Behrens et al v. JP Morgan Chase Bank N. A. et al

MEMORANDUM OF LAW in Opposition re: 182 MOTION for Sanctions Pursuant to Rule 11 Against Plaintiffs and Plaintiffs' Counsel. . Document

S.D.N.Y.July 13, 2018

UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK BRUCE BEHRENS, et al. Plaintiffs, Index No. 1:16-cv-05508-VSB vs. JPMORGAN CHASE BANK, N.A., et al., Hon. Vernon S. Broderick Defendants, PLAINtiFFS' MEMORANDUM OF LAW IN OPPOSITION TO DEFENDANT PERRY COMEAU'S MOTION FOR RULE 11 SANCTIONS. July 12, 2018 Susan J. Levy Attorney for Plaintiffs 40 East 1Oth Street Suite 2k New York, New York 10003 Tel. (212) 962-1782 Fax (212) 962-3711 Case 1:16-cv-05508-VSB Document 207 Filed 07/13/18 Page 1 of 37 TABLE OF CONTENTS Page TABLE OF AUTHORITIES ...................................................................................... .iii ARGUMENT ............................................................................................................... I I. BECAUSE THERE WAS A REASONABLE PRE-FILING INVESTIGA- TION THAT SUPPORTED EACH AND EVERY CLAIM, SANCTIONS ARE INAPPROPRIATE .......................................................................................... ! A. Because of Their Long History of Vexatious Litigation, Defense Counsel Should Not Be Moving For Sanctions .......................................... 2 B. The Three Other Court Cases Filed In Response to the NF A Arbitra- tions Were Duplicative and barred by Res Judicata ................................... 3 C. Because Defense Counsel Had No Basis to Interpose Its Motion, The Cross-Motion Should be Granted ....................................................... 5 II. BECAUSE RES JUDICATA DOES NOT BARTHIS LITIGATION, DEFENDANTS' MOTION FOR RULE 11 SANCTIONS SHOULD BEDENIED ............................................................................................................ 7 A. Ample Evidence in the Customer Class Action and CFTC v. U.S. Bank Cases Supports these Claims .................................................... 8 B. Under Well-Established Precedents Res Judicata Does Not Apply ........... 8 C. Because the Issues Determined at the NF A were Different from the Issues in the Present Case, Res Judicata does not apply ........................... II D. Because Paul Thomas, Esq. Was Conflicted, Res Judicata Does Not Instant Claims .......................................................................................... 1 7 1. Because Perry Comeau had potential liability for the customer losses under the CEA for mishandling the claimants' accounts and based on fraudulent inducement, Paul Thomas, had a conflict of interest. ................................................................................................ 1 7 2. Paul Thomas's Failure to introduce evidence to establish liability against Registrant Comeau under NF A by-law 1101 shows a conflict. ............................................................................................ 20 Case 1:16-cv-05508-VSB Document 207 Filed 07/13/18 Page 2 of 37 3. Because some Plaintiffs signed management agreements with Perry Comeau, attorney Thomas was conflicted. Because of this conflict, the claims against Comeau could not have been brought before the NFA .......................................................................................................... 23 E. Because the NF A Arbitrations were tainted by Fraud, Res Judicata is Inapplicable ................................................................................................... 24 1. Paul Thomas appears to have fraudulently dropped Perry Comeau's case in furtherance ofthe Ponzi Scheme ................................ .24 2. Paul Thomas's misrepresentations to the Panel regarding his dual representation and regarding Comeau' Role also con- stitutes Fraud ............................................................................................ 25 F. Perry Comeau Was Not in Privity with PFG, Thus Res Judicata is Inapplicable .......................................................................................................... 26 III. BECAUSE PAUL THOMAS FRAUDULENTLY CONCEALED PERRY COMEAU'S LIABILITY, EQUITABLE TOLLING EXISTS AND NO RULE 11 SANCTIONS ARE WARRANTED BASED ON THE FACTS HEREIN ....................................................................................................................... 28 IV. THIS COURT ORDERED (DOC.#128) THAT THE SAC WAS THE OPERATIVE COMPLAINT ......................................................................................... 29 CONCLUSION ..................................................................................................................... 30 ii Case 1:16-cv-05508-VSB Document 207 Filed 07/13/18 Page 3 of 37 TABLE OF AUTHORITIES CASES Page In re Amaranth Nat. Gas. Comm. Liti, 587 F.Supp. 2d 513 (S.D.N.Y.2008) ........................................................................ 20,27 Banco Commercial De Mayaguez, 157 Bank. Rep. 510 (D.P.R.1993) ................................................................................... 9 Behrens v. JP Morgan Et. AI., 16-cv-5508 Docket# 97 (S.D.N.Y. 2016) .................................................... 2,7,12,16,29 Brown v. Felsen, 442 U.S 127,99 S.Ct. 2205 (S.Ct. 1979) ....................................................................... 9 C.FT.C. v. US.Bank, NA. 6:13-cv-02041-LRR, Doc.# 112, (11/19/14, N.D.I.A) .............................................. 7,11 Chen Li Chu v. Peregrine Fin. Group et al., CFTC Docket No. 07-R029 (Sept 4, 2008), rev'd by the CFTC Commission (Sept 5, 2013), affd, 823 F.3d 1245 (91h Cir. 2016) ................................. 2 Chenli Chu v. Peregine, CFTC Doc.# 07-R029 (Sept 4, 2008) ............................................... , ........................... 3 Commeau v. Peregrine and Odem & Frye 08-ARB-96 (NF A 2008) ........................................................................................ 20,26 E. Gluck Corp. V. Rothenhaus 252 F.R.D.175, (S.D.N.Y.2008) ................................................................................... 1 Halliman v. Republic Bank & Trust 519 F.Supp. 2d 340 (S.D.N.Y. 2007) ....................................................................... 26 J & J Sports Productions, Inc. V. Senor De Chalma Corp., 2017 WL 3381164*4 (E.D.N.Y.2017) .......................................................................... 1 L-TEC Electronics Corp. V. Cougar Electronic Org., 198 F.3d 85 (2d Cir.1999) ............................................................................................. 9 MF Global Holdings Ltd. V. PriceWatershouseCoopers LLP 232 F. Supp.3d 558 (S.D.N.Y. 2017) .......................................................................... 30 iii Case 1:16-cv-05508-VSB Document 207 Filed 07/13/18 Page 4 of 37 NLRB v. United Technologies Corp., 706 F.3d 1254 (2d Cir. 1983) ...................................................................................... 10 Peregrine Financial Group v. Perry Comeau, et. AI., 2010-CH-14907(Cook Co. Ill. 2010) ........................................................................... 2 Peregrine Financial Group v. Millennium et. al., 2010-CH-40730(Cook Co. Ill2010) .................................................................... .3,24 Peregrine Financial Group, inc. v. Quantum Financial, LLC, GarZon J Maxwell, Amber Maxwell, and Perry J Comeau, Et. AI., 2010 CH 14907 (Chancery Ct. Cook Co. 2010) ............................................... 17,18 In Re Peregrine Financial Group Customer Litigation 12-cv-05546 Doc.# 66 (N.D.Ill2010) ................................................................... 7 Peregrine v. Millennium Trust Co. Et. AI., 2009 CH 34082(Cook Co. Chane. Ct. 2009) .............................................................. 3 PFG v. QuantumFinancial, LLC et al., 2010-CH-1407 (Cook Co. Chancery Ct. 2010) ...................................................... 4,24 Pierce & Weiss, LLP. v. Subrogation Part, 701 F.Supp.2d 245 (E.D.N.Y. 2010) ........................................................................ 17 Prime Management Col. v. Steinegger, 904 F2d 811 (2d Cir. 1990) ...................................................................................... .1 0 Rodick v. City of Schenectady 1 F3d 1341 (2d Cir. 1993) ........................................................................................... 1 Securities and Exchange Commission v. First Jersey Securities Inc., 101 F3d 1450 (2d Cir. 1996) ...................................................................................... 9 Wakeford, et. AI. V. PFG Joint Hearing Plan NF A 09-ARB-1 00 (2011 ) ........................................... ; ............................................ 15 STATUTES 7 U.S.C. §2(a)(1)(B) .................................................................................................... 20,25,27 7 U.S.C.§ 6b .......................................................................................................................... 19 7 u.s.c. §6(d)(b) .................................................................................................................. 11 iv Case 1:16-cv-05508-VSB Document 207 Filed 07/13/18 Page 5 of 37 RULES 17 C.F.R.1.2 .......................................................................................................................... 10 17 C.P.R. 4.14 (a)(10) ........................................................................................................... 15 CME Rule 930D ........................................................................................................ 3,4,12,16 Fed R. Civ. Pro. 11.. ..................................................................... 1,2,3,5,6,7,8,11,24,28,29,30 Fed .. R.C.P. 15(a) ................................................................................................................... 29 Fed.R.C.P. 15(a)(1)(b) .......................................................................................................... 29 Fed.C.P. 15(a)(2) ................................................................................................................... 29 MISCELLANEOUS N.F.A. By-law 1101 ............................................................................................................. 15 Memorandum ofLaw in Opposition to the Rule 11 Motion for Sanctions of Russell Wasendorf Jr ....................................................................................................... 8,29 Case 1:16-cv-05508-VSB Document 207 Filed 07/13/18 Page 6 of 37 Plaintiffs, by Counsel, and Counsel Susan J. Levy, respectfully submit this Memorandum of Law in Opposition to the Defendant Perry Comeau's Motion for Sanctions STATEMENT OF FACTS For the Statement of Facts, please refer to the other Memoranda submitted herewith.1 ARGUMENT I. BECAUSE THERE WAS A REASONABLE PRE-FILING INVESTIGATION THAT SUPPORTED EACH AND EVERY CLAIM, SANCTIONS ARE INAPPROPRIATE. Because none of the factors warranting Rule 11 Sanctions have been stated, and in fact, Ms. Levy throughly investigated and unmasked valid circumstantial evidence to support the claims and properly researched the law and made every reasonable attempt to mediate this matter amicably, the Rule 11 Motion should be denied. Rodick v. City of Schenectady, 1 F .3d 1341, 1350 (2d Cir. 1993)('"When divining the point at which an argument turns from merely losing to losing and sanctionable, courts must 'resolve all doubts in favor of the signer of the pleading."'); see also, E. Gluck Corp. v. Rothenhaus, 252 F.R.D. 175, 179 (S.D.N.Y. 2008)("Courts may issue Rule 11 Sanctions only in extraordinary circumstances.) Indeed "Whether sanctions under Rule 11 are 'appropriate' is 'distinct from the underlying merits ofthe claim"'J & J Sports Productions, Inc. v. Senor De Chalma Corp., 2017 WL 4481164 * 4 (E.D.N.Y. 2017). Therefore, there has been no sanctionable conduct where a good faith and reasonable investigation has revealed an evidentiary basis for the allegations, as in this case. How can Defense counsel even be seeking Rule 11 Sanctions, when the evidence is strong and the case will prevail, and the Fraudulent Ponzi Scheme has been explained in the 1For the Statement of Facts, please refer to the other documents incorporated by reference herein and made a part hereof including the Declaration of Susan J. Levy, Esq. In Opposition to the Rule 11 Motion ofPerry Comeau dated July12, 2018, the Declaration of Susan J. Levy, Esq. In Opposition to the Rule 11 Motion of Russell Wasendorf, Jr., Dated July 12,2018, The Memorandum of Law in Opposition to the Rule 11 Motion of Russell Wasendorf Jr. and the prior Memorandum of Law in Opposition to Defendants' Motion to Dismiss Docket #151. -1- Case 1:16-cv-05508-VSB Document 207 Filed 07/13/18 Page 7 of 37 Mem. Of Law in Opp. To the Rule 11 Motion ofRussell Wasendorf, Jr. submitted herewith. Defense Counsel assumes that the facts are still hidden and therefore will interpose a frivolous motion, to prevent eventual discovery of the full story. But it is now too late for them. A full recitation of Ms. Levy's good faith efforts and her reasonable investigation are discussed in the Declaration of Susan J. Levy, dated July 12, 2018 the Rule 11 Motion for Sanctions of Perry Comeau, ~ 9 submitted herewith and made a part hereof. A. Because Of Their Long History of Vexatious Litigation, Defense Counsel Should Not Be Moving For Sanctions. Mr. Ivarone who is co-counseling this case with Ms. Negovan, although he never bothered to properly file the necessary papers to practice in this Court, appears to be behind this motion; he continually threatened sanctions for his mistaken belief that Res Judicata bars this case. See Behrens. v. JPMorgan, Et. Al. 16-cv-5508 Docket #97 (S.D.N.Y 2016)(Rejection of Mr. Ivarone's Pro Haec Vice Motion for Admission). He appears to have a long-history of using the legal system for vexatious and harassing purposes, the instant motion is just another example of this type of conduct that has been ongoing for years. In ChenLi Chu v. Peregrine Financial Group, Inc. and James Francis Kelly, CFTC Docket No. 07-R029 (1 0/0/2009) rev ~d, by the CFTC Commission (09/5/2013), aff'd 823 F. 3d. 1245 (9th Cir. 2016) for example, where the Claimant lost $500,000.00 that was allegedly supposed to be held in a Treasury Bond at PFG, Administrative Law Judge's decision to reimburse her was overturned on appeal because the CFTC on appeal held as a matter of law that PFG had discretion to trade in her account, although she denied consent for the trades. !d. ·Judge Painter debarred Mr. Ivarone for his conduct from the proceeding. -2- Case 1:16-cv-05508-VSB Document 207 Filed 07/13/18 Page 8 of 37 However, the debarment was reversed, because Mr. Ivarone is a zealous advocate without a doubt. One CFTC Commissioner Chilton expressed his dissent. See ChenLi Chu v. Peregrine Financial Group, Inc., et. a!., CFTC Docket No. 07-R029 (09/04/2008), Levy Dec. to Perry Comeau. See Declaration of Susan J. Levy, Esq. In Opp. To the Comeau Motion, Exhibit 1. B. The Three Other Court Cases Filed In Response to The NFA Arbitrations Were Duplicative and Barred by Res Judicata. Mr. Ivarone, the attorney of record for PFG against these Plaintiffs at the NF A level, decided to institute three other law suits in Cook County, Illinois based on the claims raised at the NF A Hearing. See Print-out of Cook Cases, Levy Dec. Exhibit 2. Ironically, Mr. Ivarone was not concerned about Res Judicata by initiating duplicative litigation that raised issues that were already pending before the NF A; and now is behind this Motion upon information and belie£ The claims in the Cook County cases were also absurd. A review of these three cases show in hindsight an effort to cover-up Peregrine's liability and to make it appear as ifPFG was pristine. For example, shortly after the Claimants' Arbitrations were filed in June, 2009, Mr. Ivarone interposed a law suit in Cook County Chancery Court for Declaratory Relief to hold that CME Rule 930D did not apply to PFG and for attorneys fees. See Peregrine v. Millennium Trust Co. et. al., 2009 CH 34082 (Cook Co. Chane. Ct. 2009). Levy Dec. (Comeau), Exhibit£, List of Cook County Cases.2 This 2009 case was stayed and Peregrine brought a Motion for Declaratory Relief before the NF A. See Order staying Lawsuit, annexed to the Levy Dec. (Comeau) as Exh. 3; See NFA Mot. for Dec. Relief. See Levy Dec. (Comeau), Exh. 4. In retrospect, PFG was attempting to remove the issue of its violation of CME Rule 930D 2See Peregrine Financial Group v. Perry Comeau, et. al., 2010-CH-14907 (Cook Co. Ill. 2010); Peregrine Financial Group v. Perry Millennium, et. al., 2010-CH-40730 (Cook Co. lll2010). -3- Case 1:16-cv-05508-VSB Document 207 Filed 07/13/18 Page 9 of 37 from consideration because resolution of that issue would have gone to heart of this scheme and would have required Expert analysis to examine PFG's trading records which surely would have revealed the Ponzi Scheme, including the falsified Margin Call Notices in 2008. However, Peregrine lost their Motion for Declaratory Relief before the NFA, and the NF A Arbitrators allowed this claim for violations of CME Rule 930D to proceed to a full hearing. See NFA Decision and Order dated 3/2/2010 denying PFG's motion for Declaratory Relief, annexed to the Levy Dec. as Exh. 5. However, thanks to Paul Thomas, Esq., the conflicted attorney, he voluntarily dropped this excellent claim from the case altogether and made it easy for PFG to proceed. See Third and Final Statement of Claim, annexed to the Levy Dec. (with all Statements of claim) as Exhibit 6. In another Frivolous Cook County case brought while the NF A arbitrations were proceeding, PFG accused Comeau of conspiring with Mr. Thomas and the Maxwells to wrongfully blame PFG for the failing of the accounts. See Second Amended Complaint P FG v. Quantum Financial, Et. Al. 2010-CH-14907, ~~54-56, (Cook Co. Chane. Ct 2010) Levy Dec. (Comeau), Exh. 7. This claim was almost correct, but it was missing PFG as the other co- conspirator. This frivolous case sought legal fees notwithstanding that the NF A Arbitrators had ruled on the issue. Because organizations bringing legitimate claims do not fail to prosecute as in this case; these court filings were horse and pony shows intended to cover-up the Ponzi Scheme. See Order dismissing Second Amended Complaint, annexed to the Levy Dec.(Comeau) as Exh 8. More vexatious and sanctionable conduct occurred, again after the Schefferts' lost at the NF A level. PFG re-opened up the other Cook County Stay in the Declaratory Judgment action 2009-CH-34082 and amended its Complaint in 2012 to ask now for attorneys fees. See Amen. Com pl. annexed to the Levy Dec. as Exhibit 9. PFG by counsel, in violation of legal -4- Case 1:16-cv-05508-VSB Document 207 Filed 07/13/18 Page 10 of 37 principals of Res Judicata ignored the fact that the NF A Arbitrators had already decided the very issue of Attorneys Fees. See NF A Decision, Sherri Scheffert annexed to the Levy Dec. (Comeau) as Exhibit 10. Coincidentally, PFG sought legal fees in the amount of $25,000.00 just like in this case without any submission of a legal bill. PFG through its attorneys is engaging in sanctionable conduct, but no sanctions are ever imposed. Because the Amended Complaint for Attorneys fees shines a spot light away from anywrongdoing by PFG, PFG voluntarily drops the Amended Complaint, after making a record for the public to see to make it look like PFG had a right to Attorneys Fees, even though the NF A Arbitrators declined to award PFG any fees. See Order Voluntarily Dismissing case, dated 05/12/2012, annexed to the Levy Dec. as Exh. 11. C. Because Defense Counsel Had No Basis to Interpose Its Motion, the Cross- Motion Should Be Granted. Defense Counsels' unfounded motion for Rule 11 Sanctions is another example of a frivolous proceeding just to create an illusion that Defense Counsel has a legitimate position, when none exists. Now, Defense Counsel is doubling-down on their own misunderstanding of the facts and therefore masking their principals' liability as has been accomplished for the past twenty years in NF A arbitrations where nobody ever prevailed as a claimant in the 17 years where NFA listed its statistics for claims in excess of$100,000.00. See NFA PFG Arbitration results (Redacted) annexed to the Levy Dec. as Exhibit 12. In fact, before bringing on a Rule 11 Motion claiming lack of evidentiary basis for alleging phantom and fictitious trading, perhaps Defense Counsel should have itself reviewed the PFG trading records to see for itself that the trades were fictitious before filing this frivolous Rule 11 Motion for Sanctions. Because the evidence overwhelmingly shows this two-bit ponzi scheme was used by issuing phony margin calls and using doctored trading records to create losses in each customer's account until the accounts were finally dumped; Defense Counsel is -5- Case 1:16-cv-05508-VSB Document 207 Filed 07/13/18 Page 11 of 37 deserving of sanctions. Had they said nothing, and had Plaintiffs failed to convince a jury by a preponderance of the evidence, then Defense counsel would have prevailed. However, where defense counsel purposefully goes out of its way to misstate the evidence in a Rule 11 Motion, then it had better have reviewed the probative evidence before alleging misconduct. Under this posture, defense counsel should be held accountable. Therefore, because people in glass houses should not be throwing stones, Defense counsels' false accusation of wrongdoing should result in a sanction against them for putting unsupported factual allegations in the record by denying the entire scheme. They continue to allege that the Maxwells were the sole proximate cause of the trading losses, or an unknown Clearing Member now put the trades through, despite the fact that PFG Best and Peregrine appear to have been generating the trading records annexed to the Plaintiffs' Affidavits. PFG's defense.counsel was able to navigate through the NFA Arbitration system while this Ponzi Scheme continued for 20 years. Because the NF A allowed conflicted attorneys to proceed, and does not comply with Illinois State Law regarding conflicts of interest, the NF A arbitrators allows Mr. Thomas a conflicted attorney to proceed. See Sherri Scheffert, Aff. Exh 17, p11., ln. 14 top. 12, ln. 3. (Arbitrators held that NFA Rule 7 did not give them authority to remove an attorney based on a conflict of interest.) Because the NFA Arbitrators are not even required to know the law or understand even how to read trading records, as it appears in this case, the case proceeded in the shadows. Although the trading records were admitted into evidence, clearly the NF A Arbitrators did not scrutinize these records nor did they consider any Expert review of these records. The NFA earned approximately $50,000.00 in Filing Fees in this case and paid their Arbitrators approximately $400.00 per day as "Honorariums" upon information and belief -6- Case 1:16-cv-05508-VSB Document 207 Filed 07/13/18 Page 12 of 37 and even charged this "Honorarium" to the parties in the form of extra fees, Hearing Fees. Perhaps that is why Arbitrators do not write decisions. The NF A has therefore failed to honor its congressional mandate to provide a fair and impartial arbitral forum, and this fact will also be fully established at the time of trial in this case. However, the jig is now up, and the evidence exists to impose liability for the defalcation of Plaintiffs' customer segregated accounts and then the tossing of their accounts using in whole or in part fake trades and phony margin calls. II. BECAUSE RES JUDICATA DOES NOT BAR THIS LITIGATION, DEFENDANTS' MOTION FOR RULE 11 SANCTIONS SHOULD BE DENIED. Because the instant case Behrens v. JP Morgan, involves new claims and new facts to explain Plaintiffs, 2008 losses due to alleged theft of customer funds by Russell WasendorfSn., former CEO ofPeregrine Financial Group, Inc., the instant case is proper. Based on this new 2012 evidence and the claim that the Ponzi Scheme was the proximate cause of the losses; the previous claims that focused blame on the CTAs and PFG for strict liability, should not bar this case. These prior alternative bases for recovery heard at the NF A could not have included the instant claims because the NF A Arbitrations were filed in 2009 and were completed in 2011 prior to the 2012 knowledge of the instant facts that are the basis for the instant claims. In addition, based on Equitable Tolling and the Discovery Accrual Rule, the filing of the present claims were timely and consistent with other cases where claims were tolled ten years. See Memo Law in Opp. to Defendants' Motion to Dismiss, pp. 13-40 Doc. # 151 made a part hereof. Defense Counsel have not cited to one case that would allow the application of res judicata under these circumstances. Rather, based on the confession by Wasendorf, Sn. in 2012 and the facts determined in In re Peregrine Financial Group Customer Litigation 12-cv-05546 Doc. #66; (N.D. Ill2012), and C.FTC. v. US.Bank, N.A., 6:13-cv-02041-LRR, Document 112, -7- Case 1:16-cv-05508-VSB Document 207 Filed 07/13/18 Page 13 of 37 (11119/14, N.D.IA), there was ample evidentiary support to file this case. Therefore, by no stretch of the imagination can a Rule 11 Motion for Sanctions be granted against the undersigned for zealously litigating a meritorious claim that has never been determined on the merits. Ms. Levy had an expert review of the case and discussed and retained a RICO specialist to get the claims right. In fact, imposition of this Rule 11 Sanctions Motion is so frivolous and designed to harass and add more burdens that this type of Motion should be met with an equally forceful sanctions motion against the attorneys who wrongfully interposed this motion. A. Ample Evidence in the Customer Class Action and CFTC v. U.S. Bank Cases Supports these Claims. In the first part of this Ponzi Scheme, the documentary evidence clearly supports the allegations that Wasendorf Sn. proximately caused Plaintiffs losses by physically removing Plaintiffs' funds from customer segregated accounts held at Depository Banks, U.S. Bank and JPMorgan Chase for the benefit of the customers. In part two of the Ponzi Scheme-purposeful conduct was used to dissipate and destroy the customer's accounts to appear as though the client's fund lost due to natural market volatility rather than as a result of this well-orchestrated Ponzi Scheme where in fact there appear to be fictitious trades and trading activity including the issuance of Margin Call Notices. See Memorandum of Law in Opposition to the Rule 11 Sanctions Motion of Russell Wasendorf Jr .. which is incorporated by reference herein.3 B. Under Well-Established Precedents Res Judicata Does Not Apply 3The evidence is ample that Russell Wasendorf, Sn. could not have been the only person orchestrating this 20 year Ponzi Scheme, but he had to have had assistance from a team of brokers who helped allocate the gains and losses between 24,000 accounts to give the appearance that the accounts were good investments that just somehow went amiss. Just generating daily and monthly statements to clients to track trades would have take ample coordination. -8- Case 1:16-cv-05508-VSB Document 207 Filed 07/13/18 Page 14 of 37 None of the elements required to apply Res Judicata apply to this case, and under the well-established Fraud exception to Res Judicata, the prior NF A Hearings were tainted by Fraud and a Conflict of interest, thus preventing any bar under Res Judicata. L-TEC Electronics Corp. v. Cougar Electronic Org., 198 F.3d 85 (2d Cir. 1999); Banco Commercial De Mayaguez, 157 Bank. Rep. 510 (D. P.R. 1993). Therefore, presently there should be no bar to litigation of these new claims against any Defendants. Res Judicata prevents the institution of a second litigation after a final determination on the merits ofthe first claim. However, this defense must be applied on a case- by-case basis to the facts in both the previous litigation and the second litigation to determine whether new facts and new claims arose that could not have been previously litigated, as in this case. The Supreme Court has recognized that courts should avoid a harsh application of this doctrine and should carefully consider the facts at issue before it erects a res judicata bar. Brown v. Felsen, 442 U.S 127, 132,99 S. Ct. 2205, 2209-10 (1979). Res Judicata depends on: ( 1) whether there was a final determination on the merits of a case; (2) whether the claims at issue in the second case could have been brought in the first action and (3) whether the parties against whom the second suit is asserted was in privity with the parties to the first action. Securities and Exchange Commission v. First Jersey Securities Inc., 101 F .3d 1450, 1463 (2d Cir. 1996). Res Judicata is not applied rigidly so as to prevent injustice. In Securities and Exchange Commission v. First Jersey Securities Inc., 101 F .3d 1450, 1463 (2d Cir. 1996), the Second Circuit refused to apply the Res Judicata bar to the government's second suit for securities fraud despite a prior administration proceeding and settlement dealing with virtually the same fraud. However, because the subsequent litigation dealt with different temporal dates, -9- Case 1:16-cv-05508-VSB Document 207 Filed 07/13/18 Page 15 of 37 regarding similar claims, the Second Circuit refused to apply Res Judicata. The Second Circuit clarified the applicable standards regarding Res Judicata: "With respect to the determination of whether a second suit is barred by res judicata, the fact that both suits involved essentially the same course of wrongful conduct is not decisive, see, e.g. Prime Management Col. V. Steinegger. 904 F.2d 811, 815 (2d Cir. 1990); nor is it dispositive that the two proceedings involved the same parties, similar or overlapping facts and similar legal issues, see, e.g. NLRB v. United Technologies Corp. 706 F.3d 1254, 1259-60 (2d Cir. 1983.)" This standard demonstrates that Res Judicata does not bar the instant suit because it is based on a substantially new set of facts that Plaintiffs' life-savings were being removed unlawfully right out of their segregated customer accounts and pocketed by at least W asendorf Sn. These facts were concealed from public knowledge until at least July, 2012 over six months after the last NF A Arbitration ended. Therefore, it would be unlikely for Plaintiffs' funds to vanish in the trading markets when their funds were already stolen before any trades even begun. The issues determined in the NF A Arbitrations had very little to do with the claims in this case; therefore no bar exists under Res Judicata. Defense counsels' argument to the contrary is pure malarkey. 4 More evidentiary support for the claims that these Plaintiffs had their life-savings pocketed by Wasendorf, Sn. between 2007 and 2008 is demonstrated from several sources including the report of a Forensic Examiner Joy McCormack who analyzed the transfers of customer segregated funds during part of the time period when this 20 year Ponzi Scheme was in 4These new alleged facts have evidentiary support in documentary evidence. For example, Plaintiffs sent their opening funds to the PFG Customer Segregated Account at JPMorgan Chase ending in 5265 which is one of the accounts that was allegedly being used for non-customer purposes and allegedly being used to transfer monies to Wasendorf. See Memorandum of Law in Opposition to the Rule 11 Motion for Sanctions of Russell Wasendorf, Jr. submitted herewith and fully incorporated by reference herein and made a part hereof; see also, Levy Declaration as Exhibit 1 which is a true and complete copy of a form filled out by Millennium Trust indicating the customer monies were wired into the JPMorgan 5265 account on behalf of David Scheffert in August, 2007, see also, Affidavit of Bruce Behrens, Exhibits 2,4 submitted herewith showing funds returned to Behrens from the 5265 Account. -10- Case 1:16-cv-05508-VSB Document 207 Filed 07/13/18 Page 16 of 37 full force and effect showing that as part of the Scheme. 5 According to the allegations in the SAC, once customer monies were transferred from the JPMorgan customer segregated Account into the US Bank Account, 1845, then these customer monies were simply handed-over to Wasendorf, Sn. Regulators have alleged these transfers to constitute criminal fraud in violation of the Anti-Fraud Provisions of the Commodities Exchange Act 7 U.S.C.§ 6(d)(b) and 17 C.P.R. 1.20. 6 Customer records including account statements and Margin call notices indicate that when W asendorf, Sn. needed cash for himself, he would inter alia issue a phony Margin Call on one of the customer's account, and then remove cash from the 1845 Customer Segregated Account and steal the funds. As long as the customer account was open, he could allocate these phony Margin Calls, on the customers' accounts and have a paper trail to validate the fraudulent transaction. The Margin Call Notice covered the theft of funds from the 1845 account because when a Margin Call is issued, the FCM has a legal right to debit the customer segregated account to cover the short fall and pay the CME Clearing Exchange for the customer default. See Wasendorf Jr Memo in Opp. C. Because the Issues Determined at the NF A Were Different From the Issues in the Present Case, Res Judicata Does Not Apply. Res Judicata requires a showing that the same issues are being litigated twice. A 5 The McCormack Report demonstrates hard facts that JPMorgan Chase transferred $94,000,000.00 from the PFG- JPMorgan Chase customer segregated account into another PFG Customer Segregated Account at U.S. Bank ending in 1845. The transfer of this $94 million dollars worth of customer segregated monies took place exactly when these Plaintiffs, had their funds in the JPMorgan Chase 5265 account, because the time frame referred to in the McCormack report was from June, 2008 through July, 2012. See C.F.T.C. v. U.S.Bank, N.A., 13-CV-2041- LRR, Doc. #112, p. 8, 22 (N.D. lA 2014.). Because the customers transferred their accounts in the summer of2007, by June, 2008, all of their money was with PFG. 6The McCormack report also establishes that transfers of customer segregated monies also went back from the U.S. Bank 1845 account back to the PFG-JPMorgan Chase Customer Segregated Account in the amount of $108,500,000.00 during the relevant time period. See McCormack Cash Flow Summary, at 148; C. F. T. C. v. U.S. Bank, N.A., 13-CV-2041-LRR, Doc. #112, p 22 (N.D. IA 2014.) -11- Case 1:16-cv-05508-VSB Document 207 Filed 07/13/18 Page 17 of 37 movant must show that these issues were already fully determined on the merits. However, Defense counsels' bold assertion that the claims in the present litigation, Behrens v. JPMorgan Et. Al. 16-cv-5508 (S.D.N.Y. 2016) were fully determined in the NFA Arbitrations is entirely belied by the record. Despite the long laundry list of issues heard by the NF A arbitrators, that list is merely a recitation of claims in the "Third and Final Statement of Claim" that were perfunctorily listed in the decision and do not cover the instant claims. See NF A Statement of Claims annexed to Levy Dec (Comeau) as Exhibit 6. Defense counsel has misrepresented the import of this list stated by the NF A Arbitrators. This list of issues can only be evaluated by juxtaposing the list with the Third and Final Statement of Claim to understand that none of the issues in this case were actually resolved at the NF A level. See. NF A Award for the Schefferts, annexed to the Levy Dec. as Exh.l 0. One specific issue to which defense counsel refers as being previously determined is the issue of whether PFG violated CME Rule 930D which was alleged to incorporated by reference into their PFG Customer Agreement proximately causing losses to the customer accounts by failing to stop trading in undermargined accounts as CME Rule 930D is supposed to prevent. However, not even this issue was finally determined at the NF A level and is therefore not barred from consideration in this case, because the record is clear, that for no reason, Paul Thomas, Esq. voluntarily removed this claim regarding violation of CME Rule 930D from "The Third and Final Statement of Claim" despite an NF A order allowing this claim to be heard at the NFA arbitration. See NFA Order, Levy Dec. (Comeau) Exhibit 5. Therefore, Defense counsels' attempt to pull the wool over this Court is unspeakable, and it knows or should know that there was never any consideration by the NF A Arbitrators concerning PFG's violations ofCME Rule 930D. Therefore, to the extent that this -12- Case 1:16-cv-05508-VSB Document 207 Filed 07/13/18 Page 18 of 37 issue is being raised in this case, it should not be barred since this issue was never even resolved. Because Defense counsel knew or should have known that none of the present issues being litigated were finally determined at the NF A level, it should pay costs of having to defend this frivolous motion. See Hearing Transcripts of Bruce and Kathleen Beherns, annexed to the Levy Declaration as Exhibit 13. Any expert review of these account statements would have readily unmasked this two-bit, twenty year ponzi scheme whereby falsified and phantom transactions are occurring in each Plaintiffs' account. Presumptively, Paul Thomas, Esq. by filleting the NFA case, appears at some point to have joined the conspiracy to aid and abet Wasendorf, Sn. to prolong this ponzi scheme from 2008 to 2012 allowing the further losses of appropriately $200 million dollars. The claims against Comeau who helped the Maxwells to convince the Group to invest in such high risk investments that were bound to fail, as well as PFG's negligent supervision and vicarious liability for such violations of the Anti-Fraud Provisions of the Commodity Exchange Act were effectively removed from the NF A Arbitrations all together. However, the NF A Business Conduct Committee actually fined PFG $700,000.00 for its role in very similar conduct described in the NFA BCC Order, See Levy Dec. Exhibit 14. So, clearly PFG's continued arguments in Cook county that it had no legal liability for allowing the Brokers doing business with it from engaging in deceptive practices with respect to the customers was against well-established law and sanctionable conduct for misstating the law. To avoid scrutiny, PFG with the help of Paul Thomas, Esq only considered peripheral issues that focused on the PFG's vicarious liability for the Maxwells's misconduct. Therefore, the NF A Arbitration did not address the issues of Fraud presently being heard. In fact, there was never any testimony about the account statements, including -13- Case 1:16-cv-05508-VSB Document 207 Filed 07/13/18 Page 19 of 37 claims of deceptive trading practices, PFG's failure to supervise's and PFG's vicarious liability under 7 U.S.C. §2(a)(l )(B). Rather, at the Behren 's NF A arbitration, Claimants' Expert admitted that he had no testimony to proffer on the actual trading practices. At page 268, line 10 to 269, ln. 12: Levy. Dec (Comeau), Exh. 13: "Arbitrator: Did you analyze the amount of money that Mr. Maxwell or Mrs. Maxwell might have made off of the Claimants' accounts? A: No. I did not. I believe the testimony earlier was that a certain percentage? Q: Right. You didn't look at the numbers? A: I didn't look at the total numbers? Q. Do yo know if he traded-the Maxwells traded for their own account? A. I don't know if they did or not. Q. Did you ask? A: I believe that I asked the attorneys, but I did not ask any of the clients. I did ask one of the clients, and they couldn't remember if he had traded for his own account or not Q: Last question [By the Arbitrator]. Did you look at the actual trading-did you look at the actual trading strategies of the Claimants? A. I looked through-it has been quite a some time, but I did review in the very beginning looked through some of the equity runs. They did not have all of the Equity runs. I think that was early in discovery, but I did look through some of the- Q. Do you have an opinion then regarding the trading strategy? A: I wasn't asked to speak to that. A review of the Joint Hearing Plan from the NF A Arbitration for Richard Wakeford annexed to the Levy Dec (Comeau) as Exh. 15, shows that the issues considered at the -14- Case 1:16-cv-05508-VSB Document 207 Filed 07/13/18 Page 20 of 37 NF A were significantly different from the claims at issue in the case at bar.7 A review of the NF A proceedings demonstrate that most of the proceeding dealt with the solitary issue of whether the Maxwells had more than 15 customers which would have required the Maxwells to register. Claimants' argument was that because the Maxwells should have registered, and they were not exempted from registration under 17 C.F.R. § 4.14(a)(10); then, PFG was strictly liable under NF A By-Law 1101 for allowing non-registrants to handle customer accounts. See NFA By-Law 1110, annexed to the Levy Dec. (Comeau) as Exh.l6. The other issues at the NF A hearing concerned whether PFG was negligent in supervising the CT A disclosure process whereby Garlon Maxwell did not disclose certain relevant information about himself and whether more risk disclosures should have been made to claimants based on their 7The Claims listed in the joint hearing plan were: a. Whether Amber Maxwell was required to registered as a commodity trading advisor while Claimants' accounts were carried by PFG. b. Whether the Respondents conducted an [sic] adequate due diligence, pursuant to NF A rules, in determining that Amber Maxwell was exempt from registration as a commodity trading advisor. c. Whether PFG had any responsibility to supervise the trading in claimants' accounts. d. Whether Amber Maxwell provided trading advise while claimants' accounts were carried by PFG for more than fifteen persona as defined by CFTC regulations. e. Whether Amber Maxwell held herself out generally to the public as a commodity trading advisor while Claimants' accounts were carried by PFG. f. If Maxwell [sic] improperly acted as an unregistered CTA while Claimants' accounts were carried by PFG, whether that was proximate cause of Claimants' losses. h. Did PFG have any obligation to notify Claimants of margin calls via telephone and, if so, was the failure to notify the Claimants via phone of margin calls a proximate cause of the losses suffered by Claimants. The Claimants also wanted another issue heard as to: I. Whether PFG was negligent in failing to provide Claimants with additional risk disclosures regarding investing their retirement funds in futures and options on futures and whether PFG was negligent in allowing the Claimants' percentage of retirement assets traded by Amber Maxwell. See Wakeford, et. al. v. PFG Joint Hearing Plan annexed to the Levy Dec. as Exhibit 15 -15- Case 1:16-cv-05508-VSB Document 207 Filed 07/13/18 Page 21 of 37 level of experience. See Behrens' 'Transcripts annexed to Levy Dec. As Exh. 13. Therefore, because a review of the NF A Arbitrations show only a tangential relationship to the present claims, no bar is warranted under well-settled law of Res Judicata. In fact, the issues heard at the NF A would be considered alternative theories of relief or issues side-stepping the real issue ofPFG's failure to supervise deceptive trading as found by the NFA Business Conduct Committee. See Levy Dec. (Comeau), Exh.14. Because none of the trading records had to be scrutinized to litigate these side-issues, PFG was able to use the NF A process to keep its Ponzi Scheme under wraps. The NF A arbitrators never even considered the unlawful and fraudulent trading strategies carried on by the Maxwells and Comeau under the supervision of PFG by unlawfully allowing them to invest in naked puts and calls knowing that these Senior, Retirees only wanted conservative investments. Thus, these damning trading records and Margin Call Notices went unnoticed by the NF A Arbitrators even though they were admitted as Exhibits, and should have been reviewed by someone. Therefore, Defense counsels cannot not allege that there was a full adjudication on the same issues at the NF A level, and this allegation is flawed. See Motion for Rule 11 Sanctions of Perry Comeau Docket 182, ~~1-3. For example, the NF A arbitrators listed that they decided an issue ofFraud in their final decision. However, the issue ofFraud that is listed on the NFA Decision only related to the evidence adduced at the hearings as to the fraudulent conduct of Garlon Maxwell who allegedly omitted a material fact on his required PFG forms as to whether he had ever declared Bankruptcy. This narrow issue concerning Fraudulent Conduct that the NF A Arbitrators listed on their decision as"Fraud" without any further explanation is not at all the same issues of Fraud in this case including mail fraud and wire fraud and including transfers of customer monies from segregated accounts to W asendorf, Sn. personally and the issuances of -16- Case 1:16-cv-05508-VSB Document 207 Filed 07/13/18 Page 22 of 37 falsified Margin Call Notices. Therefore, such misrepresentations that the claims at issue herein were already adjudicated is unsupported and is the basis for the instant cross-motion for Rule 11 Sanctions. D. Because Paul Thomas, Esq.'s Was Conflicted, Res Judicata Does Not Bar the Instant Claims. Another criteria for the bar of Res Judicata or claim preclusion, is a consideration of whether the issues presently being litigated could have been brought in the first litigation. If so, then Res Judicata may apply. However a review of the record shows that the issue of a violation of Rule 930D could not have been fully litigated in the prior case due to the conflict of Interest that existed with respect to Attorney Paul Thomas who represented both Perry Comeau and the other Claimants. See Aff. Sherri Scheffert, Exh. 17. p. 5, ln.1 top. 9, ln.38. 1. Because perry comeau had potential liability for the customer losses under the CEA for mishandling the claimants' accounts and based on fraudulent inducement, paul thomas, had a conflict of interest. Because Perry Comeau a registrant with the NF A entered into management agreements with some of the Plaintiffs and was assisting the Maxwells, he had potentialliabi1ity for the losses in these customer's accounts. See Affidavit of Kathleen Behrens, Exh.1, Aff. David Scheffert, Exh.6. However, because Mr. Comeau was also being represented by Mr. Thomas and had also been represented by Mr. Thomas in a prior NF A Arbitration filed in 2008, there was a clear conflict of interest. See Comeau v. PFG and Odem & Fry, 08-ARB-96 (NFA, 2008). By representing Mr. Comeau, Mr. Thomas wanted to minimize Comeau's liability; therefore, Mr. Thomas failed to bring a CEA Fraud claim against Perry Comeau. See Pierce & Weiss, LLP. v. Subrogation Part, 701 F. Supp. 2d 245 (E.D.N.Y. 2010.) In fact, it was actually Mr. Ivarone who first raised the obvious issue of conflicts of interest when Peregrine instituted a separate law suit against Perry Comeau entitled, Peregrine -17- Case 1:16-cv-05508-VSB Document 207 Filed 07/13/18 Page 23 of 37 Financial Group, Inc. v. Quantum Financial, LLC., Gar/on J Maxwell, Amber Maxwell, and PerryJ Comeau, Et. AI., 2010 CH 14907 (Chancery Ct. Cook Co. 2010.) This absurd case now appears to have been brought to divert attention from PFG so that the Ponzi Scheme would be covered up. Peregrine was suing Comeau for conspiring with Thomas and others to wrongfully accuse PFG of misconduct. In paragraphs 32 and 33 of the Second Amended Complaint, Mr. Ivarone and his associates accused Paul Thomas and Perry Comeau of conspiracy and conflict of interests; "32. In conspiring [sic] have the Customers file the said 'arbitrations, Thomas and Comeau did so intentionally and maliciously for the purpose of diverting any claims of liability by the Customers against Comeau, Garlon, and Amber, even though the direct and proximate result of any and all losses the Customers sustained in their accounts at PFG were the orders entered by Quantum, Garlon and Amber. 33. As a material part of the conspiracy, Thomas and his agent Thomas Burke, an Illinois attorney who was retained to represent the Customers in the NF A arbitrations, failed to disclose to the customer the possible liability of Comeau as a member of the Comeau venture and the resultant conflict of interest that existed, not only by representing both the Customers and Comeau, but by filing the same claim for Comeau before the NF A." [Emphasis Added.] See Second Amended Complaint, Peregrine v. Quantum, Et. AI. 2010 CH 14907 annexed to the Levy Declaration as Exhibit 7. 8 8PFG is suing Comeau, the Maxwells and their LLC, Quantum for legal fees for PFG's need to defend against the Claimants' Arbitration claims. PFG accuses Comeau and Thomas of encouraging the Group to sue PFG to cover up Comeau's own misconduct as trading agents. Therefore, PFG seeks breach of contract damages. PFG alleges at paragraphs 49 and 50 of its Amended Verified Complaint: "49 .... Presumably, these Customers have been encouraged by the Defendants herein, who are intimately familiar with the NFA's registration requirements with respect to CT As (as Defendant COMEAU's prior testimony bears out), to file these new claims against PFG ... 50. This is ultimately a case in which Defendants, the Customers' attorney, and other third parties are encouraging the Customers to breach the irrespective Customer Agreements with PFG, to their detriment. ... 57. In an attempt to deflect the blame for the Defendants' mismanagement of each of the Customers' accounts, the Defendants, and each of them, without lawful authority, interfered with the contractual relationship between PFG and the Customers by intentionally inducing the Customer to breach their contractual obligations with PFG." -18- Case 1:16-cv-05508-VSB Document 207 Filed 07/13/18 Page 24 of 37 Mr. Ivarone also addresses this Conflict of Interest in The Wakeford Joint Hearing Plan also established the claim for Conflicts of Interests: "j. PFG asserts an issue regarding a conflict concerning Perry Comeau, who was a Claimant in one of the other consolidated groups proceeding in arbitration on identical claims. PFG will prove the Comeau received compensation from Maxwell for each ofhis co-Claimants' accounts. Furthermore, it is PFG's position that Comeau, an NF A registrant, orchestrated the filing of these claims through his attorney Mr. Thomas to prevent the Claimants from filing claims against him. PFG believes that the inherent conflict between Comeau, who worked hand-in-glove with Maxwell, has not been fully disclosed to Wakeford, Jernigan, Bonik or Crandall. Inadequate disclosure of this obvious conflict could give rise to a subsequent court challenge of any unfavorable award to the other Claimants. Therefore, PFG will present a motion requesting that Wakeford, Jernigan, Bonik, and Crandall acknowledge that they have received full disclosure of the conflict and will not assert any such conflict as a ground for vacating any award herein, or in the alterative that the Panel order that Claimants' counsel be disqualified." See Wakeford Joint Hearing Plan, annexed to the Levy Dec. as Exhibit 15. Therefore, because of this strong conflict of interest, any claims that the Claimants had against Perry Comeau who aided and abetted the Maxwells, could not have been brought, since their own attorney, Paul Thomas, Esq. was trying to protect his client Perry Comeau's interest and reduce Comeau's liability. Because of this conflict of interest between the other Claimants and Perry Comeau, Attorney Thomas failed to bring any claims on behalf of Claimants and against Perry Comeau for Commodities Fraud when Comeau underplayed the risks and told the others that only 10% of their funds would be invested and that the naked puts and calls were conservative investments (when they were not) and appropriate for retirement income when in fact, these naked puts and calls were doomed to fail eventually. These misrepresentations would have See Amended Verified Complaint 2010-CH-14907 (Cook Co. Chancery Ct. 2010) annexed to the Levy Dec. (Wasendorf Jr.) as Exhibit 5. This Amended Complaint has been verified by Russell Wasendorf, Jr. who affirms to the truthfulness of the allegations therein -19- Case 1:16-cv-05508-VSB Document 207 Filed 07/13/18 Page 25 of 37 allegedly violated the anti fraud provisions of the Commodities Exchange Act, 7 U.S.C. 6b.9 Based on Comeau's liability, PFG should have also been held fully liable for these fraudulent artifices based on the strong vicarious liability provision of the Commodities Exchange Ac7 U.S.C. §2(a)(l)(B)10 which applies to all PFG privities and non-privies such as Perry Comeau, Garlon and Amber Maxwell who acted as independent contractors with respect to PFG, but would be liable based on the broad vicariously liability that applied to employees as well as independent contractors such as defendants Comeau and the Maxwells. See In re Amaranth Nat. Gas. Comm. Liti, 587 F. Supp.2d 513, 546 (S.D.N.Y 2008). Therefore, there should be no bar to re-litigation of any claims against Comeau. 2. Paul Thomas's failure to introduce evidence to establish liability against registrant Comeau under NFA By-Law 1101 shows a conflict. Paul Thomas, Esq. failed to introduce the deposition testimony regarding the fact each broker had exceeded 15 customers; thus, there would have been clear evidence to prevail against PFG for doing business with non-registrants, the Maxwells .. However, because such evidence would have also created liability for Comeau, a clear conflict of interest exists. Perry Comeau provided the damning testimony to create liability for the Maxwells. But due to 9 7 U.S.C. § 6b provides: Contracts designed to defraud or mislead (a) UNLAWFUL ACTIONS It shall be unlawful- (!) for any person, in or in connection with any order to make, or the making of, any contract of sale of nay commodity in interstate commerce or for future delivery that is made, or to be made, on or subject to the rules of a designated contract market, for or on behalf of any other person; or ... (A) to cheat or defraud or attempt to cheat or defraud the other person 107 U.S.C.§ 2(a)(l)(B) provides: Liability of principal for act of agent The act, omission, or failure of any official, agent, or other person acting for any individual, association, partnership, corporation, or trust within the scope of his employment or office shall be deemed the act, omission, or failure of such individual, association, partnership, corporation, or trust, as well as of such official, agent, or other person. -20- Case 1:16-cv-05508-VSB Document 207 Filed 07/13/18 Page 26 of 37 Paul Thomas's conflict, this important testimony was never introduced into evidence. This testimony showed that these unregistered CTAs were not exempted under 17 C.P.R. 4.14(a)(10) because each had more than 15 customers each, requiring them to register. Therefore, PFG would have had been strictly liable for doing business with non-registrants under NF A By-Law 1110. See Levy Dec. Exh 16. Perry Comeau's admitted at a sworn deposition that he began to sign up customers on his own ledger because Garlon and Amber Maxwell's accounts already had 15 customers, and they all wanted to fall under the exception to avoid the necessity of registering with the NF A, at page 48 line 10: "Q: So at what point did clients start signing up under you? A: I would say October, November oflast year. Q: How did that come about? A: I would have to look at the records, though, ma'am. I'm not exact on that. Q.: And how did that come about, that prior to that date people were going directly to Garlon, but then on that date they started signing up under you? So what caused that change? A: Well, what caused that change was basically their ledgers were full. They couldn't handle any more than 15 clients. That was the rule. That was the CFTC rule. Q: Well, prior to that you didn't have any clients under your name? A: Correct. Q: How did it come about that you started taking clients in? A: Because the Clients wanted us to trade their account? -21- Case 1:16-cv-05508-VSB Document 207 Filed 07/13/18 Page 27 of 37 Q: Let me finish my question A: Sorry Q: Did you even know it was an option, or did you know it was an option that you could have clients under you? A: Yes, I knew that I could have my own 15 clients ... . Q: Did you approach Garlon at some point and say,' I want to start taking on clients myself? A: No. I mean, it was just that we had more clients than what they could handle in their accounts. Q: So did Garlon come to you then? A: No. Garlon didn't come to me. It was just that we knew you could have 15 accounts under your name, and their ledgers were full. They had 15 accounts. So we wanted to help these people and mange their accounts and so- Q: I'm just trying to get a better understanding of the sequence of events, and what triggered the fact that you started putting clients under your name. You say that it was not a suggestion of Garlon? A. I just knew that his ledger was full, like I've explained. Her ledger was full, Amber. They were actively trading those accounts. We had more people who wanted to have an account, so I knew that I could also have 15, so then at that point I started putting them under my advisory account. See Sworn Statement of Perry James Comeau dated AprillO, 2007, annexed to the Levy Dec. (Comeau) as Exhibit 17, Page 48, line 10 to Page 51, line 18. Paul Thomas's neglect to introduce this crucial testimony prevented Claimants from establishing a violation of 17 C.F.R. 4.14(a)(10), and therefore, PFG was not in violation of NFA By-law 1110. Favoring Comeau, conflicted Thomas protects Comeau at the other Claimants' expense. Based on· the classic case of conflict of interests, Res Judicata should not apply. Mr. Ivarone himself admitted to this serious conflict of interest and recognized it as a basis to nullify the NF A proceedings. Thus, this Motion is inappropriate. See Transcript ofNF A Proceedings of -22- Case 1:16-cv-05508-VSB Document 207 Filed 07/13/18 Page 28 of 37 the Schefferts annexed to the Affidavit ofSherri Scheffert as Exh 17, p. 5, Ins. 1-25. Knowing that a conflicted proceeding can be reopened, a sanction is appropriate against Defense counsel for moving for sanctions under these circumstances. Defense Counsels' attempt to mislead this Court should not be countenanced by incorrectly arguing that the issues at bar had been fairly adjudicated- thus defense counsel has demonstrated lack of candor. 3. Because some plaintiffs signed management agreements with perry comeau, attorney thomas was conflicted. Because of this conflict, the claims against comeau could not have been brought before the NFA. Because both David Scheffert and Kathy Behrens and others gave Perry Comeau trading discretion in their accounts; and Perry Comeau allegedly received compensation for these services, Perry Comeau had potential liability for confirming the soundness of these investments. Therefore, claims against Comeau along the Maxwells were appropriate in the NFA arbitration and Comeau had potential liability under the Anti-Fraud Provisions of the CEA including aiding and abetting the Maxwells; and PFG had vicarious liability for the act of these agents under 7 U.S.C. §2(a)(l)(B). Paul Thomas, Esq. also represented the Comeaus in a prior NF A Arbitration involving different claims and different brokers relating to other PFG holdings, unrelated to the investments by the Maxwells. That2008 case settled for $10,000.00 in 2009 and was entitled Comeau v. PFG and Odem & Fry, 08-ARB-96. (NFA 2008). In the NFA arbitrations involving the Maxwells which were brought in 2009, Perry Comeau actually introduced his attorney, Paul Thomas to the Group and recommended him. Because Perry Comeau was also a PFG customer, the Class Plaintiffs did not perceive any conflict of interests nor were any conflicts expressed. However, Thomas's loyalty to Comeau precluded him from asserting any claims either directly against Comeau or against the Maxwells that would have implicated Comeau as -23- Case 1:16-cv-05508-VSB Document 207 Filed 07/13/18 Page 29 of 37 well. Therefore, under res judicata, there should be no bar to litigation of any claims against Comeau in this proceeding, since Thomas was unwilling to bring any claims against his client. Indeed, Mr. Ivarone was well-aware of this real conflict of interest between Thomas, Comeau and the other claimants. Mr. Ivarone moved to dismiss Thomas as counsel at the Arbitration Proceedings ofSherri Scheffert. See Aff. Sherri Scheffert, Exh. 17, p.5, Ins. 1-25. His motion to disqualify was denied by the Arbitrators. See Transcripts of Proceedings annexed to the Aff. Sherri Scheffert as Exh,17, p.11, ln. 14 top. 12, ln. 3. The Arbitrators ruled that there was no NF A provision allowing them to dismiss a conflicted counsel. Based on this identified conflict of interest, res judicata would be inappropriate, or a good faith argument exists and therefore Rule 11 Sanctions should be denied. E. Because the NFA Arbitrations Were Tainted by Fraud, Res Judicata Is Inapplicable. Because the NF A Arbitrations were tainted by Fraud, and in fact, the entire P FG v. Quantum Financial, LLC, et. a/. 2010-CH-14907 (Cook Co. Chancery Ct. 2010) and other two proceedings in court diverted attention away from this 20 year Ponzi Scheme, Res Judicata should not apply to here. See Aff. Sherri Scheffert, Exh 17, p. 11, ln. 14-p. 12, ln. 3. PFG fraudulently brought at least three Court cases in Cook County Chancery Court regarding the same facts of the Arbitrations. See P FG v. Quantum Financial, LLC, et. al. 2010-CH-14907 (Cook Co. Chancery Ct. 2010); PFG v. Millennium, et. al. 2010-CH-40730 (Cook Co. Chancery Ct. 2010), and PFG v. Millennium, et. a/. 2009-CH-34082 (Cook Co. Chancery Ct. 2009) All of these cases were either dismissed voluntarily or for want of I prosecution. See Levy Dec (Comeau) Exhs. 8,11, 18. 1. Paul thomas appears to have fraudulently dropped perry comeau's case in furtherance of the ponzi scheme. -24- Case 1:16-cv-05508-VSB Document 207 Filed 07/13/18 Page 30 of 37 Because Paul Thomas, an experienced attorney, must have wanted to protect PFG and knew that PFG could be liable for any misconduct of Perry Comeau under 7 U.S.C.§2(a)(l)(B); Paul Thomas decided to drop Perry Comeau's case to protect the Ponzi Scheme. Why would Paul Thomas, advise his client Perry Comeau to drop a claim of approximately $500,000.00 for the same trading losses that he told the others were legitimate and compensable? Instead, Paul Thomas, Esq. explained to the group about a negotiated agreement between Claimant Bill Allen and Perry Comeau whereby Perry Comeau would drop his approximate $500,000.00 claim in exchange for Bill Allen paying him $10,000.00. This conduct does not demonstrate zealous advocacy. In fact, Bill Allen a fellow claimant could not have provided the valid consideration to even support a valid settlement because Bill Allen and Perry Comeau were not adversaries, but co-claimants. This sham settlement supports the allegation against Paul Thomas for his participation in helping to cover up what actually happened, to hide the on-going Ponzi Scheme. By removing Perry Comeau from the case, PFG would be protected and there would be no testimony where Comeau would have to admit that he had more than 15 customers, and therefore he was required to register with the NF A. See Deposition of Perry Comeau annexed to the Levy Dec. as Exhibit 1 7. 2. Paul thomas's misrepresentation to the panel regarding his dual representation and regarding comeau's role also constitutes fraud. The NF A proceeding was tainted by Fraud because when Mr. Ivarone raised the issue of conflicts of interest at the Scheffert Hearing, Paul Thomas, Esq. failed to disclose that he had also been representing Perry Comeau in the same Group Arbitration and had dropped him as a Claimant in the Groups' case. See NF A Transcript annexed to the Sherri Scheffert Aff., Exh. 17, p.5, ln. 31 top. 6, ln. 28. Rather, Paul Thomas only admitted that he had represented -25- Case 1:16-cv-05508-VSB Document 207 Filed 07/13/18 Page 31 of 37 Perry Comeau in a prior unrelate4d NF A arbitration that had settled in 2009 entitled Comeau v. Peregrine and Odem & Frye, 08-ARB-96 (NF A 2008); Affidavit of Sherri Scheffert, Exhibit 17. Paul Thomas's negotiated settlement for Perry Comeau at the expense of claimant Bill Allen, who gave Perry Comeau $10,000.00 to drop his case, was not disclosed to the Panel, and should have been. See Levy Dec. (Comeau), Exh. 19. Mr. Thomas denied the obvious fact that Comeau was receiving fees for services rendered and that he had discretion in some accounts.. See Transcript of Proceedings, annexed the Aff of Sherri Scheffert, Exh. 17, p.4, ln. 41 to p.6, ln. 28. Clearly, Paul Thomas was favoring of Perry Comeau over his other client, Bill Allen and everyone else. Paul Thomas's failure to disclose this fact to the Panel at the Hearing when asked to explain his position was a material omission constituting fraud. Thus Res Judicata should not apply. See Affidavit ofSherri Scheffert executed on July 3, 2018 as Exh. 17. F. Perry Comeau Was Not In Privity with PFG, Thus Res Judicata Is Inapplicable. Defense Counsel's argument that Perry Comeau was in privity with Peregrine is itself frivolous in light of the fact that Peregrine was suing Perry Comeau personally in three Cook County Cases, and therefore no fiduciary relationship existed between PFG and Comeau at any time to support a claim of privity. See Halliman v. Republic Bank & Trust, 519 F. Supp. 2d 340 ,357 (S.D.N.Y. 2007.) In one case, PFG sued Comeau for conspiring with Paul Thomas to encourage the rest of the Claimants to sue Peregrine for their trading loses. Certainly this type of adversarial relationship does not qualifY Comeau as a privy ofPFG, notwithstanding their other relationships. See Halliman v. Republic Bank & Trust, 519 F. Supp2d 340,357 (S.D.N.Y. 2007(although Privity does not have a technical definition, privity is found were there is a fiduciary relationship among parties whereby one party will be protecting the privies interests in litigation.) Defense counsel irresponsibly tries to assert that Perry Comeau was an employee of -26- Case 1:16-cv-05508-VSB Document 207 Filed 07/13/18 Page 32 of 37 PFG and covered by the PFG customer agreement when the uncontroverted evidence demonstrates that at no time was Perry Comeau ever an employee ofPFG, but a customer. The evidence shows that Perry Comeau was a sole proprietor giving investment advice for a fee to unwitting clients. His management agreements are annexed to the Affidavit of David Scheffert a Exhibit 6 and Kathy Behrens as Exhibit 1. Furthermore a review of the NF A BASIC system also shows that Comeau never had an employee-employer relationship to Peregrine. There is absolutely no argument to extend the concept of privity to Perry Comeau, and Defense Counsel clearly has failed to apprehend what privity means in the context of applying Res Judicata. Even PFG recognized that Comeau was not in privity with it in their Cook County \)ases by alleging in court papers that Comeau was a managing member of his own firm Black Inc. Trading. PFG also alleges that Comeau created a joint venture with the Maxwells to carry on investment objectives. At no time, does PFG allege a relationship of privity, nor does one exist. Therefore, there is no evidence to suggest that Comeau was in any way a privy ofPFG. Defense counsel's confusion concerning the CEA's broad vicarious liability provision under 7 U.S.C. §2(a)(l)(B) extends liability to FCM's for conduct of independent contractors who are non-privies, as well as privies. See In re Amaranth Nat. Gas. Comm. Lili, 587 F. Supp.2d 513, 546 (S.D.N.Y 2008). However, in this case, because the NFA arbitrations did not even assert any claims against Comeau, whether he was in privity with PFG or not was never raised nor decided at the NF A level, and therefore any new claims against Comeau would not be precluded. In fact, based on the new facts of a RICO Conspiracy, any claims involving privity between PFG and Comeau for Comeau's assistance as an aider and abetter was only -27- Case 1:16-cv-05508-VSB Document 207 Filed 07/13/18 Page 33 of 37 discovered after 2012. So, any allegations in the SAC as to Comeau's agency relationship with PFG or anyone else would not create privity between them in a 2011 NF A Hearing based on other claims. III. BECAUSE PAUL THOMAS FRAUDULENTLY CONCEALED PERRY COMEAU'S LIABILTY, EQUITABLE TOLLING EXISTS AND NO RULE 11 SANCTIONS ARE WARRANTED BASED ON THE FACTS HEREIN. Because the evidence shows that Perry Comeau's liability was fraudulently and actively concealed by Paul Thomas, Esq., and Paul Thomas, Esq. at all times represented to Plaintiffs that only the Maxwells, PFG and Brewer were responsible for the trading losses, there was fraudulent concealment thus affording Plaintiffs Equitable Tolling. In fact, Paul Thomas told Claimants that Perry Comeau was dropping his own case as a sacrifice to improve the Claimants' chances for a full recovery which also constituted fraudulent concealment of the true fact that Comeau had liability. See Letter dated April 5, 2011 to Bill Allen from Paul Thomas annexed to the Levy Dec. as Exh. 19. The opposite was true, because by dropping Comeau as a Claimant, Thomas could keep out of the record the fact that the Maxwells and Comeau had violated 17 C.F.R. 4.14(a)(10) by having more than 15 customers each. The entire transaction was a way to fraudulently conceal Comeau's liability to the group. Paul Thomas, Esq. denied that Perry Comeau was earning commissions as part of his involvement in these transactions. He also denied that Comeau had authority to trade in David Scheffert's account. See NFA Transcript of Proceedings annexed to the Sherri Scheffert, Aff., as Exh. 17, p. 5. ln. 41 top. 6. ln. 1, Ins. 18-19, p. 8ln. 42- p.9, ln.2. Thomas also fraudulently concealed Perry Comeau's liability when he told the Claimants that only the Maxwells were responsible for the trading losses when Comeau did have discretion in the customers account as evidenced by the Perry Comeau management agreements annexed to the -28- Case 1:16-cv-05508-VSB Document 207 Filed 07/13/18 Page 34 of 37 Affidavit of Kathleen Behrens as Exhibit 1, and David Scheffert as Exhibit 6. The earliest this evidence was unmasked was in 2015 when the Schefferts requested their NF A files to defend the potential Adversary proceeding of the Peregrine Bankruptcy Trustee. NF A files were also requested for the Behrens and Mr. Wakeford and such files trickled in from 2016 to 2017. As soon as it became apparent that Mr. Comeau had liability for these accounts, a claim was interposed against him. Ms. Levy interviewed the clients carefully and based on their information, she brought this suit against him. She had a right to believe her clients and also verified their claims by examining the Perry Comeau Management Agreements. Therefore, the claims against Mr. Comeau are valid under Equitable Tolling, Memorandum of Law in Opposition to Defendants' Motion to Dismiss, pp 24-29, Doc. #151. IV. THIS COURT ORDERED (DOC. #128) THAT THE SAC WAS THE OPERATIVE COMPLAINT. Defense Counsel's instant motion for Rule 11 Sanctions based upon an alleged violation ofFederal Rule of Civil Procedure 15(a) for filing ofthe Second Amended Complaint on November 30, 2017 is entirely inappropriate. This Court first entered an order August 29, 2017 allowing Plaintiffs to Amend the Complaint. See Docket Entry #77, Behrens v. JP Morgan, 16-cv-5508 (S.D.N.Y. 2016). Based on this Order, Ms. Levy amended the first time on October 11, 2017, based on Docket #77, Ms. Levy believed in good faith that the First Amencied Complaint was under Fed. Rule Civ Pro. 15(a)(2) and based on Doc. #77, an Order. Even if she were wrong, it would not have been a reason for sanctions. Then, the first set of Motions to Dismiss were filed on November 9, 20 1 7. Plaintiffs decided to amend again in good faith, as of right pursuant to Fed. R. Civ. Pro. 15(a)(1)(B). Therefore, within 21 days or by November 30, 2017, Ms. Levy filed the SAC on behalf of Plaintiffs. Other Defendants moved by letter-motion (Doc. ### 108, 109, 11 0) to strike -29- Case 1:16-cv-05508-VSB Document 207 Filed 07/13/18 Page 35 of 37 the SAC arguing that Ms. Levy had already amended and did not have a right to re-amend absent their consent. Ms. Levy disagreed and believed after researching the issue extensively that the SAC was properly interposed as of right. All Defense Counsel had ample opportunity to be heard. This Court entered an Order, Docket Entry #128 allowing the SAC to act as the Operative Complaint. Prior to the Order, Doc. #128, Ms Levy refrained from serving the new summons and waited for the ruling. Now Defense Counsel appears to be disregarding this Court Order, Docket #128, and again is asking this Court to strike the SAC, and audaciously now for Rule 11 Sanctions as well. Defense Counsels' disregard for the Court Order #128 should not be countenanced, because it is law of the case. See MF Global Holdings Ltd v PriceWaterhouseCoopers, LLP. 232 F. Supp.3d 558, 570 (S.D.N.Y. 2017)(Judge Marrero rejecting the Statute of Limitations Defense based on Law of the Case Doctrine where a previous order had been entered denying the Statute of Limitations defense.)(Case was voluntarily dismissed in 2017) Defense Counsels' failure to submit a letter-motion back in December, 2017 does not now give them a second chance to re-argue a prior ruling that should stand as law of the case. Rather, a motion for reconsideration would have been appropriate but the time for reconsideration has long-expired. CONCLUSION WHEREFORE, based on the foregoing, it is respectfully requested that Defendants' motion for Rule 11 Sanctions be denied in full, that the SAC not be stricken, and for all further relief that this Honorable Court deems just and proper. Respectfully Submitted, -30- Case 1:16-cv-05508-VSB Document 207 Filed 07/13/18 Page 36 of 37 Susan J. Levy, Esq. Attorneys for Class Plaintiffs and Class Members 40 East 1 01h Street Suite 2K New York, New York 10003 Tel: (212) 962-1782 Fax: (212) 962-371 -31- Case 1:16-cv-05508-VSB Document 207 Filed 07/13/18 Page 37 of 37