Hughes Hubbard & Reed convinced a New York bankruptcy judge to dismiss a former Lehman Brothers Inc. (LBI) broker's $5.5 million bankruptcy claim seeking to force LBI to underwrite a 2008 arbitration award in favor of ex-clients who had accused her of securities fraud.
On July 28, U.S. Bankruptcy Judge Shelley Chapman granted LBI Trustee Jim Giddens' request for relief in his objection to an amended claim filed by Sofia Frankel over a $2.5 million award that her onetime clients Jeffrey and Lauren Sardis and their shell corporation won in a 2008 Financial Industry Regulatory Authority (FINRA) arbitration.
The Sardises, who followed Frankel from Goldman Sachs to LBI, accused her of making unauthorized trades, overcharging commissions and falsifying records to conceal her alleged fraud. By 2004, they claimed to have sustained $7.7 million in out-of-pocket losses, including $2.2 million after their accounts were transferred to LBI, and an additional $1.9 million in lost income. FINRA found Goldman and Frankel jointly and severally liable for paying $1 million to the Sardises and LBI and Frankel liable for an additional $2.5 million.
In her claim, Frankel sought indemnification of the award in addition to her attorneys' fees and $1.7 million in post-judgment interest. Hughes Hubbard filed an objection in March, arguing that Frankel had not satisfied the "good faith standard of conduct" required under Delaware law for company personnel to qualify for indemnification.
Hughes Hubbard said that granting Frankel's claim would effectively indemnify her for the full amount of the award even though she had yet to satisfy the lion's share of it and would hand her attorneys' fees from litigation stemmed from her own misconduct.
"Prior findings that Ms. Frankel acted fraudulently preclude any determination that she met the standard for indemnification," Hughes Hubbard said.
Frankel countered that she "believed that she was acting in good faith and in the best interest of LBI throughout her term of employment with LBI" and was never informed that her employer had to determine whether she acted in good faith to provide indemnification.
Judge Chapman agreed with Hughes Hubbard and said the amended claim was "disallowed and expunged in its entirety with prejudice."
Giddens is represented by a team led by Jim Kobak and Chris Kiplok. Jason Benton, Robert Funkhouser, Meaghan Gragg and Jordan Pace worked on this matter.