Opinion
Civil Action No. 3:02-CV-2176-P.
December 22, 2004
MEMORANDUM OPINION AND ORDER
Now before the Court is Defendant Fidelity Deposit Company of Maryland's ("FD") Motion for Summary Judgment, filed October 29, 2004. After careful consideration of the Parties' briefing and applicable law, the Court hereby GRANTS Defendant's motion.
FACTS
Plaintiff Investors Trading Corporation d/b/a Oxford Financial Group ("Oxford") is a retail securities brokerage firm. At all relevant times, Oxford was covered under a Financial Institution Bond ("Bond") issued by FD that insured losses stemming from dishonest or fraudulent acts of Oxford's employees.
In October 2000, two securities brokers employed by Oxford, Nima Taherian ("Taherian") and Kenneth Robinson ("Robinson") violated Oxford's policy of prohibiting the trade of uncovered index options in their personal, employee trading accounts. Both employees sold short SP 500 index options, a very risky form of options trading, far in excess of the equity in their respective trading accounts. Both employees have testified that they made these trades with the intent to make money for themselves. However, Oxford's clearing broker, Southwest Securities, Inc., was experiencing computer problems at the time and did not generate timely margin calls on Taherian's and Robinson's trading activities.
Over the course of several days, Taherian's and Robinson's trades lost value and both men's accounts went into a negative balance. When Southwest discovered the computer error, it issued margin calls on the men's accounts. Neither was able to meet the margin call. Oxford then liquidated the employees' accounts to mitigate the losses. Taherian and Robinson lost approximately $650,000 in their personal trading accounts.
On or about November 14, 2000, Oxford notified FD that it had suffered a covered loss as a result of Taherian's and Robinson's unauthorized trading activities. FD denied Oxford's claims on May 23, 2001.
DISCUSSION
Defendant moves for summary judgment on the grounds that these claims are not covered under the terms of the Bond. The Bond provides that FD agrees to indemnify Oxford for:
(A) Loss resulting directly from dishonest or fraudulent acts committed by an Employee acting alone or in collusion with others.
Such dishonest or fraudulent acts must be committed by the Employee with the manifest intent;
(a) to cause the insured to sustain such loss; and
(b) to obtain financial benefit for the Employee and which, in fact, result in obtaining such benefit.
(Def.'s App. at 87.)
The first element of this policy coverage is that the employee have a manifest intent to cause the brokerage firm a loss. See First Nat'l Bank of Louisville v. Lustig, 961 F.2d 1162, 1165 (5th Cir. 1992). An employee may commit dishonest or fraudulent acts with an intent to harm the employer or with an intent to benefit it. See id. In some cases the nature of the dishonest act itself demonstrates the employee's intent. See id. At one end of the continuum, intent to cause loss to the employer may be determined as a matter of law because an embezzlement-like act implies that the embezzler always has a manifest intent to cause the loss. See id.; In re J.T. Moran Fin. Corp, 147 B.R. 335, 340 (S.D.N.Y. 1992). At the other end of the continuum are dishonest acts by employees which can only benefit the employee when the employer also benefits. These do not as a matter of law reflect a manifest intent to cause a loss to the employer. See Lustig, 961 F.2d at 1165 (5th Cir. 1992); Moran, 147 B.R. at 340.
In Lustig, the Fifth Circuit relied on Municipal Securities v. Insurance Company of N.A., 829 F.2d 7 (6th Cir. 1987) to illustrate the principle that where an employee would benefit only if her employer also benefitted, manifest intent to cause a loss to the employer is not established as a matter of law. See Lustig, 961 F.2d at 1165-66. Likewise, in In re J.T. Moran Fin. Corp., 147 B.R. 335, 339-40 (S.D.N.Y. 1992), the court cited to the Municipal Securities case to illustrate the same principle — that where the employee's manifest intent is to make money, not to cause the employer to lose money, the operative language of the fidelity bond is not invoked. See id. at 340. In In re J.T. Moran, as in this case, the employee violated an established company policy "prohibiting trading for his own account which left the account in an open position without sufficient liquid assets to cover potential losses." Id. at 337. The Court found that the employee violated a company policy of failing to cover his potential losses, but he did not engage in transactions intended to cause the company loss. See id. at 341. In fact, his intention was to make money. See id.
Similarly, in Continental Bank, N.A. v. Aetna Casualty Surety Company, 626 N.Y.S.2d 385, 386 (N.Y.Sup.Ct. 1995), two brokerage firm employees implemented a scheme in which they made unauthorized trades in customers' accounts and sold the stock from one customer to another without the customers' knowledge. They did this to inflate the stock prices and increase their personal profit. When the scheme failed, the brokerage firm was left with the responsibility of purchasing the stock that the customers disavowed. The firm sought coverage for its losses under the fidelity bonds. The court determined that coverage was not triggered because the employees did not display a manifest intent to cause a loss to their employer. See id. at 387. The court noted that "the last thing [the employees] wanted was for their scheme to fail . . . `[P]ersonal profit motivated the scheme of [the employees].' The manifest intent of these scoundrels was to make money, not to cause [the brokerage firm] to lose money." Id. at 387.
Plaintiff argues that because the employees knew that any losses resulting from their trades would be borne by Oxford, a fact issue exists as to manifest intent. ( See Pl.'s Resp. at 12-13.) However, knowledge that an employer will bear responsibility for losses an employee sustains in excess of his resources is not the same thing as intending to cause a loss to an employer. In this case, the undisputed facts are that neither Taherian nor Robinson desired to cause a loss to Oxford. (Def.'s App. at 76, 82-83.) On the contrary, both employees wanted to make money off their trading activities. ( See id.) The knowledge that Oxford would bear the losses, if any, simply created a security blanket for them to allow them to engage in the trades. The evidence establishes as a matter of law that Taherian and Robinson lacked the manifest intent to cause Oxford's losses. For this reason, Defendant's Motion for Summary Judgment is hereby GRANTED with respect to Oxford's breach of contract claim.
In its response, Plaintiff seeks to withdraws its Article 21.21 claim and its DTPA claim. Because the Court has granted summary judgment for Defendant on Plaintiff's breach of contract claim, summary judgment is appropriate on Plaintiff's Article 21.21 claim and DTPA claim as well. For these reasons, the Court hereby GRANTS summary judgment on Plaintiff's Article 21.21 claim and Plaintiff's DTPA claim.
It is SO ORDERED.