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Stock Loan Fraud

Challenge: Our client was defrauded of millions of dollars in a stock loan fraud. His shares pledged as collateral were sold notwithstanding the fact that he did not get the loan proceeds and he never defaulted under the “loan.”  In a stock loan fraud, holders of restricted shares in a corporation are misled into believing that they can utilize those shares as collateral for a loan.  The fraudulent loan agreement contained an arbitration clause requiring arbitration in an offshore jurisdiction that would likely enforce the fraudulent loan agreement because identical agreements were previously enforced by the offshore arbitration tribunal. Even when contracts are fraudulent, New York courts have traditionally enforced arbitration clauses, so the case by some accounts presented an insurmountable challenge.

Solution: Guzov, LLC aggressively sought injunctive relief from the New York Supreme Court to ensure that the stock that had been pledged, but not yet sold, could not be sold. And, over the course of time, our firm’s vigilance uncovered violations of the Court’s order that prompted several applications to the Court to hold defendants in contempt. Additionally, and equally important, we demonstrated to the assigned judge that the loan documents in question were permeated with fraud and therefore the offshore arbitration clause could not be enforced. The Court ordered arbitration in New York before the American Arbitration Association instead of  the offshore jurisdiction.

Result: An arbitration panel issued a sweeping award requiring that all shares be returned to our client together with monetary damages.