(Super. Ct. No. 37-2008-00058449- CU-FR-CTL) APPEAL from an order of the Superior Court of San Diego County, Luis R. Vargas, Judge.
The opinion of the court was delivered by: Benke, Acting P. J.
CERTIFIED FOR PUBLICATION
Societe Generale (SG) and SG Structured Products, Inc. (SGSP) (together, SG appellants) appeal from the trial court's order denying their petition to compel arbitration of all claims asserted against them in the civil action of Charles E. Jones and Judith W. Jones (the Joneses). Also parties in this appeal are Ivor J. Jacobson (Jacobson), Santa Fe Investment Advisors Ltd. (SFIA), Anglo African Shipping Co. of New York and Anglo African Holdings Ltd. (together, Jacobson appellants), all of whom "joined" in the SG appellants' unsuccessful motion to compel arbitration.*fn1
None of the SG (and Jacobson*fn2 ) appellants is a signatory to the agreement that includes the arbitration provision. The agreement instead is between the Joneses and SG America Securities, LLC (SGAS), an entity the Joneses did not name as a defendant in their amended complaint. The SG appellants nonetheless moved to compel arbitration. That motion was joined by the Jacobson appellants. The trial court denied the motion and the joinder.
On appeal, the SG appellants argue the trial court erred in denying their motion to compel arbitration because: (i) the Joneses agreed to arbitrate "any controversy" arising out of the subject matter of the agreement, and the Joneses' claims against them arise out of that agreement; (ii) the arbitration provision applies to any "agent" or "employee" of SGAS and the Joneses' amended complaint includes myriad allegations of wrongdoing by two alleged employees of SGAS, neither of whom, however, are seeking to enforce the arbitration provision; and (iii) the Joneses' claims against them are "intimately founded in and intertwined" with the underlying obligations arising under the agreement between SGAS and the Joneses, and thus the Joneses are estopped from repudiating the arbitration provision in that agreement.
The Jacobson appellants alone argue they are entitled to enforce the arbitration provision under a third party beneficiary theory.
As we explain, we conclude the trial court did not err when it denied the motion to compel arbitration of the SG appellants. Neither SG nor SGSP satisfied its burden to establish the requisite identity of interest between either or both of them, on the one hand, and a "party" to the agreement, SGAS, on the other hand.*fn3 We also conclude the Jacobson appellants did not satisfy their burden to show they were third party beneficiaries under the agreement.
FACTUAL AND PROCEDURAL OVERVIEW
The Joneses' amended complaint alleges as follows:
In late 2004, the Joneses became acquainted with Jacobson. Jacobson lived in the same general area as the Joneses and actively courted the Joneses' friendship. Jacobson then represented to the Joneses that he had 40 years of experience as an investment advisor in large, complex securities transactions across multiple continents, that he owned various entities through which he channeled investments and that he had accumulated substantial wealth by investing in " 'fund of funds' hedge fund vehicles."
In November 2004, Jacobson solicited the Joneses to invest money with him. The Joneses explained to Jacobson that any money they would be investing was from their retirement savings and that they wanted to avoid unnecessary risk and invest only in securities with low risk and relatively high liquidity.
During a meeting between the Joneses and Jacobson in December 2004, Jacobson presented the Joneses with a "performance history of investments" he had made over the previous several years and represented the Joneses could obtain stable returns on their investment by purchasing funds of hedge funds. Jacobson also represented he had relationships with many top-tier hedge fund managers that would enable Jacobson to make investments that would not otherwise be available to the Joneses.
Based partly on these representations, the Joneses entered into a joint venture with Jacobson to invest in a leveraged investment vehicle, with each venturer investing $2.5 million into a fund that would, in turn, invest in a diversified portfolio of hedge funds. The resulting fund managed by Jacobson was coined the "Santa Fe Diversified Fund" (Santa Fe Fund).
Initially, Jacobson asked the Joneses to wire the $2.5 million into one of his offshore accounts. When the Joneses expressed some concern about that arrangement, Jacobson proposed, and the Joneses agreed, that each of them would fund the joint venture through an account with SG.
Prior to the formation of the joint venture, Jacobson met with several financial institutions, including SG, in search of an institutional partner that would enhance Jacobson's credibility with potential investors. During one such meeting with SG, Jacobson presented the same investment return information, and made many of the same representations, he had given potential investors like the Joneses. Jacobson also met with representatives of appellants Lyxor Asset Management, S.A. (Lyxor) and SG Hambros Trust Company Ltd. (SG Hambros). Both Lyxor and SG Hambros were wholly owned subsidiaries of SG.
The Santa Fe Fund was organized by SG as a subfund of the Lyxor Master Fund Trust (the "Lyxor Trust"). SG Hambros was the trustee of the Lyxor Trust and, as trustee, it delegated to Lyxor certain investment advisory functions related to the Santa Fe Fund. Lyxor, in turn, delegated certain of those investment advisory functions to Jacobson. Investors such as the Joneses invested in the Santa Fe Fund through the purchase of "warrants" linked to that fund. Each warrant represented a quantum investment in the Santa Fe Fund and a payment obligation of SGSP, with SG guaranteeing the warrant investments.
SGSP issued the warrants pursuant to an offering circular dated April 20, 2005. The warrants were leveraged with millions of dollars borrowed from SG, who in turn created a "secondary market" for the warrants to allow investors to sell back or "redeem" the warrants. Money raised from the sale of the warrants, along with the money borrowed from SG, was invested in the Santa Fe Fund.
SG, SGSP, Lyxor and SG Hambros (together, SG parties) did not perform proper due diligence on Jacobson, despite having ample opportunity to investigate his investment experience and background (or lack thereof) and despite various "red flags" with regard to Jacobson and his myriad representations. It was only after the Joneses and other investors sustained significant losses in the Santa Fe Fund that the SG parties investigated Jacobson and took steps to prevent him from continuing to act as the manager of that fund.
The Joneses initially purchased 100 warrants on or about April 22, 2005, at a cost of $25,000 per warrant, for a total initial investment of $2.5 million. Over the next several years, the Joneses purchased additional warrants, investing a total of about $8 million in 250 warrants.
The SG parties and Jacobson began working together in late 2005 to accomplish various common goals, including bringing new investors into the Santa Fe Fund to increase the size of its portfolio. The SG parties prepared a presentation for Jacobson entitled the "Q1 2006 Business Plan." The presentation was made to Jacobson by Stanislaus Debreu and Guillaume Auvray, who were both "senior employees of one or all of the SG [parties]." The Q1 2006 Business Plan recommended as a long-term objective "hav[ing] an investment advisor charge a fee for investment advisory services," which was in contradiction to the terms of the joint venture agreement between Jacobson and one or more of his entities, on the one hand, and the Joneses, on the other hand. Until this litigation, the Joneses were unaware of the Q1 2006 Business Plan and its proposal they pay fees for investment advisory services. This proposal contradicted what Jacobson had promised the Joneses and was in addition to the fees the Joneses already were obligated to pay under the joint venture agreement.
The SG parties and Jacobson also sought to amend the overall investment strategy of the Santa Fe Fund by way of a supplemental prospectus. Their plan was to convert the structure of the Santa Fe Fund into what they called a "master-feeder" fund structure. Under such a structure, the Santa Fe Fund would invest in the "Santa Fe Master Fund," which would then invest in "a wide range of trading opportunities." The supplemental prospectus issued by the SG parties indicated that Lyxor was responsible for managing the amount by which the warrants were leveraged and that SG Hambros and Lyxor were responsible for handling the liquidation of any assets required to satisfy any warrant redemption request.
The SG parties also developed a website for the Santa Fe Fund, which provided information to warrantholders and to potential investors, and which listed both Jacobson and Auvray of SG as contacts for additional information.
Jacobson, in cooperation with the SG parties, prepared a 29-page "information memorandum" in June 2006 setting out the details and features of the Santa Fe Fund. The information memorandum specifically mentioned SG, Lyxor and SG Hambros, and stated that Lyxor, as part of the "team," set the Santa Fe Fund apart from other funds: " 'Lyxor has a relationship with about 650 asset managers, 140 of which fund separate accounts for Lyxor, and [Lyxor] possesses, in many cases, a great deal of insight and information on these managers which will be available to the Investor, together with Lyxor's own expertise in asset allocation, macro opinions and asset manager selection.' "
The information memorandum also stated that Lyxor would perform "due diligence review" for the Santa Fe Fund, that this Fund "features a 'low risk portfolio [that] allows for 2-3x leverage designed to protect capital' " and that "[e]nhanced [r]returns" are " 'achieved through 2-3x leverage on a highly conservative portfolio.' " The SG parties assisted in the preparation of the information memorandum.
Seeking to further their common goals, Jacobson, with the backing of the SG parties, solicited the Joneses to make additional investments in the Santa Fe Fund. The Joneses purchased 73 additional warrants in late March 2006, at a price of $33,100 per warrant, for a total purchase price of $2,416,300. When they purchased the additional warrants, the Joneses were unaware of the plan of the SG parties and Jacobson to amend the investment strategy of the Santa Fe Fund.
Jacobson represented to the Joneses that converting the Santa Fe Fund from its initial structure to the proposed "master-feeder" structure would not affect the Joneses. Jacobson also represented the change would allow him to charge others a fee for managing the Santa Fe Fund, that it would bring more investors into the fund and that the fund would become more profitable, as it would give Jacobson the opportunity to invest in a greater variety of hedge funds and obtain better returns. The SG parties sponsored the conversion to the master-feeder structure, as they too would realize more profits by adding more investors to, and permitting larger investments in, the Santa Fe Fund. Relying on Jacobson and the SG parties, the Joneses agreed to a reorganization of the Santa Fe Fund into a master-feeder structure.
In early 2007, Jacobson offered to sell 50 shares, or five percent of his investment company, SFIA, to the Joneses for $140 per share. The sale was memorialized by a "Securities Purchase Agreement" dated May 1, 2007 (SPA). Under the SPA, the Joneses also agreed to purchase 50 additional warrants at a purchase price of $43,710 per warrant, for a total purchase price of $2,185,500. The SPA contained a purported "lockup" provision that sought to preclude the Joneses from transferring some warrants through 2010. The Joneses never received any SFIA shares in exchange for their $7,000 payment.
After the SPA, Jacobson became "increasingly distant and inaccessible" to the Joneses, who began to express concern that the Santa Fe Fund was over leveraged. Jacobson on at least three occasions also sought to increase the fees he was charging to manage the Santa Fe Fund. The last fee increase took place in late 2008, as the Santa Fe Fund was losing a significant amount of its value. Despite Jacobson's promises to the contrary, the Joneses paid fees not only on invested principal, but also on the borrowed leverage. They also paid interest on the borrowed amount and fees on gains realized from the Santa Fe Fund. Because the fees earned by Jacobson were a ...