MEMORANDUM DECISION OVERRULING JEFFREY LEVINE'S OBJECTION TO THE DENIAL OF HIS CUSTOMER CLAIM

STUART BERNSTEIN, Chief Judge, Bankruptcy

Jeffrey Levine submitted a customer claim (the "Claim") in the sum of $298,903.00 in this liquidation proceeding under the Securities Investor Protection Act of 1970, 15 U.S.C. § 78aaa et seq. ("SIPA"). The Securities Investor Protection Corporation ("SIPC"), acting as trustee, denied the Claim. Levine filed an objection to that denial, SIPC responded, and the parties consented to the treatment of their submissions as cross-motions for summary judgment regarding the denial of the Claim. (Transcript of hearing, held Oct. 30, 2003 ("Tr."), at 33.) For the reasons that follow, SIPC's motion is granted, Levine's is denied, and his objection is overruled.

BACKGROUND A. The Transaction

At all relevant times, the debtor, Mason Hill Co., Inc., was engaged in business as a broker-dealer, belonged to the National Association of Securities Dealers (the "NASD") and SIPC, and traded securities for the accounts of its clients. Prior to the transactions in question, Levine maintained trading account no. 614-10017 (the "Account") with the debtor. On February 29, 2000, Levine and the debtor entered into a Memorandum of Understanding (the "Memorandum"). Pursuant to the Memorandum, Levins proposed to wire $1 million into his Account, the debtor promised to deliver 800,000 shares of common stock in Digital Mafia Enterprises ("Digital Mafia") "as collateral," and the parties agreed that upon the repayment of the $1 million.

Levine would return 650,000 shares of Digital Mafia, and keep the balance. Christopher Kinsley, one of the debtor's brokers and principals, signed the Memorandum on behalf of the debtor. Levine wired $1 million into the Account on or about March 1, 2000. During March 2000, the debtor engaged in thirty-three purchases and sales of securities in the Account, resulting in a net trading loss of $329,918.70. By the end of March, the debtor had wired $642,111.88 to Levine. This more or less represented the return of the $1 million, minus the March trading losses and the negative margin balance that existed at the beginning of the month.

After the end of March, Levine received a Client Account Statement (the "March Statement") depicting each of these transactions. The March Statement included a legend warning Levine that "[t]his statement shall be conclusive if not objected to in writing within ten days." Levins does not dispute that he received the March Statement and never protested any of the thirty-three transactions.

The Account still had a total asset value of $151,898.22 when April began, and the trading continued. During April, the Account engaged in approximately twenty-five buy and sell transactions, earning a net credit of $55,681.39. On April 13, 2000, the debtor wired $59,000.00 to Levine. By the end of the month, the Account had a total asset value of $135,397.37. In May 2000, the Account engaged in thirteen transactions, suffered a net trading loss of $40,368.42, and ended the month with a total asset value of $391,668.22. In June 2000, the busiest month, there were forty trades, the Account sustained net trading losses of $77,464.84, and ended the month with a total asset value of $81,162.40. As with the March Statement, the monthly statements covering April, May and June were sent to Levine, they contained the same legend requiring objections within ten days, and Levine never objected to any of the 100 plus transactions.

Between July 1^st and July 27^th, the Account engaged in another twenty-three transactions, realized a net trading gain of $44,586.29, and reflected a total asset value of $190,088.18 by month's end. On July 28, 2000 — one day after the final July transaction — Levine sent a memorandum to Kinsley threatening legal action and demanding the turn over of 800,000 shares of Digital Mafia as collateral for Levine's "unpaid loan". (Levine's Objection, Ex. C.) Levine also insisted that the debtor liquidate the Account immediately, and send a check for the net proceeds. Levine's memorandum omitted any mention of the earlier buy-sell transactions reflected in the monthly statements. B. This Proceeding

The debtor ceased doing business on or about April 5, 2001. On March 27, 2002, SIPC commenced this liquidation proceeding in the United States District Court for the Southern District of New York, and was appointed trustee by the District Court on the same day.

Levine filed the Claim with SIPC for a cash credit balance of $298,903.00 on July 2, 2002. In his accompanying letter, Levine's attorney alleged that the debtor had "improperly used [Levine's] funds and failed to return $298,903." (Trustee's Response, Ex. A.) SIPC denied the claim, and on July 16, 2003, Levine submitted his "Hearing Request and Opposition to Denial of SIPC Claim." C. Kinsley's Bankruptcy

After the debtor's demise, Kinsley filed a chapter 7 bankruptcy petition in the Eastern District of New York. Levine commenced an adversary proceeding for a determination that his claim against Kinsley — the same claim he has asserted in this proceeding — was not dischargeable. In a decision dated May 23, 2003, Bankruptcy Judge Stan Bernstein granted summary judgment to Levine under 11 U.S.C. § 523(a)(2)(A) and 523(a)(4). (Levine's Objection, Ex. D.) According to the bankruptcy court's decision, Kinsley (1) misrepresented that Levine's funds would be secure and that he would provide security for the account deposit, (2) used the money to "shore up" his own trading accounts, and (3) engaged in unauthorized short sales. (Id. at 8, 9-10.) Kinsley, who was appearing pro se by that time, did not respond to the motion. D. The Parties' Contentions

SIPC makes two straight forward arguments in opposition to Levine's objection. First, the transaction between Levine and the debtor was a loan, and Levine is not entitled to protection as a customer under SIPA. Second, even if Levine was a customer, his Claim is based on unauthorized trading, and is barred as a matter of law.

Levine's contentions are less straightforward, and at times contradictory. In his initial submission, Levine based his Claim on some of the theories articulated in Judge Stan Bernstein's decision. Levine maintained that Kinsley had misappropriated the funds and securities in the Account for improper purposes, but emphasized, for reasons that will soon become apparent, that his claim was not based on unauthorized trading. (Levine's Objection ¶ 9.)

Levine's reply papers raised a new claim and different theories. For the first time, he asserted a claim based on the debtor's failure to liquidate his Account and remit the balance in accordance with the July 2000 direction. (Reply Memorandum of Law, dated Oct. 29, 2003, at 3-4, 7.) This had nothing to do with the $1 million deposit. In addition, Levine seemed to embrace all of the grounds cited by Judge Stan Bernstein. He returned to the idea that his losses were due to Kinsley's misrepresentations regarding the use of his funds, unauthorized trading and misappropriation. (Id., at 2.)

Lastly, paragraph 3 of Levine's reply declaration (the Declaration of Jeffrey F. Levine, dated Oct. 28, 2003), described a hybrid trading-guarantee agreement. According to Levine, Kinsley urged him to increase the amount of his business, and Levine agreed because Kinsley and he enjoyed a long-term business relationship. He was concerned, however, that the debtor was a newly-formed broker-dealer, and asked for "some protection." Kinsley gave him a secured guarantee (my words, not Levine's) to ensure the repayment of the $1 million, and Levine then transferred the funds.

DISCUSSION

A. The Standards Governing Summary Judgment

The standards governing a summary judgment motion are well-settled. A court must grant summary judgment "if the pleadings, depositions, answers to interrogatories and admissions on file, together with affidavits . . . show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c). The moving party bears the initial burden of showing that the undisputed facts entitle him to judgment as a matter of law.Rodriguez v. City of New York, 72 F.3d 1051, 1060-61 (2d Cir. 1995). If the movant carries this initial burden, the nonmoving party must set forth specific facts that show triable issues, and cannot rely on pleadings containing mere allegations or denials. Fed.R.Civ.P. 56(e); Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586-587 (1986). In deciding whether material factual issues exist, the Court must resolve all ambiguities and draw all reasonable inferences against the moving party. Id. at 587-88.

B. Levine Was Not A "Customer"

The threshold question raised by the objection is whether Levine enjoys the status of a customer under SIPA. A creditor with customer protection under SIPA is entitled to preferential treatment over other creditors in the distribution of assets of the debtor's estate marshaled by the trustee. "Customer," as defined in § 78 111(2) of SIPA, includes:

any person (including any person with whom the debtor deals as principal or agent) who has a claim on account of securities received, acquired, or held by the debtor in the ordinary course of its business as a broker or dealer from or for the securities accounts of such person for safekeeping, with a view to sale, to cover consummated sales, pursuant to purchases, as collateral security, or for purposes of effecting transfer. The term "customer" includes any person who has a claim against the debtor arising out of sales or conversions of such securities, and any person who has deposited cash with the debtor for the purpose of purchasing securities, but does not include—

. . . .

(B) any person to the extent that such person has a claim for cash or securities which by contract, agreement, or understanding, or by operation of law, is part of the capital of the debtor, or is subordinated to the claims of any or all creditors of the debtor, notwithstanding that some ground exists for declaring such contract, agreement, or understanding void or voidable in a suit between the claimant and the debtor.

Accord 11 U.S.C. § 741(2).

The claimant bears the burden of proving that he is a "customer" within the meaning of SIPA. Schultz v. Omni Mutual. Inc., No. 93-3700 (KG), 1993 WL 546671, at *2 (S.D.N.Y. Dec. 30, 1993); In re A.R. Baron Co., Inc., 226 B.R. 790, 795 (Bankr. S.D.N.Y. 1998); In re Adler Coleman Clearing Corp., 204 B.R. 111, 115 (Bankr. S.D.N.Y. 1997). A claimant can qualify as a customer for some transactions with his broker, but not others. In re First Interregional Equity Corp., 290 B.R. 265, 274 (Bankr. D.N.J. 2003). Hence, the determination must be based on the transaction giving rise to the claim.

To satisfy his burden, the claimant must demonstrate that the transactions underlying the claim (1) relate to investment, trading or participation in the securities markets, and (2) arise out of the type of fiduciary relationship that generally exists between a broker-dealer and his customer. Id. at 274; In re Brittenum Assocs., Inc., 82 B.R. 64, 67 (Bankr. E.D. Ark. 1987); see SEC v. F.O. Baroff Co., 497 F.2d 280, 284 (2d Cir. 1974) (loan of securities to broker to help it out of a cash bind did not involve participation in securities markets or the "indicia of the fiduciary relationship between a broker and his public customer," and claimant was not a customer). One involved in an ordinary debtor-creditor relationship with the broker is not a customer, SIPC v. Executive Sec. Corp., 556 F.2d 98, 99 (2d Cir. 1977); SEC v. F.O. Baroff Co., 497 F.2d at 284; In re Hanover Square Sec., 55 B.R. 235, 239-40 (Bankr. S.D.N.Y. 1985), as Levine concedes. (Tr. 5.)

The undisputed facts show that Levine was not a customer, as the transaction giving rise to the Claim appears to be a short-term loan. The Memorandum was essentially a promissory note, and used several terms more consistent with Article 3 of the Uniform Commercial Code than SIPA. It referred to the debtor as the "Maker" and to Levine as the "Holder". It also referred to the 800,000 shares of Digital Mafia stock "as collateral," and required Levine to return all but 150,000 shares — the cost of the loan, or interest — upon "repayment" of the $1 million. The debtor returned the $1 million, minus the March trading losses and the negative margin balance, in less than thirty days. Furthermore, Levine's July 2000 memorandum referred to his $1 million as "my unpaid loan," and demanded that Kinsley turn over the "collateral."(Levine's Objection, Ex. C.)

Even under Levine's version of what occurred, he is still not a customer. According to Levine, he transferred the $1 million into his Account for the purpose of conducting securities transactions, but first insisted on "protection" for his money. Since the funds were intended to permit trading, the "protection" necessarily meant a guarantee against trading losses. In response, Kinsley delivered a guarantee of repayment secured by the Digital Mafia stock.

The agreement described by Levine was plainly illegal. A broker cannot lawfully guarantee a customer against a loss in a securities transaction. NASD Rule 2330(e). Thus, his claim based on the failure to honor the guarantee did not arise from the typical fiduciary relationship between a broker and his customer. Levine failed, therefore, to prove that he was a customer under SIPA with respect to the transaction underlying the Claim.

C. Levine's Hypothetical Customer Claims Lack Merit

Even if Levins had demonstrated that he was a customer, his Claim would still fail. He seems to argue that the debtor either misappropriated his funds (or stock) after the transfer into his Account, or engaged in unauthorized trading. There is no evidence of misappropriation or diversion. To the contrary, the Client Account Statements provide a full accounting of what happened to the $1 million. The funds were deposited into the Account and remained there, until the balance was returned in March after deducting the March trading losses and negative margin balance. In addition, the statements reflect that they were prepared by CIBC Oppenheimer. CIBC was an independent record keeper, and there is no suggestion — much less evidence — of collusion between the debtor and CIBC. (See Tr. 29-30.)

This leaves a claim based on unauthorized trading in the Account. Levine has flip-flopped, at times rejecting and at other times embracing this theory, but an unauthorized trading

claim is doomed to failure. "While there is no separate written-objection requirement specifically set forth under SIPA, courts have generally enforced such provisions of customer agreements requiring that a party objecting to securities transactions as unauthorized, present that objection in writing." In re John Dawson Assocs., Inc., 271 B.R. 561, 566 (Bankr. N.D. Ill. 2001). The written objection rule avoids swearing contests, and prevents an investor from playing the market and crying foul when stock prices fall. See, e.g.,Modern Settings. Inc. v. Prudential-Bache Sec. Inc., 936 F.2d 640, 646 (2d Cir. 1991); Richardson Greenshields Sec. Inc. v. Lau, 819 F. Supp. 1246, 1259-1260 (S.D.N.Y. 1993) (timely complaint is necessary to give the broker a chance to correct a disputed trade; in the absence of such a complaint, the customer may play the market with impunity and complain only if a trade becomes a losing proposition);DBL Liquidating Trust v. Clarkson Constr. Co. (In re Drexel Burnham Lambert Group), 157 B.R. 539, 543 (S.D.N.Y. 1993) ("requirement of prompt written notice of repudiation of trades has long stood as a pillar in the law of customer-broker relations"); In re Stratton Oakmont, Inc., 257 B.R. 644, 646 (Bankr. S.D.N.Y. 2001) (noting that "each of the Claimants has met the Trustee's stringent requirements as to proof that unauthorized trading occurred in the customer's account — for example, by having asserted and documented claims for unauthorized transactions long before the broker failed").

Here, Levine received the March Statement which required objections within ten days. He failed to object to any of the March trades. He also failed to object to the April trades, while accepting a $59,000.00 payment primarily generated by the trading profits in that month. He failed to object to the May and June trades as well. In fact, his July demand did not object to any of the trades either.

Levine has, therefore, failed to show that the trading activity in his account was unauthorized, and he cannot recoup the market losses that he has suffered as a result. See, e.g., SEC v. Albert Maauire Sec. Co., 560 F.2d 569, 572 (3d Cir. 1977) (SIPA provides no protection "against the vagaries of the market"); SIPC v. Associated Underwriters. Inc., 423 F. Supp. 168, 171 (D. Utah 1975) ("SIPC is not an insurer, nor does it guarantee that customers will recover their investments which may have diminished as a result of, among other things, market fluctuations or broker-dealer fraud"); SIPC v. Charisma Sec. Corp., 371 F. Supp. 894, 899 n. 7 (S.D.N.Y.) ("claims for market losses against brokerage houses are not included in the insurance umbrella afforded by SIPC"), aff'd, 506 F.2d 1191 (2d Cir. 1974)

Finally, the proceedings in Kinsley's personal bankruptcy case are irrelevant. According to Levine, Judge Stan Bernstein found that Kinsley lied to him about the use of the funds, used the funds for unauthorized trading in the debtor's account, lost the funds in some unaccounted manner, misappropriated the funds and used the funds to cover trading losses in the debtor's own account. (Levine's Objection ¶ 5.)

The trustee was not a party to that proceeding, and Kinsley, appearingpro se, did not oppose the motion. Furthermore, if Judge Stan Bernstein had not had to depend on the description of the transactions supplied by Levine, and instead, had the benefit of the trustee's arguments as I have, I am confident that he would have reached different conclusions than those relied on by Levine in this litigation. In addition, the question here, unauthorized trading, requires a prompt written objection while a challenge to dischargeability does not.

CONCLUSION

The submissions show that Levins loaned $1 million to the debtor, or, accepting his version, he received a guarantee against trading losses, and the debtor thereafter breached their agreement by failing to collateralize its obligation, return the balance of the $1 million or pay the 150,000 shares of Digital Mafia. Levine never put $1 million at risk for trading in the stock market. Although his loss is an unfortunate consequence of doing business with Kinsley and the debtor, it does not transform that loss into a customer claim under SIPA. The trustee's motion for summary judgment is granted, Levine's motion for summary judgment is denied, and the Levine's objection to the trustee's rejection of his customer claim is, therefore, overruled.

Settle order on notice.