Negligence claim against Citibank dismissed from SEI Investments' lawsuit over $530K reimbursement

PHILADELPHIA – A federal court partially ruled for Citibank on Tuesday, resulting in claims of negligence and indemnity made against it by a fund services company being dismissed.

But, the same court ruling allowed the plaintiff to continue pursuing claims of breach of contract and unjust enrichment against the banking institution.

SEI Investments Global Fund Services filed suit against its custodian bank, Citibank, on Oct. 20, asserting it breached their contract in its conduct of certain financial trades it had made, was negligent in those same trades and is liable for unjust enrichment.

SEI says is entitled to restitution and indemnification for certain amounts it repaid to the investment fund to compensate for the fund’s losses on those trades.

In its defense, Citibank argued SEI hadn't proven it was entitled to financial relief for any of its allegations.

SEI alleges that in October 2013, The Advisors Inner Circle Fund II (TAICF-II) entered into an agreement with Kopernik Global Investors, LLC for the purpose of providing investment advisory services for their fund.

Secondly, the plaintiff claims TAICF-II initiated a similar agreement with Citibank at that time, to name the bank as custodian of the fund. Pursuant to the agreement, TAICF-II named SEI as an authorized party to issue trading advice to Citibank on behalf of the fund at approximately the same time period.

In her opinion, Judge Wendy Beetlestone elaborated on the process by which this advice would be communicated.

“One of the ways in which the parties agreed for SEI to communicate trading instructions to Citibank was through a trade communications system called Lightspeed TDMS. Lightspeed generated messages known as ‘SWIFT’ messages,” Beetlestone wrote.

On Nov. 5, 2013, SEI created instructions to Citibank via SWIFT message to settle four securities trades for the Fund.

“For reasons not explained in the Complaint, however, SEI did not send the SWIFT message regarding the trades to Citibank at that time,” Beetlestone added.

Just one day later on Nov. 6, SEI sent a second SWIFT message to Citibank, instructing it to cancel the four trades from the previous day, though it had not in fact even sent the original Nov. 5. SWIFT message.

“Each trade listed in the cancellation instructions was designated with its own trade number. Upon receipt of the message cancelling the trades that never had been made, Citibank took no action,” Beetlestone wrote.

“Citibank did not contact SEI to inform it that Citibank had received instructions to cancel trades that it never had been instructed to make.”

Two days later, on Nov. 8, 2013, SEI sent another SWIFT message instructing Citibank to make four trades with the same exact trade numbers as those that had been listed in the Nov. 6 cancellation instructions.

“Upon receipt of the Nov. 8 trading instructions, Citibank proceeded to execute the trades. Later on Nov. 8, SEI observed that the four trades had been made and instructed Citibank to cancel the four trades,” Beetlestone said.

“Citibank executed the instruction to cancel the trades on the next business day, Monday, Nov. 11, 2013.”

As a result of the delay, the lawsuit alleges the fund suffered losses from the trades caused by changes in foreign exchange rates totaling $630,489.13. SEI reimbursed Kopernik and the fund for $530,489.13 plus interest for its losses over a period spanning February to April 2014, and took an assignment of the fund’s claims with respect to the losses in the four trades, including any rights the fund might have against Citibank, according to the lawsuit.

SEI claims Citibank has refused all demands to reimburse it for the $530,489.13 it had to pay to Kopernik’s fund to make it whole once again, thus leading to SEI filing suit against Citibank for breach of contract and negligence.

“Citibank argues that the plaintiff’s claim for breach of contract should be dismissed because the allegations of the complaint demonstrate that it did not breach any duty,” Beetlestone wrote.

“It contends that it followed SEI’s directions, executing the trade instructions when they arrived on Nov. 8, 2013 and then executing the instruction to cancel the trades that it received later on Nov. 8 on the next business day.”

Citibank’s position was it doubted the contents of the Nov. 6 trade cancellation instructions as justification for not acting on them. However, this did not satisfy the law, according to Beetlestone.

“A professional who undertakes to perform a contractual duty has an obligation to so do with the ordinary level of skill of one in his profession. Citibank was required to exercise the skill and due care of a professional fund custodian in making the decision as to whether to act on the initial cancellation instructions or not,” Beetlestone wrote, permitting the breach of contract claim to stand.

However, Citibank cited the “gist of the action” doctrine of Pennsylvania law (which bars a plaintiff from recovering in tort for the failure to perform a contract) and successfully argued that the court should dismiss the claim of negligence against it.

Beetlestone cited both that law and New York law as rationale for dismissing the negligence claim.

“Like Pennsylvania, New York recognizes that a special relationship may exist between a professional and his or her client out of which tort duties may arise apart from the terms of the parties’ contract,” Beetlestone opined.

“It is well established, however, that the special relationship does not arise in actions, like this one, involving the contractual duties between corporations and financial institutions.”

As to unjust enrichment, SEI alleges it conferred a benefit upon Citibank that amounts to an unjust enrichment of Citibank, when it reimbursed the Kopernik fund with $530,489.13 for the losses resulting from the disputed trades.

Beetlestone concurred, in her 14-page opinion released Tuesday.

“SEI’s claim for unjust enrichment accrued when it made those payments in February and April, 2014. Citibank has cited no authority for the proposition that a subsequent assignment of the fund’s contractual claim against the fund divests SEI of the pre-existing claim for unjust enrichment that it had in its own right,” Beetlestone wrote.

Finding the claims of breach of contract and unjust enrichment possessed merit, the court ruled to retain to those claims and partially dismiss the other claims of negligence and indemnity.

In addition to demanding a jury trial, the plaintiffs are seeking the aforementioned damages of $530,489.13, plus interest and court costs, and any further relief the court may deem appropriate.

The plaintiff is represented by Brady L. Green and James F. Tate, of Wilbraham Lawler & Buba PC, of Philadelphia.

The defendant is represented by Brian T. Feeney and Gregory T. Sturges, of Greenberg Traurig LLP, also of Philadelphia.

United States District Court for the Eastern District of Pennsylvania case 2:14-cv-05972