Focht v. Heebner , 223 F.3d 1296 ( 2000 )

In re: OLD NAPLES SECURITIES, INC., Debtor.
Theodore H. Focht, Securities Investor Protection Corp., Plaintiffs-Appellants,
v.
Kevin Heebner, Eileen C. Brown, Merritt W. Brown, Defendants-Appellees.
No. 99-2510.
United States Court of Appeals,
Eleventh Circuit.
Aug. 23, 2000.
Appeal from the United States District Court for the Middle District of Florida.(No. 98-01661-CIV-T-17E),
Elizabeth A. Kovachevich, Chief Judge.
Before BLACK, CARNES and KRAVITCH, Circuit Judges.
KRAVITCH, Circuit Judge:
In this appeal, we determine whether clients of an insolvent brokerage qualify as "customers" under
the Securities Investor Protection Act ("SIPA" or "the Act"), 15 U.S.C. §§ 78aaa-78lll, entitling them to funds
from the brokerage's estate and, if necessary, the Securities Investor Protection Corporation ("SIPC"). The
bankruptcy and district court each concluded that the clients had deposited cash with Old Naples Securities
for the purpose of investing in securities, and were therefore "customers" entitled to the protection of SIPA
when the court-appointed Trustee liquidated the brokerage's assets. Discerning no clear error in the district
court's findings of fact, and based upon our legal analysis, we affirm the district court and hold that the clients
were customers of Old Naples Securities.
I. Background and Procedural History
Old Naples Securities was a securities broker-dealer, a member of the SIPC and registered with the
SEC. Specifically, Old Naples Securities was an "introducing broker"; a separate clearing broker, Howe
Barnes, carried and maintained the accounts of Old Naples Securities' clients. Old Naples Securities was
based in Naples, Florida, with branch offices in Wyomissing and Bethlehem, Pennsylvania. James
Zimmerman was the sole shareholder and principal of Old Naples Securities. He was also the owner and
principal of Old Naples Financial Services,1 a separate company that was not a securities brokerage. Daniel
Shaffer ran the Wyomissing office, and all of the claimants in this case were his clients.
From the time Zimmerman bought Old Naples Securities in 1992, the brokerage was in financial
difficulty. Increasingly desperate to pay outstanding debts and to cover other obligations, Zimmerman began
what, in effect, was a "Ponzi scheme." In 1995 and 1996, Zimmerman raised money from investors in Florida
and repeatedly asked his Pennsylvania branch managers to raise funds from their clients. Zimmerman used
some of these contributions to pay Old Naples Securities' expenses, and he diverted some of the funds for his
personal use. He used other contributions to pay back the principal and interest owed to earlier investors.
By the summer of 1996, Zimmerman was unable to cover substantial payments owed to his Pennsylvania
brokers and their investors.
Congress passed SIPA in 1970 for just this situation: to protect investors when their brokerages fail.
The statute established the SIPC to maintain a fund for investor protection, oversee the liquidation of
brokerages in a manner similar to bankruptcy proceedings, and, under certain circumstances, reimburse
customers of a failed brokerage. See Securities Investor Protection Corp. v. Pepperdine Univ. (In re
Brentwood Sec., Inc.), 925 F.2d 325, 327 (9th Cir.1991); SEC v. Ambassador Church Fin./Dev. Group, Inc.,
679 F.2d 608, 609-10 (6th Cir.1982). On August 29, 1996, the SIPC filed an application in the United States
District Court seeking a protective order against Old Naples Securities. The court found that the brokerage's
customers needed the protection afforded by SIPA, appointed Focht as Trustee to liquidate Old Naples
Securities' assets, and removed the case to bankruptcy court.
SIPA permits "customers," as defined by the Act, to file claims with the Trustee for any outstanding
obligations by the brokerage. "Customers" include those who have entrusted securities to the brokerage in
the ordinary course of its business and those who have deposited cash with the brokerage for the purpose of
1
Also referred to in the record as Olde Naples Financial Services (emphasis added).
purchasing securities.2 The Trustee determines whether a claim is covered by SIPA and should be paid;
claimants can then file an objection to the Trustee's determination in the bankruptcy court. That is what
happened in this case.
Kevin Heebner, Eileen Brown, and her son Merritt Brown, III, filed claims for losses resulting from
their unwitting participation in Zimmerman's Ponzi scheme. In December 1995, Shaffer had convinced
Heebner to invest $50,000 for one month with a return of ten percent. As promised, Heebner received a
check for $55,000 in January 1996. Shaffer repeated the offer the next month, and Heebner invested $80,000.
Approximately a month later, Heebner recouped his $80,000 investment and $8,000 in interest. In April,
Shaffer presented Heebner with an opportunity to invest $100,000 for three months with an annualized return
of eighteen percent. Heebner did so, and "rolled over" the investment for an additional three months at an
interest rate of twenty-four percent annualized. In August 1996, however, Heebner learned that Zimmerman
had misappropriated his money, and he subsequently filed a claim with the Trustee for $100,000.
The Brown family had a similar experience. Beginning in July 1995, Merritt Brown, Jr., invested
increasing amounts of money at Shaffer's behest in the name of his wife, Eileen Brown. Weeks after each
investment, funds representing the principal and interest were deposited in Eileen Brown's account with Howe
Barnes. Contacted by Shaffer in January 1996, Merritt Brown, Jr., invested $500,000 on behalf of his wife;
three months later he invested $110,000 on behalf of his son, Merritt Brown, III. Eileen and Merritt Brown,
III, received interest payments over the course of the summer, but in August Shaffer informed the Browns
that Zimmerman had stolen their money.
According to Heebner and the Browns, Shaffer had told them Zimmerman would use their money
to buy bonds, and they understood that the bonds would be purchased in their names. According to Merritt
2
term "customer" of a debtor means any person ... 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.... The term
"customer" includes ... any person who has deposited cash with the debtor for the purpose of purchasing
securities....
15 U.S.C. § 78lll(2)(2000).
Brown, Jr., Shaffer explained that Zimmerman had opportunities to purchase discounted bonds and resell
them quickly at near face value. Shaffer, however, never identified the specific bonds that Heebner and the
Browns supposedly were purchasing.
Shaffer presented these investment opportunities in his capacity as an Old Naples Securities broker,
and Heebner and Merritt Brown, Jr., claim they thought the investments would be purchased through Old
Naples Securities. Merritt Brown, Jr., made the investment on behalf of his son through a check payable to
Old Naples Securities, but pursuant to Shaffer's instructions, Heebner and Eileen Brown's investments were
made by way of a wire transfer to Old Naples Financial Services. All of the claimants received monthly
statements from Old Naples Financial Services showing the amount invested and an interest rate of
twenty-four percent. Merritt Brown, Jr., also received a letter in February 1996 from Zimmerman on Old
Naples Securities letterhead which stated:
This letter is notification that all money loaned to Olde Naples Financial Services, Inc. and Old
Naples Securities, Inc. will be held in an escrow account. The money will only be used as [an]
escrow fund to raise net capital in the firm and I will guarantee this as owner of the company.3
Merritt Brown, Jr., claims that he spoke with Shaffer about the letter, and that Shaffer assured him that his
money was used to buy bonds, that the investment was insured, and that Brown owned the bonds and would
be able to obtain the paper certificates.
The Trustee denied the claims of Heebner and the Browns on the ground that they did not qualify as
"customers" under SIPA. The bankruptcy court disagreed, concluding that the claimants had deposited funds
with Old Naples Securities for the purchase of securities.4 The district court summarized the bankruptcy
court's factual findings as follows: (1) neither Heebner nor Merritt Brown, Jr., had any reason to know that
they were not dealing directly with the debtor brokerage when they wired funds to Old Naples Financial
Services; (2) the claimants entrusted money for the purpose of purchasing bonds of some sort; (3) these
3
Trustee's Ex. 13.
4
The bankruptcy court determined that Heebner had a valid claim for cash in the amount of $87,000;
Eileen Brown had a valid claim for cash in the amount of $335,000; and Merritt Brown, III, had a valid
cash claim for $103,400. Order on Objections to Trustee's Determinations of Claims at 13, in R1, Tab 1.
transactions had the characteristics, at least from the claimants' perspective, of a typical fiduciary relationship
between a broker and client; and (4) the claimants had no intention of lending money to Zimmerman or his
corporations.5 Admittedly, some statements in the bankruptcy court's order are in tension with those findings.
For example, the court stated in its order that the investments "could be seen as a joint venture because
Zimmerman and the Claimants were to share the profit."6 Nonetheless, the district court affirmed the
bankruptcy court's order. Focht and the SIPC now appeal.
II. Discussion
Focht and the SIPC argue that, for the purpose of their claims, neither Heebner nor the Browns
qualify as "customers" within the meaning of SIPA for three reasons. First, Heebner and Eileen Brown
(through her husband) wired funds to Old Naples Financial Services rather than Old Naples Securities, the
debtor brokerage. Second, Focht and the SIPC contend that claimants' investments were not in "securities"
as defined by SIPA; as Appellants characterize it, Heebner and the Browns either lent money to Zimmerman
or participated in an investment fund. Finally, Focht and the SIPC claim that because the investments
promised such a high return and were so poorly documented, they cannot be considered within Old Naples
Securities' "ordinary course of business" and therefore cannot form the basis of a SIPA customer claim. We
consider each of these arguments in turn.7
5
See Order on Appeal at 3-4, in R1, Tab 18.
6
Order on Objections to Trustee's Determinations of Claims at 7, in R1, Tab 1. Similarly, the court
stated that "[t]he 'plan' was that Zimmerman would purchase bonds at a discount, which he would later
sell and then split the profit with the investor." Id. at 5.
7
Claimants also contend that this appeal was untimely filed. We consider this issue briefly as part of
our ongoing responsibility to ensure our jurisdiction over an appeal. Focht and the SIPC mistakenly filed
notice of their appeal with the clerk's office for the bankruptcy court in the Middle District of Florida; the
notice did not reach the district court clerk until March 16, 1999, one day after the standard thirty day
period for filing an appeal had expired. See Fed. R.App. P. 4(a)(1). Focht and the SIPC immediately
moved the district court for either a finding that the appeal had been timely filed or for an extension of
time to file the appeal on the ground of excusable neglect. See Fed. R.App. P. 4(a)(5)(A). The court
granted the motion, and we review orders granting additional time for appeal for abuse of discretion. See
Advanced Estimating Sys., Inc. v. Riney, 77 F.3d 1322, 1325 (11th Cir.1996). Given that Focht and the
SIPC initially filed their appeal (albeit in the wrong court) within the thirty days allowed by Rule 4(a)(1),
that the district court received the notice of appeal only one day late, and that the misfiling apparently
We review the bankruptcy court's factual findings for clear error, Green Tree Acceptance, Inc. v.
Calvert (In re Calvert), 907 F.2d 1069, 1071 (11th Cir.1990), but whether or not the facts establish that
Heebner and the Browns were customers of Old Naples Securities in regard to their claims is a question of
law that we review de novo, see Securities Investor Protection Corp. v. Wise (In re Stalvey & Assocs.), 750
F.2d 464, 468 (5th Cir.1985).
A. Did Heebner and Eileen Brown "Deposit Cash with the Debtor"?
A claimant is only a "customer" protected by SIPA in regard to a claim for cash entrusted to a
brokerage if he or she "deposited [the] cash with the debtor." 15 U.S.C. § 78lll(2) (emphasis added). Focht
and the SIPC argue that because Heebner and Eileen Brown wired funds to Old Naples Financial Services
rather than Old Naples Securities, they do not qualify.8 Whether a claimant "deposited cash with the debtor,"
however, does not (as Focht and the SIPC suggest) depend simply on to whom the claimant handed her cash
or made her check payable, or even where the funds were initially deposited. Instead, the question is whether
there was "actual receipt, acquisition or possession of the property of a claimant by the brokerage firm under
liquidation." In re Stalvey, 750 F.2d at 469 (quoting SEC v. Kenneth Bove & Co., 378 F.Supp. 697, 700
(S.D.N.Y.1974)). Thus, courts have held that a claimant who delivered a note payable to a broker personally,
rather than to the brokerage, could qualify as a "customer" protected by SIPA, see Ravis v. Day (In re
Investors Sec. Corp.), 6 B.R. 420, 423, 425 (Bankr.W.D.Pa.1980), and that the statute covered claimants
when one brokerage (which later became insolvent) misused their funds held in accounts with another firm,
see In re First State Sec. Corp., 34 B.R. 492, 495-96 (Bankr.S.D.Fla.1983).
Claimants who invest with a broker in his individual capacity, rather than as an agent of the
resulted from clerical error, we conclude that any neglect on Appellants' part was excusable. See id.(listing the factors a court should consider when determining whether a party's neglect in filing an appeal
within thirty days was "excusable").
8
Heebner and Eileen Brown argue that the bankruptcy court's conclusion that they deposited funds
with Old Naples Securities is a factual finding, reviewed only for clear error. We agree with Focht and
the SIPC, however, that this is a legal rather than factual conclusion, for the bankruptcy court only
reached it by first determining that Old Naples Securities and Old Naples Financial Services should be
viewed as a single entity for the purpose of this litigation.
brokerage, are not protected by SIPA. See SEC v. First Sec. of Chicago, 507 F.2d 417, 422 (7th Cir.1974).
Similarly, claimants who invest directly in a company, bypassing the brokerage altogether, are not protected
by SIPA even if their broker first suggested the investment. See In re Brentwood Sec., 925 F.2d at 328-29.
On the other hand, SIPA protects claimants who attempt to invest through their brokerage but are defrauded
by dishonest brokers. See id. at 329-30; Securities Investor Protection Corp. v. Waddell Jenmar Sec., Inc.
(In re Waddell Jenmar Sec., Inc.), 126 B.R. 935, 938-39, 942, 946 (Bankr.E.D.N.C.1991); cf. In re Gibralco,
Inc., 53 B.R. 324, 329 (Bankr.C.D.Cal.1985) ("The trusting customer is not to be penalized for choosing a
careless, unethical or dishonest broker. The primary purpose of the Act is to assure the unsophisticated
participant in securities transactions that there is protection when a bad choice of brokers is made.") (quoting
Ambassador Church, 679 F.2d at 614). If an investor intended to have the brokerage purchase securities on
her behalf and reasonably followed the broker's instructions regarding payment, she can be considered a
"customer" under SIPA if the brokerage or its agents then misappropriate the funds. See In re Brentwood
Sec., 925 F.2d at 329-30; First Sec. Co. of Chicago, 507 F.2d at 421-22; In re Waddell Jenmar Sec., Inc.,
126 B.R. at 938-39.
In this case, the bankruptcy court noted that "Claimants had no reason to know that they were not
dealing with the Debtor,"9 and this finding was not in error. Shaffer acted as the agent of Old Naples
Securities when he brought the bond opportunity to the attention of Merritt Brown, Jr., and Heebner, and
Shaffer represented that the bonds would be purchased through Old Naples Securities.10 Claimants followed
his instructions for payment. Heebner and the Browns had had no dealings with Old Naples Financial
Services prior to the investments underlying this litigation, and they had never heard of the company.
Heebner did not notice that the wire instructions were for an entity other than Old Naples Securities, and he
9
Order on Objections to Trustee's Determinations of Claims at 8, in R1, Tab 1.
10
See Final Evidentiary Hr'g (Dec. 9, 1997) at 20, 25, 29, 38-39, in R1, Tab 1. Even Shaffer's business
card stated, "Securities by licensed individuals offered through Old Naples Securities, Inc." R, Claimants'
Ex. 1.
believed that he was sending money to the brokerage.11 Merritt Brown, Jr., did notice, but when he inquired
about the discrepancy, Shaffer assured him that Old Naples Securities and Old Naples Financial Services were
one and the same.12 The letter Zimmerman sent to Merritt Brown, Jr., was on Old Naples Securities
letterhead; it referred to money given to the brokerage and Old Naples Financial Services to be used by "the
firm."13
It is also clear that Heebner and Eileen Brown's funds, although initially deposited with Old Naples
Financial Services, were used by, or at least for, Old Naples Securities. Zimmerman testified that he diverted
some of the investors' money from Old Naples Financial Services for personal use, and he used much of the
money to pay Old Naples Securities' expenses.14 There is ample evidence in the record of checks, drawn from
the account to which Heebner and Eileen Brown wired their funds, issued to Old Naples Securities and also
to cover the brokerage's obligations.15 Given this evidence, we are satisfied that the debtor brokerage
acquired control over all of the claimants' funds.16
B. Did the Claimants Deposit Their Cash "for the Purpose of Purchasing Securities"?
Claimants who have deposited cash with the debtor brokerage qualify as "customers" under SIPA
only if they entrusted the funds "for the purpose of purchasing securities." 15 U.S.C. § 78lll(2). Whether the
11
See id. at 38.
12
See id. at 114. Shaffer corroborated Brown's testimony, acknowledging that he believed and told
his investors that Old Naples Securities and Old Naples Financial Services were a single entity. See
Shaffer Dep. at 40-42, in Trustee's Ex. 10.
13
See R, Trustee's Ex. 13.
14
See Sworn Statement of Zimmerman at 139-40, 313-16 in Claimants' Ex. 6.
15
See id. at 130-84.
16
The parties contest whether the "alter ego" theory applies in SIPA proceedings, that is, whether the
court can consider funds held by Old Naples Financial Services to be in the possession of Old Naples
Securities because the companies are in effect a single entity. We need not dwell on whether Old Naples
Financial Services' assets in general are deemed to belong to Old Naples Securities, however, because, as
the text makes clear, the funds of the individual claimants in this case were used by the owner of Old
Naples Securities for the benefit of Old Naples Securities.
investment was to be made in a "security" is a matter of law, because SIPA provides a definition of the term.
See 15 U.S.C. § 78lll(14).
When a claimant entrusts cash with a brokerage, and the broker misappropriates the money, courts
must determine whether the intended investment as understood by the claimant would have been in a
"security" as defined by SIPA.17 See, e.g., Securities Investor Protection Corp. v. C.J. Wright & Co. (In re
C.J. Wright & Co.), 162 B.R. 597, 605-06 (Bankr.M.D.Fla.1993); In re Investors Sec. Corp., 6 B.R. at 425-
26.
According to Focht and the SIPC, the investment opportunity presented to the claimants by Shaffer
was for Zimmerman to buy bonds in his own name, sharing profits with the investors. In this view, the
claimants were not buying bonds, but participating in an unregistered "investment plan" or lending money
to Zimmerman, neither of which falls within SIPA's definition of covered securities.18 Focht and the SIPC
point out that the investments were to pay a fixed rate of interest, that the claimants knew Zimmerman would
be the one actually buying the bonds, and that the claimants did not know in which bonds they supposedly
were investing.
The bankruptcy court disagreed with this characterization and made a factual finding that "the
17
By contrast, if claimants entrusted securities to the brokerage, courts can discern whether SIPA
provides coverage from the actual characteristics of those securities and the arrangement with the
brokerage. See, e.g., In re Brittenum & Assocs., Inc., 82 B.R. 64, 65, 68 (Bankr.E.D.Ark.1987). It also is
possible to look at the arrangement objectively if claimants entrusted cash with a brokerage and the
money was not misappropriated. Typically in this scenario, either (1) the broker actually purchased an
investment for the claimant, in which case there was no longer a SIPA claim for cash, see, e.g., In re
Omni Mut., Inc., 193 B.R. 678, 681 (S.D.N.Y.1996), or (2) the deposit of cash was for some purpose
other than purchasing securities for the claimant, and no fiduciary relationship was established, see, e.g.,
Tew v. Resource Management (In re ESM Gov't Sec., Inc.), 812 F.2d 1374, 1376-77 (11th Cir.1987).
18
An "investment contract or certificate of interest or participation in any profit-sharing agreement"
only falls within SIPA's definition of securities "if such investment contract or interest is the subject of a
registration statement with the Commission pursuant to the provisions of the Securities Act of 1933." 15
U.S.C. § 78lll(14). Cash that is simply lent to the brokerage cannot form the basis of a SIPA customer
claim because the statute's definition of "customer" excludes individuals whose claims are for "cash ...
which ... is part of the capital of the debtor." 15 U.S.C. § 78lll(2)(B). Case law has established that
individuals must have a fiduciary relationship, rather than a creditor-debtor arrangement, with their
brokerage to state a claim under SIPA. See Tew v. Resource Management (In re ESM Gov't Sec., Inc.),
812 F.2d 1374, 1376 (11th Cir.1987); SEC v. F.O. Baroff Co., 497 F.2d 280, 283-84 (2d Cir.1974).
Claimants wired the funds with the intent that the funds be used for the purchase of discount bonds of some
sort."19 It is not surprising that Zimmerman would be the one purchasing the bonds, because he was a
registered broker, and he was the one with the special opportunity to purchase discounted bonds that could
quickly be resold at near face value. There is ample evidence that the claimants believed Zimmerman would
buy the bonds in their names and for their individual accounts.20 It is true that a fixed rate of return is often
associated with loans, but the bankruptcy court noted that it is often characteristic of bonds as well.21 Finally,
other courts have concluded that when a claimant deposits cash with his brokerage to make an investment,
SIPA provides protection even if the claimant does not identify specific securities for his broker to purchase.
See Ravis v. Caretti (In re Investors Sec. Corp.), 30 B.R. 214, 219 (Bankr.W.D.Pa.1983); see also In re C.J.
Wright & Co., 162 B.R. at 606, 608-09 (claimants who invested in debtor brokerage's "Money Market Club"
and "Deposit Account," and who thought their funds would be used to purchase unnamed certificates of
deposit, are entitled to customer status under SIPA).
Investors, of course, must have had some notion of what they wanted their funds used for; a deposit
of funds with only the vaguest instructions to make "stock market investments" would not qualify as a deposit
"for the purpose of purchasing securities." See In re Waddell Jenmar Sec., Inc., 126 B.R. at 947. Moreover,
although "lack of diligence" does not defeat a claim under SIPA, In re Gibralco, 53 B.R. at 328-29 (citing
Ambassador Church, 679 F.2d at 614),22 willful ignorance on the claimant's part in the face of clear
indications that an investment scheme is suspect may preclude a finding that the claimant intended to
purchase "securities" covered by the Act.
Claimants in this case could have been more diligent when presented with an opportunity promising
19
Order on Objections to Trustee's Determinations of Claims at 10, in R1, Tab 1.
20
See Final Evidentiary Hr'g at 36, 38-39, 137, 146, in R1, Tab 1.
21
See Order on Objections to Trustee's Determination of Claims at 10, in R1, Tab 1, Docket Entry
165.
22
See also In re C.J. Wright & Co., 162 B.R. at 607.
a high return and requiring an immediate investment; they could have demanded more information and more
thorough documentation of their investments. Nonetheless, having considered the claimants' testimony
concerning their understanding of the investments at issue here, the testimony of Zimmerman and Shaffer
about their explanation of the investment opportunity, and the documentary record evidence, we can find no
error in the bankruptcy court's finding that claimants reasonably believed they were buying bonds. Because
SIPA's definition of "securities" includes bonds, see 15 U.S.C. § 78lll(14), we conclude that claimants did
deposit their funds with Old Naples Securities for the purpose of purchasing securities.
C. Did the Claimants Deposit Their Cash "in the Normal Course of Business" with Old Naples
Securities?
Finally, Focht and the SIPC argue that the claimants are not "customers" as defined by SIPA because
the investments at issue in this case were so unusual, they cannot be considered a part of Old Naples
Securities' "ordinary course of business" as a brokerage. Focht and the SIPC base this argument on the first
sentence of SIPA's definition of "customer," which states in pertinent part that "[t]he term 'customer' of a
debtor means any person ... 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 ...." 15 U.S.C. § 78lll(2) (emphasis added).
The claims in this case, however, are not based on securities held by Old Naples Securities. Heebner
and the Browns assert claims for cash based on the second sentence of § 78lll (2), which covers "any person
who has deposited cash with the debtor for the purpose of purchasing securities." This sentence does not
include the "ordinary course of business" qualification. When interpreting a statute, we look first to the plain
meaning of its language, see United States v. Gonzales, 520 U.S. 1, 4-6, 117 S.Ct. 1032, 1034-35, 137
L.Ed.2d 132 (1997), and "[w]here Congress includes particular language in one section of a statute but omits
it in another section of the same Act, it is generally presumed that Congress acts intentionally and purposely
in the disparate inclusion or exclusion," see Russello v. United States, 464 U.S. 16, 23, 104 S.Ct. 296, 300,
78 L.Ed.2d 17 (1983) (quoting United States v. Wong Kim Bo, 472 F.2d 720, 722 (5th Cir.1972)) (per
curiam). In this regard, § 78lll(2) is clear: the definition of "customers" pertaining to claims for cash
deposited with a brokerage does not require a special showing that a claimant entrusted funds within the
ordinary course of the brokerage's business.
Such a requirement would be largely superfluous. As discussed above, deposits of cash must be for
the purchase of traditional security instruments. SIPA's thorough definition of "securities" includes more
flexible and amorphous investments, such as profit-sharing agreements, only if they are registered with the
SEC. See 15 U.S.C. § 78lll (14). SIPA also disallows claims based on transactions with foreign subsidiaries
of any SIPC member brokerage and claims for cash or securities that form a part of the brokerage's capital.
See 15 U.S.C. §§ 78lll (2)(A) & (B). Finally, courts have held that SIPA only provides claimants with
protection for transactions with indicia of a fiduciary relationship. See Tew v. Resource Management (In re
ESM Gov't Sec., Inc.), 812 F.2d 1374, 1376 (11th Cir.1987); SEC v. F.O. Baroff Co., 497 F.2d 280, 283-84
(2d Cir.1974). These restrictions help ensure that SIPA protects only claimants who sought legitimate
brokerage services.
Focht and the SIPC acknowledge that no court has disallowed a claim under SIPA on the grounds
that the underlying transaction was not in the brokerage's ordinary course of business, and no court has
applied the requirement to claims for cash. We decline to be the first.
III. Conclusion
We AFFIRM the district court order allowing the claims of Kevin Heebner, Eileen Brown, and
Merritt Brown, III, in the Old Naples Securities SIPA liquidation proceedings.