new shares through their broker Darbie. At the same time, the Broker Defendants, whose account holders purchased the N&B shares, were credited $3, 737, 466.18 and passed those credits on to their account holders. COR debited the accounts of N&B through broker Darbie, only to discover that Calissio had not paid dividends on ineligible shares, so the debits were unfunded.

         To recover its loss, COR launched simultaneous efforts against various parties, in addition to suing Calissio and SST for fraud. COR froze N&B's accounts with Darbie, recovering roughly $700, 000 from each. COR obtained an arbitration award of $2, 236, 000 against Nobilis but has not recovered that amount. Following arbitration, Darbie settled with COR, paying $500, 000 and agreeing to indemnify another $1.7 million pending the results of COR's other suits. COR attempted to obtain "post-payable adjustments" to the credits and debits under DTC rules, but the district court denied COR's motion to appoint a receiver, a decision COR does not appeal. COR then filed an amended complaint adding claims against the Broker Defendants for conversion and unjust enrichment and seeking imposition of a constructive trust. Ruling on cross motions for summary judgment following extensive discovery, the district court granted summary judgment dismissing all claims against SST and the Broker Defendants.

         II. COR's Fraud ...


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