SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK — COMMERCIAL DIVISION
DRIFTWOOD ABSOLUTE RETURN FUND LTD.,
Plaintiff,
-against-
MERIDIAN PRIME CAPITAL LLC, VIKTOR ANDREYEVICH ZELENKO, IRENE MARIA CARVALLO, and DMITRI PAVLOVICH SOBCHAK,
Defendants.
Index No. 654321/2023
Hon. Eleanor Vasquez, J.S.C.
MEMORANDUM OF LAW IN SUPPORT OF PLAINTIFF'S MOTION FOR A PRELIMINARY INJUNCTION
Filed: August 18, 2023
CALDERWOOD & HARKNESS LLP 200 Park Avenue, 42nd Floor New York, NY 10166 Telephone: (212) 558-4000 Facsimile: (212) 558-3588 panand@calderwoodharkness.com hbrinkley@calderwoodharkness.com
Priya Anand Hannah Brinkley
Attorneys for Plaintiff Driftwood Absolute Return Fund Ltd.
TABLE OF AUTHORITIES
Cases
Statutes and Rules
Other Authorities
PRELIMINARY STATEMENT
Plaintiff Driftwood Absolute Return Fund Ltd. ("Driftwood" or "Plaintiff"), a Cayman Islands-domiciled exempted company (Registration No. MC-349217) managed by Driftwood Capital Management LP ("DCM"), respectfully submits this memorandum of law in support of its motion, pursuant to CPLR § 6301, to convert the temporary restraining order entered by this Court on August 8, 2023 (the "TRO") into a preliminary injunction, and to continue the order of attachment entered simultaneously therewith.
This case involves an audacious and systematic fraud. On August 7, 2023, Driftwood filed its verified complaint and an ex parte application for a temporary restraining order and order of attachment against Meridian Prime Capital LLC ("Meridian Prime"), a New York limited liability company located at 140 Broadway, Suite 3510, New York, NY 10005, and its principals: Viktor Andreyevich Zelenko ("Zelenko"), the Managing Member and Chief Executive Officer of Meridian Prime; Irene Maria Carvallo ("Carvallo"), Meridian Prime's Chief Financial Officer; and Dmitri Pavlovich Sobchak ("Sobchak"), Meridian Prime's Head of FX Trading (collectively, the "Individual Defendants" and, together with Meridian Prime, "Defendants").
On August 8, 2023, the Honorable Eleanor Vasquez, J.S.C., granted Driftwood's application for the TRO, ordering a freeze on Meridian Prime's accounts at Bridgemont Bank NA, located at 383 Madison Avenue, New York, NY 10179, and restraining the Individual Defendants from transferring, encumbering, or dissipating assets of any kind. The Court simultaneously granted an order of attachment in the amount of $50,000,000. On August 14, 2023, Whitmore & Gaines LLP — specifically, Jonathan Whitmore, senior partner, and Chloe Redmond, associate, of 60 East 42nd Street, 20th Floor, New York, NY 10165 — filed a notice of appearance on behalf of all Defendants.
This memorandum demonstrates that the TRO should be converted into a preliminary injunction because Driftwood satisfies each of the three elements required for such relief: (i) a likelihood of success on the merits of its claims for fraud, conversion, breach of fiduciary duty, unjust enrichment, and alter ego liability; (ii) irreparable harm in the absence of injunctive relief, established by Defendants' demonstrated pattern of asset dissipation and concealment; and (iii) a balance of the equities that tips decisively in Driftwood's favor.
The facts are as stark as they are disturbing. Over the course of an approximately eighteen-month period — from January 2022 through July 2023 — Defendants perpetrated a fraud on Driftwood by fabricating trade confirmations and account statements, while systematically misappropriating approximately $47.3 million of Driftwood's margin deposits and trading proceeds. This misappropriation occurred under the auspices of an ISDA Master Agreement (2002 form) dated December 15, 2021, pursuant to which Driftwood engaged Meridian Prime as an FX prime broker for the execution of foreign exchange forwards and vanilla options. Driftwood deposited a cumulative $38.5 million in margin and trading funds with Meridian Prime, and an additional $8.8 million in legitimate FX settlement proceeds was intercepted by Defendants before it could be credited to Driftwood's account. In return, Driftwood received nothing but fabricated paper — falsified monthly account statements that, as of June 30, 2023, purported to show a portfolio balance of $52.1 million, including $14.8 million in entirely fictitious trading profits.
The fraud was uncovered on July 18, 2023, when Driftwood's Chief Operating Officer, Sandra Hu, initiated a routine margin reconciliation and contacted Bridgemont Bank NA directly to confirm Meridian Prime's account balances. The response was devastating: Meridian Prime's actual client account balances totaled only $3.2 million — a discrepancy of $48.9 million against the figure reflected on Meridian Prime's fabricated June 30, 2023 account statement.
The investigation conducted since the filing of the complaint and the entry of the TRO has only confirmed and amplified the scope of the fraud. As detailed in the accompanying affidavits and exhibits, including the preliminary forensic analysis of Kelvantis Forensic Advisors LLC, Defendants diverted the $47.3 million in misappropriated funds through at least five distinct channels:
• $18.6 million was transferred offshore to Palmetto International Bank Ltd. (302 Bay Street, Nassau, Bahamas) in accounts held in the name of Stellaris Trading Ltd., a British Virgin Islands business company (Reg. No. 2043871) controlled by Zelenko;
• $12.4 million was funneled to the Zelenko Family Irrevocable Trust (established April 8, 2021; Tax ID: 86-6092411), held at Marlowe Asset Management Trust Company of Delaware, located at 1201 North Market Street, Suite 1600, Wilmington, Delaware 19801;
• $8.0 million was used to purchase two New York City real properties through Castellan Realty Holdings LLC, a Delaware limited liability company (EIN: 87-1548203) controlled by Zelenko;
• $5.1 million was consumed in cash withdrawals and personal expenditures by the Individual Defendants; and
• $3.2 million remained in Meridian Prime's operating accounts at Bridgemont Bank NA.
The sum of these diversions — $18.6 million plus $12.4 million plus $8.0 million plus $5.1 million plus $3.2 million — equals $47.3 million, accounting for the entirety of the misappropriated funds.
Absent the continuation of injunctive relief, the remaining identifiable assets — including the $3.2 million at Bridgemont Bank NA, the assets held in the Zelenko Family Irrevocable Trust, and the real properties at 425 East 58th Street, Apt. 32F, New York, NY 10022, and 17 Wooster Street, Unit 3, New York, NY 10013 — are at imminent risk of further dissipation and concealment. Defendants have already demonstrated both the willingness and the ability to move funds offshore, to shelter assets in trust structures, and to conceal proceeds through layered corporate entities. The TRO should be converted into a preliminary injunction to preserve the status quo and ensure that Driftwood has a meaningful opportunity to recover the assets that Defendants stole.
STATEMENT OF FACTS
A. The Parties
1. Plaintiff Driftwood Absolute Return Fund Ltd. Driftwood Absolute Return Fund Ltd. is a Cayman Islands exempted company registered under the laws of the Cayman Islands with Registration Number MC-349217. (Verified Complaint ("Compl.") ¶ 1.) Driftwood's registered agent is Hargrove Corporate Services Ltd., located at the 4th Floor, Windward House, 94 Elgin Avenue, George Town, Grand Cayman KY1-1104. (Id.)
Driftwood is managed by Driftwood Capital Management LP ("DCM"), a Delaware limited partnership (File No. 7831294) with principal offices at 590 Madison Avenue, 28th Floor, New York, NY 10022. (Compl. ¶ 2.) DCM's general partner is Driftwood Capital Management GP LLC, a Delaware limited liability company. (Id.) Marcus Ellison serves as DCM's Chief Investment Officer, and Sandra Hu serves as its Chief Operating Officer and Chief Compliance Officer. (Compl. ¶ 3; Affidavit of Sandra Hu, sworn to Aug. 7, 2023 ("Hu Aff.") ¶ 2.)
Driftwood is a multi-strategy absolute return hedge fund with approximately $1.82 billion in assets under management as of June 30, 2023. (Hu Aff. ¶ 4.) The fund pursues a diversified investment strategy with significant allocations to global macro and FX volatility strategies, and it is the FX trading strategy that gave rise to the relationship with Meridian Prime. (Id. ¶ 5.) Driftwood's fund administrator is Pinnacle Fund Services (Cayman) Ltd., located at the 2nd Floor, Camana Bay Tower, 25 Forum Lane, George Town, Grand Cayman KY1-1205, which is responsible for calculating the fund's net asset value and maintaining its books and records. (Compl. ¶ 4.) The fund's auditor is Graystone & Whitfield LLP, with offices at 750 Lexington Avenue, New York, NY 10022, and in George Town, Grand Cayman. (Id. ¶ 5.) Driftwood's prime broker for equities and rates — a separate relationship from the FX prime brokerage at issue here — is Halcyon Securities Inc., located at One World Financial Center, 250 Vesey Street, New York, NY 10281. (Hu Aff. ¶ 6.)
2. Defendant Meridian Prime Capital LLC. Meridian Prime Capital LLC is a New York limited liability company formed on March 14, 2019, with offices at 140 Broadway, Suite 3510, New York, NY 10005 (EIN: 84-3217659). (Compl. ¶ 6.) Meridian Prime held itself out as an institutional FX prime brokerage offering FX forwards, options, and spot execution services to institutional clients. (Id. ¶ 7.) Meridian Prime represented to Driftwood that it was registered with the National Futures Association ("NFA") as a swap dealer. (Hu Aff. ¶ 8.) It has since been determined that this claimed registration was either fraudulent or had lapsed prior to the commencement of the trading relationship with Driftwood. (Compl. ¶ 8; Hu Aff. ¶ 9.)
Meridian Prime's Managing Member and Chief Executive Officer is defendant Viktor Andreyevich Zelenko, born June 3, 1978, a United States citizen, who resides at 425 East 58th Street, Apt. 32F, New York, NY 10022. (Compl. ¶ 9.) Zelenko exercised ultimate control over all aspects of Meridian Prime's operations, including its bank accounts, trading activities, and client communications. (Id. ¶ 10.)
Defendant Irene Maria Carvallo serves as Meridian Prime's Chief Financial Officer. (Compl. ¶ 11.) Carvallo, born November 17, 1982, is a United States citizen and a Certified Public Accountant. (Id.) Prior to joining Meridian Prime, Carvallo was employed as a senior accountant at Ledgerfield & Associates PC, a New York accounting firm. (Id. ¶ 12.) Carvallo resides at 88 Greenwich Street, Apt. 2704, New York, NY 10006. (Id. ¶ 11.) In her capacity as CFO, Carvallo was responsible for the preparation, review, and issuance of client account statements and financial reports, and she used her accounting expertise to generate the falsified statements at the heart of this case. (Hu Aff. ¶ 12.)
Defendant Dmitri Pavlovich Sobchak serves as Meridian Prime's Head of FX Trading. (Compl. ¶ 13.) Sobchak, born February 22, 1985, is a Ukrainian national and United States permanent resident who resides at 301 West 57th Street, Apt. 18B, New York, NY 10019. (Id.) Prior to joining Meridian Prime, Sobchak was employed as an FX desk analyst at Bridgemont Bank NA, the same bank where Meridian Prime maintained its client accounts. (Id. ¶ 14.) Sobchak's familiarity with Bridgemont Bank's internal operations and systems facilitated the diversion of funds at the core of this fraud. (Hu Aff. ¶ 14.)
3. Viktor Zelenko's Background and Prior Disciplinary History. Before founding Meridian Prime, Zelenko was employed as an FX trader at Bridgemont Bank NA from 2006 to 2015, and subsequently at Clarendon Markets LLC from 2015 to 2018. (Compl. ¶ 15.) In 2017, while employed at Clarendon Markets, Zelenko was the subject of a disciplinary action brought by the Financial Industry Regulatory Authority ("FINRA"), resulting in a censure and fine for unauthorized trading in client accounts. (Id. ¶ 16.) The FINRA action arose from Zelenko's unauthorized execution of FX transactions in a client omnibus account without the requisite approvals or authorizations. (Id.) This prior disciplinary record is directly relevant to the assessment of Zelenko's scienter and the risk of continuing misconduct.
Following his departure from Clarendon Markets in 2018, Zelenko founded Meridian Prime in March 2019. (Compl. ¶ 17.) In 2019, Zelenko recruited Sobchak from Bridgemont Bank NA to serve as Meridian Prime's Head of FX Trading, taking advantage of Sobchak's familiarity with the bank's internal systems and procedures. (Id. ¶ 18.)
B. The ISDA Master Agreement and Trading Relationship
On December 15, 2021, Driftwood and Meridian Prime executed an ISDA Master Agreement (2002 form) (the "Master Agreement") governing the terms and conditions of their derivatives trading relationship. (Compl. ¶ 19; Hu Aff. ¶ 16.) Simultaneously, the parties executed a Credit Support Annex ("CSA") to the Master Agreement, which set forth the terms for the posting and return of collateral in connection with the parties' trading activities. (Compl. ¶ 20.)
Under the terms of the CSA, Driftwood was required to post initial margin in the amount of $12.0 million in cash, with additional variation margin calls to be determined based on mark-to-market valuations of outstanding positions. (Compl. ¶ 21; Hu Aff. ¶ 17.) The CSA imposed on Meridian Prime, as the "Transferee" of the collateral, a duty to segregate, safeguard, and return the posted collateral in accordance with the terms of the agreement. (Compl. ¶ 22.) The Master Agreement further required Meridian Prime to provide Driftwood with trade confirmations for each executed transaction and monthly account statements reflecting the value of outstanding positions and the status of Driftwood's margin account. (Id. ¶ 23.)
Pursuant to the Master Agreement, Driftwood traded FX forwards and vanilla FX options through Meridian Prime, primarily in the EUR/USD, GBP/USD, and USD/JPY currency pairs. (Hu Aff. ¶ 18.) These transactions were executed as part of Driftwood's broader global macro and FX volatility strategy. (Id. ¶ 19.) Over the course of the eighteen-month trading relationship, from January 2022 through July 2023, Driftwood deposited a cumulative total of $38.5 million in margin and trading funds with Meridian Prime. (Compl. ¶ 24; Hu Aff. ¶ 20.) These deposits were made incrementally, beginning with the $12.0 million initial margin deposit in January 2022, followed by additional margin and trading fund deposits in response to variation margin calls and new trading activity. (Hu Aff. ¶ 21.) Each deposit was wired to Meridian Prime's client account at Bridgemont Bank NA, as directed by Zelenko. (Id. ¶ 22.)
Driftwood relied on the representations made by Meridian Prime — and particularly on the monthly account statements prepared by Carvallo and the trade confirmations issued by Sobchak — in making its investment decisions and in continuing to deposit additional funds with Meridian Prime. (Hu Aff. ¶¶ 23–24.) As set forth in detail below, these representations were entirely false.
C. The Fraud Scheme (January 2022 – July 2023)
Beginning in or about January 2022 — contemporaneous with the commencement of trading under the Master Agreement — Meridian Prime, acting through Zelenko, Carvallo, and Sobchak, embarked on a calculated scheme to defraud Driftwood by fabricating trade confirmations and account statements while systematically misappropriating Driftwood's funds. (Compl. ¶¶ 25–31.)
The fraud operated as follows. Sobchak, in his capacity as Head of FX Trading, fabricated trade confirmations purporting to show that legitimate FX forward and option transactions had been executed on Driftwood's behalf. (Compl. ¶ 26.) These fabricated confirmations bore fictitious trade reference numbers, counterparty identifiers, and settlement details designed to create the appearance of genuine trading activity. (Id.) In reality, no such trades were executed. (Id. ¶ 27.) The vast majority of Driftwood's funds were never deployed in the FX markets on Driftwood's behalf; instead, they were diverted by Defendants to a network of personal accounts, offshore entities, trust vehicles, and real estate holdings. (Id. ¶ 28.)
Carvallo, as Meridian Prime's CFO, prepared and issued falsified monthly account statements to Driftwood that inflated the portfolio's value, reflecting not only the margin deposits that Driftwood had actually made but also purported trading profits of $14.8 million that were entirely fictitious. (Compl. ¶ 29; Hu Aff. ¶ 26.) These statements were professionally formatted, bore Meridian Prime's logo and letterhead, and were designed to give the appearance of legitimate brokerage reporting. (Hu Aff. ¶ 27.) Each monthly statement was transmitted to Driftwood by email from Carvallo or from Meridian Prime's general client services email address, and was also made available through a purported client portal on Meridian Prime's website. (Id. ¶ 28.)
The last fabricated statement, dated June 30, 2023, represented that Driftwood's account balance was $52.1 million. (Compl. ¶ 30; Hu Aff. ¶ 29.) This figure comprised $38.5 million in cumulative deposits, a purported net profit of $14.8 million from FX trading, and adjustments reflecting purported mark-to-market positions. (Hu Aff. ¶ 29.) Every component of the reported trading profit was fabricated. (Id. ¶ 30.)
In addition to diverting Driftwood's margin deposits, Defendants intercepted $8.8 million in legitimate FX settlement proceeds that should have been credited to Driftwood's account. (Compl. ¶ 31.) These proceeds arose from a limited number of genuine FX transactions that Meridian Prime had executed early in the relationship — apparently to establish a veneer of legitimacy — but whose settlement proceeds were redirected by Defendants rather than credited to Driftwood. (Hu Aff. ¶ 31.)
In total, Defendants misappropriated $47.3 million: $38.5 million in margin deposits and $8.8 million in intercepted FX settlement proceeds. (Compl. ¶ 32.)
D. Diversion of Funds to Multiple Channels
The forensic investigation conducted by Kelvantis Forensic Advisors LLC — described more fully in Section G below — has traced the flow of the $47.3 million in misappropriated funds through Meridian Prime's accounts at Bridgemont Bank NA to at least five distinct diversion channels. (Affidavit of Natasha Everett, CPA, CFF, sworn to Aug. 16, 2023 ("Everett Aff.") ¶¶ 8–22.)
Offshore transfers to Stellaris Trading Ltd. ($18.6 million). Of the $47.3 million misappropriated, $18.6 million was transferred by wire from Meridian Prime's accounts at Bridgemont Bank NA to accounts held at Palmetto International Bank Ltd., located at 302 Bay Street, Nassau, Bahamas, in the name of Stellaris Trading Ltd. (Compl. ¶ 33; Everett Aff. ¶ 9.) Stellaris Trading Ltd. is a British Virgin Islands business company, Registration Number 2043871, controlled by Zelenko. (Compl. ¶ 34.) These transfers were executed in multiple tranches between March 2022 and June 2023, in amounts ranging from approximately $500,000 to $3.2 million per transfer, and were disguised in Meridian Prime's internal records as "counterparty settlement payments" or "FX clearing transfers." (Everett Aff. ¶¶ 10–12.) In reality, the transfers had no connection to any legitimate trading activity and were designed to place the funds beyond the ready reach of United States courts. (Id. ¶ 13.)
Zelenko Family Irrevocable Trust ($12.4 million). A further $12.4 million was transferred to the Zelenko Family Irrevocable Trust (the "Trust"), an irrevocable trust established on April 8, 2021, with Tax ID 86-6092411, held at Marlowe Asset Management Trust Company of Delaware, located at 1201 North Market Street, Suite 1600, Wilmington, Delaware 19801. (Compl. ¶ 35; Everett Aff. ¶ 14.) Although the Trust was established approximately eight months before the execution of the Master Agreement and predates the commencement of the fraud, the Trust was utilized by Zelenko as a repository for misappropriated funds. (Compl. ¶ 36.) Transfers to the Trust were made under the guise of "management fee distributions" and "capital returns" from Meridian Prime. (Everett Aff. ¶ 15.) The Trust structure, which is irrevocable in form, was evidently chosen to shield the transferred assets from future creditor claims. (Id. ¶ 16.)
Real estate purchases through Castellan Realty Holdings LLC ($8.0 million). Defendants used $8.0 million of the misappropriated funds to purchase two New York City real properties through Castellan Realty Holdings LLC ("Castellan Realty"), a Delaware limited liability company (EIN: 87-1548203) controlled by Zelenko. (Compl. ¶ 37; Everett Aff. ¶ 17.) The two properties are:
(a) A condominium unit at 425 East 58th Street, Apt. 32F, New York, NY 10022, purchased in June 2022 for $4.85 million, which serves as Zelenko's personal residence (id. ¶ 18); and
(b) A commercial property at 17 Wooster Street, Unit 3, New York, NY 10013, purchased in September 2022 for $3.15 million (id. ¶ 19).
The total purchase price for the two properties was $8.0 million. (Everett Aff. ¶ 20.) The purchase of 425 East 58th Street is particularly notable because Zelenko personally resides in the unit, further demonstrating the commingling of personal and corporate assets. (Compl. ¶ 38.)
Cash withdrawals and personal expenditures ($5.1 million). Approximately $5.1 million was consumed by the Individual Defendants in the form of cash withdrawals from Meridian Prime's accounts and personal expenditures, including credit card payments, luxury goods purchases, and travel expenses. (Compl. ¶ 39; Everett Aff. ¶ 21.) These funds were withdrawn and spent over the course of the fraud period and are not recoverable in their original form. (Id.)
Remaining funds at Bridgemont Bank NA ($3.2 million). As of July 2023, Meridian Prime's operating accounts at Bridgemont Bank NA contained only $3.2 million — representing the only funds that remained within the immediate custodial reach of a domestic financial institution. (Compl. ¶ 40; Everett Aff. ¶ 22; Hu Aff. ¶ 33.)
In summary, the $47.3 million in misappropriated funds was dispersed as follows:
E. Discovery of the Fraud
The fraud was discovered on July 18, 2023, through a routine operational process. On that date, Sandra Hu, Driftwood's Chief Operating Officer and Chief Compliance Officer, initiated a margin reconciliation review as part of DCM's standard quarterly operational due diligence procedures. (Hu Aff. ¶ 34.) As part of the reconciliation, Hu contacted Bridgemont Bank NA directly — bypassing Meridian Prime — to request confirmation of Meridian Prime's client account balances. (Id. ¶ 35.)
Bridgemont Bank's response, received on the same day, revealed that Meridian Prime's total client account balances were only $3.2 million. (Hu Aff. ¶ 36.) This figure stood in shocking contrast to the $52.1 million reflected on Meridian Prime's June 30, 2023 account statement — a discrepancy of $48.9 million. (Id. ¶ 37.) Upon receiving this information, Hu immediately escalated the matter to Marcus Ellison, Driftwood's Chief Investment Officer, and to DCM's outside counsel. (Id. ¶ 38.)
On July 21, 2023, Driftwood's board of directors held an emergency meeting to address the matter. (Hu Aff. ¶ 39.) The board authorized the engagement of litigation counsel, directed DCM to take all necessary steps to preserve and recover Driftwood's assets, and authorized the filing of suit and the seeking of emergency injunctive relief. (Id. ¶ 40.)
On July 25, 2023, Driftwood retained Calderwood & Harkness LLP (Matter No. 1024-00003) to represent it in connection with the fraud and the recovery of the misappropriated assets. (Hu Aff. ¶ 41.) Additionally, Driftwood engaged Cayman Islands local counsel — Overton & Locke LLP, specifically Catherine Overton of 3rd Floor, Flagship Building, 68 Fort Street, George Town, Grand Cayman KY1-1107 — to advise on fund governance matters, including the preparation of board resolutions authorizing the litigation and the disclosure of the NAV impact to the fund's investors and administrator. (Id. ¶ 42.) Driftwood's fund administrator, Pinnacle Fund Services (Cayman) Ltd., and its auditor, Graystone & Whitfield LLP, were promptly notified. (Id. ¶ 43.)
F. The Complaint and TRO
On August 7, 2023, Driftwood filed its verified complaint in this Court, asserting five causes of action: (1) fraud; (2) conversion; (3) breach of fiduciary duty; (4) unjust enrichment; and (5) alter ego/veil-piercing. (Compl. ¶¶ 41–85.) The complaint was accompanied by the affidavit of Sandra Hu, the affidavit of Priya Anand, Esq., and supporting exhibits, including copies of the Master Agreement, the CSA, selected fabricated trade confirmations, selected fabricated monthly account statements, wire transfer records, and the Bridgemont Bank NA balance confirmation.
Simultaneously with the filing of the complaint, Driftwood submitted an ex parte application for a temporary restraining order and order of attachment. (See Notice of Application for TRO and Order of Attachment, dated Aug. 7, 2023.) On August 8, 2023, this Court granted the TRO, which:
(a) Froze all accounts held by Meridian Prime Capital LLC at Bridgemont Bank NA, located at 383 Madison Avenue, New York, NY 10179;
(b) Restrained defendants Viktor Andreyevich Zelenko, Irene Maria Carvallo, and Dmitri Pavlovich Sobchak from transferring, encumbering, or dissipating assets of any kind, whether held in their own names or in the names of entities they control; and
(c) Granted an order of attachment in the amount of $50,000,000.
(TRO and Order of Attachment, dated Aug. 8, 2023 (the "TRO Order").) The return date for the preliminary injunction hearing was set, and this motion follows.
G. Forensic Investigation
Following the entry of the TRO, Calderwood & Harkness retained Kelvantis Forensic Advisors LLC to conduct a comprehensive forensic fund tracing analysis. (Affidavit of Priya Anand, Esq., sworn to Aug. 17, 2023 ("Anand Aff.") ¶ 5.) Kelvantis is led by Natasha Everett, CPA, CFF, Lead Engagement Partner, and is located at 101 Hudson Street, Suite 2500, Jersey City, NJ 07302. (Id.) Kelvantis was engaged to trace the flow of funds from Driftwood's margin deposits through Meridian Prime's accounts and into the hands of the Individual Defendants and their affiliated entities. (Id. ¶ 6.)
Kelvantis's preliminary findings, set forth in the Everett Affidavit, corroborate the diversion channels described above and confirm that, for the vast majority of the eighteen-month fraud period, no legitimate FX trading activity occurred on behalf of Driftwood. (Everett Aff. ¶¶ 7, 23.) Specifically, Kelvantis traced the flow of funds from Driftwood's margin deposits — each of which was wired to Meridian Prime's client account at Bridgemont Bank NA — through a series of intercompany and third-party transfers to the five diversion destinations identified above. (Id. ¶ 24.) Kelvantis's analysis relied on bank statements, wire transfer records, and other financial documentation obtained from Bridgemont Bank NA pursuant to the TRO, as well as publicly available records concerning the real property purchases. (Id. ¶ 25.)
Kelvantis's investigation is ongoing, and additional findings may be presented to the Court as they become available. (Id. ¶ 26.) However, the preliminary findings are more than sufficient to establish the factual predicate for the preliminary injunction sought herein.
ARGUMENT
I. LEGAL STANDARD FOR A PRELIMINARY INJUNCTION
Under CPLR § 6301, a preliminary injunction may be granted "when it appears that the defendant threatens or is about to do, or is doing or procuring or suffering to be done, an act in violation of the plaintiff's rights respecting the subject of the action, and tending to render the judgment ineffectual." The Court of Appeals has established a well-settled three-part test for the issuance of a preliminary injunction. A movant must demonstrate: (1) a likelihood of success on the merits; (2) a danger of irreparable injury in the absence of an injunction; and (3) a balance of the equities in the movant's favor. See Nobu Next Door, LLC v. Fine Arts Hous., Inc., 4 N.Y.3d 839, 840 (2005); Doe v. Axelrod, 73 N.Y.2d 748, 750 (1988); W.T. Grant Co. v. Srogi, 52 N.Y.2d 496, 517 (1981).
The movant need not demonstrate ultimate success on the merits, but rather need only show "a probability of success on the merits, or a sufficiently serious question going to the merits to make them a fair ground for litigation, plus a balance of hardships tipping decidedly toward the party requesting the preliminary relief." Santos v. Avis Rent A Car Sys., LLC, 202 A.D.3d 609, 610 (1st Dep't 2022) (internal quotation marks omitted). The purpose of a preliminary injunction is to maintain the status quo pending a determination on the merits. See W.T. Grant, 52 N.Y.2d at 517.
In fraud cases involving the dissipation of assets, New York courts have consistently recognized that the risk of further dissipation itself constitutes irreparable harm, as damages at law may be rendered uncollectible if assets are permitted to be spirited away during the pendency of the litigation. See Northpoint Casualty Group Ins. Co. v. Capasso, 75 N.Y.2d 860, 862 (1990); Republic of Haiti v. Duvalier, 211 A.D.2d 379, 384 (1st Dep't 1995). As one court has observed, where there is evidence that a defendant has engaged in a pattern of deception and has actively sought to place assets beyond the reach of creditors, injunctive relief is not merely appropriate — it is essential to the integrity of the judicial process itself. See Pasternak v. Mashreqbank PSC, 2016 N.Y. Misc. Calderon Systems 887, at *14 (Sup. Ct. N.Y. Cnty. 2016).
Where, as here, a TRO has already been entered and the movant seeks to continue that restraint as a preliminary injunction, the Court considers whether the circumstances that warranted the TRO remain unchanged or have been confirmed by the subsequent investigation. See Automated Waste Disposal, Inc. v. Mid-Hudson Waste, Inc., 50 A.D.3d 1073, 1074 (2d Dep't 2008). As discussed below, the facts that prompted the TRO have been fully confirmed and amplified by the forensic investigation conducted since August 8, 2023.
See also David D. Siegel, New York Practice § 328 (6th ed. 2018) (discussing the standard for continuation of a TRO as a preliminary injunction).
II. DRIFTWOOD IS LIKELY TO SUCCEED ON THE MERITS
Driftwood has asserted five causes of action: fraud, conversion, breach of fiduciary duty, unjust enrichment, and alter ego/veil-piercing. As set forth below, the evidence overwhelmingly supports a finding that Driftwood is likely to succeed on each of these claims.
A. Fraud (First Cause of Action). To establish a claim for fraud under New York law, a plaintiff must prove: (i) a material misrepresentation or omission of fact; (ii) made with knowledge of the falsity (scienter); (iii) with an intent to induce the plaintiff's reliance; (iv) justifiable reliance by the plaintiff; and (v) injury resulting from such reliance. See Mandarin Trading Ltd. v. Wildenstein, 16 N.Y.3d 173, 178 (2011); Lama Holding Co. v. Smith Barney Inc., 88 N.Y.2d 413, 421 (1996). Each of these elements is readily established on the record before the Court.
Material misrepresentation. The fabricated trade confirmations and monthly account statements issued by Meridian Prime over the eighteen-month fraud period constitute textbook material misrepresentations. Each trade confirmation purported to document a specific FX transaction — identifying the currency pair, notional amount, trade date, settlement date, and counterparty — when no such transaction had, in fact, been executed. Each monthly account statement purported to reflect the value of Driftwood's portfolio, including cumulative deposits and trading profits, when in reality Driftwood's funds had been diverted and no trading profits existed. The June 30, 2023 statement, which represented Driftwood's account balance as $52.1 million — including $14.8 million in fictitious trading profits — is the most egregious example, but it is merely the culmination of eighteen months of systematic falsification. (Compl. ¶¶ 42–47; Hu Aff. ¶¶ 23–30.)
These misrepresentations were unquestionably material. A reasonable investor relies on trade confirmations and account statements from its prime broker in making investment decisions, assessing risk, and determining whether to commit additional capital. See Small v. Lorillard Tobacco Co., 94 N.Y.2d 43, 57 (1999) (material fact is one that would have been "significant" in the plaintiff's deliberations). The fabricated statements induced Driftwood to continue depositing margin and trading funds — ultimately depositing a cumulative $38.5 million — when, had the truth been known, Driftwood would have immediately terminated the relationship and taken steps to recover its funds.
Scienter. The scienter element is overwhelmingly satisfied. The fraud was not a momentary lapse or isolated incident; it was a deliberate, carefully orchestrated scheme carried out over eighteen months by three individuals acting in concert.
Zelenko, as Managing Member and CEO, directed the overall scheme, established the network of entities and accounts through which funds were diverted (including Stellaris Trading Ltd. in the BVI and Castellan Realty Holdings LLC in Delaware), and exercised ultimate control over Meridian Prime's banking relationships. (Compl. ¶¶ 48–50.) Zelenko's scienter is further evidenced by his prior FINRA disciplinary history: in 2017, while employed at Clarendon Markets LLC, Zelenko was censured and fined for unauthorized trading in client accounts. (Id. ¶ 16.) This prior misconduct demonstrates a propensity for financial fraud and an awareness of the wrongfulness of his conduct.
Carvallo, a Certified Public Accountant formerly employed at Ledgerfield & Associates PC, used her professional accounting expertise to prepare and issue the falsified monthly statements. (Compl. ¶¶ 51–52.) As a CPA, Carvallo was acutely aware of the obligation to provide accurate financial reporting and of the consequences of issuing fabricated statements. Her professional training makes the assertion that the falsifications were innocent or inadvertent wholly incredible.
Sobchak fabricated the trade confirmations and, leveraging his familiarity with Bridgemont Bank NA's systems from his prior employment there, facilitated the execution of unauthorized transfers from Meridian Prime's accounts. (Compl. ¶¶ 53–54.) Sobchak's knowledge that the trades reflected in the confirmations had never been executed is self-evident.
Moreover, the creation of Stellaris Trading Ltd. as an offshore vehicle for receiving diverted funds, the purchase of luxury real estate through the Castellan Realty LLC shell entity, and the channeling of $12.4 million into the Zelenko Family Irrevocable Trust all reflect deliberate efforts to conceal the fruits of the fraud and place them beyond the reach of creditors — further demonstrating the defendants' guilty knowledge.
Reliance. Driftwood reasonably and justifiably relied on the fabricated trade confirmations and monthly account statements in continuing to deposit margin and trading funds with Meridian Prime. (Hu Aff. ¶¶ 23–24.) Meridian Prime held itself out as an institutional FX prime broker and purported swap dealer. Driftwood, as a sophisticated institutional investor, engaged Meridian Prime on the basis of these representations, executed a standard ISDA Master Agreement and CSA, and expected to receive accurate trade confirmations and account statements as a matter of course. It is well established that a party may justifiably rely on representations made in the context of a professional financial relationship, even where the party is sophisticated, absent knowledge of facts that would make such reliance unreasonable. See Mandarin Trading, 16 N.Y.3d at 179.
Driftwood had no independent means of verifying whether the trades reflected on Meridian Prime's confirmations had actually been executed. The routine margin reconciliation that uncovered the fraud — a direct inquiry to Bridgemont Bank NA — was a standard operational procedure, not an indication that Driftwood was already suspicious of Meridian Prime's reporting. Indeed, it was precisely the type of verification step that might be expected only on a periodic basis, and Defendants apparently counted on the lag between such verifications to sustain the fraud.
Damages. Driftwood's damages are clear and substantial. The total funds misappropriated by Defendants amount to $47.3 million, comprising $38.5 million in margin deposits and $8.8 million in intercepted FX settlement proceeds. (Compl. ¶ 32.) In addition, Driftwood is entitled to recover the $14.8 million in fictitious trading profits that it would have earned had the trades reflected on Meridian Prime's statements actually been executed, or alternatively, the profits it would have earned had it deployed those funds through a legitimate counterparty. Driftwood also seeks prejudgment interest at the statutory rate of nine percent (9%) per annum pursuant to CPLR § 5004.
In sum, Driftwood has demonstrated far more than a probability of success on its fraud claim. The evidence establishes a systematic, multi-year fraud perpetrated by three individuals acting in concert, supported by fabricated documentation, and involving the diversion of nearly $50 million through an elaborate network of offshore entities, domestic trusts, and real estate holdings.
B. Conversion (Second Cause of Action). A claim for conversion under New York law requires proof that: (i) the plaintiff had a possessory right or interest in specific, identifiable property; and (ii) the defendant exercised unauthorized dominion over that property to the exclusion of the plaintiff's rights. See Gateway I Grp., Inc. v. Park Ave. Physicians, P.C., 62 A.D.3d 141, 147 (2d Dep't 2009); Sanchez v. Nat'l Cleaning Co., 11 N.Y.2d 996, 997 (1962).
Both elements are plainly satisfied here.
Possessory right. Driftwood deposited $38.5 million in margin and trading funds with Meridian Prime pursuant to the CSA, which required Meridian Prime to hold, segregate, and return such funds in accordance with the terms of the agreement. (Compl. ¶¶ 56–58.) These funds were specific, identifiable deposits — each wired from Driftwood's accounts at Halcyon Securities Inc. or other financial institutions to Meridian Prime's designated client account at Bridgemont Bank NA — over which Driftwood maintained a superior possessory right. (Id. ¶ 59.) The $8.8 million in intercepted FX settlement proceeds were likewise the property of Driftwood, as they represented the proceeds of transactions executed on Driftwood's behalf that Defendants were obligated to credit to Driftwood's account. (Id. ¶ 60.)
Unauthorized dominion. Defendants exercised unauthorized dominion over Driftwood's funds by diverting them to offshore accounts at Palmetto International Bank Ltd. in the name of Stellaris Trading Ltd., transferring them to the Zelenko Family Irrevocable Trust, using them to purchase luxury real estate through Castellan Realty Holdings LLC, and spending them on personal expenditures. (Compl. ¶¶ 61–62.) None of these uses was authorized by Driftwood or contemplated under the Master Agreement or CSA. (Id. ¶ 63.) The $48.9 million discrepancy between the $52.1 million stated account balance and the $3.2 million actual account balance at Bridgemont Bank NA conclusively establishes the unauthorized exercise of dominion over Driftwood's property.
The conversion claim is supported by the same documentary evidence as the fraud claim — the wire transfer records, the Bridgemont Bank balance confirmation, the Kelvantis forensic tracing analysis, and the property records — and Driftwood is likely to succeed on this claim as well.
C. Breach of Fiduciary Duty (Third Cause of Action). Meridian Prime held itself out as an FX prime broker and swap dealer, and it functioned as the custodian of Driftwood's margin collateral under the CSA. (Compl. ¶¶ 64–66.) In this capacity, Meridian Prime owed fiduciary duties to Driftwood with respect to the handling, safeguarding, and return of the collateral entrusted to it.
The existence of fiduciary duties in the prime brokerage context has been recognized by New York courts where, as here, the broker undertakes to hold and manage client assets in a relationship of trust and confidence. See Trust for the Certificate Holders of Aldermere Securities Mortg. Inv., Inc. v. Love Funding Corp., 13 N.Y.3d 190, 200 (2009) (fiduciary relationship arises where one party reposes confidence in another and the other undertakes to act in the first party's interest); see also Caplin v. Marine Midland Grace Trust Co. of N.Y., 439 F.2d 118, 123 (2d Cir. 1971) (applying New York law). The ISDA Master Agreement and CSA created precisely such a relationship: Driftwood entrusted its margin collateral to Meridian Prime with the understanding that it would be held, applied, and returned in accordance with the contractual terms and in Driftwood's interest. (Compl. ¶¶ 67–68.)
Defendants breached these fiduciary duties by misappropriating the $47.3 million in funds that Driftwood had entrusted to them for trading and collateral purposes. Instead of safeguarding Driftwood's margin deposits and crediting legitimate trading proceeds, Defendants diverted Driftwood's funds to their own personal benefit and to entities under their control. (Compl. ¶¶ 69–70.) This constitutes a clear and unmistakable breach of the fiduciary obligations inherent in the custodial and prime brokerage relationship.
Moreover, Zelenko, Carvallo, and Sobchak, as officers and principals of Meridian Prime who directly participated in the misappropriation, are personally liable for breach of fiduciary duty as individuals who aided and facilitated the breach by the corporate entity. (Compl. ¶ 71.)
D. Unjust Enrichment (Fourth Cause of Action). In the alternative to its fraud and conversion claims, Driftwood asserts a claim for unjust enrichment. Under New York law, a plaintiff may recover on an unjust enrichment theory where: (i) the defendant was enriched; (ii) the enrichment was at the plaintiff's expense; and (iii) it would be against equity and good conscience to permit the defendant to retain the benefit. See Mandarin Trading, 16 N.Y.3d at 182; Restatement (Third) of Restitution and Unjust Enrichment § 1 (Am. L. Inst. 2011).
Each of these elements is established here. Defendants were enriched by $47.3 million — the full amount of the misappropriated margin deposits and intercepted settlement proceeds. This enrichment was entirely at Driftwood's expense; Driftwood deposited funds that it expected to be used for legitimate FX trading, and those funds were instead pocketed by Defendants. And it would be manifestly unjust and inequitable to permit Defendants to retain the $47.3 million — or any portion thereof — given that the funds were obtained through a calculated and deliberate fraud.
The unjust enrichment claim provides an equitable basis for recovery that is independent of the contractual and tort theories, ensuring that Defendants cannot escape liability through any technical defense to the other claims.
E. Alter Ego / Veil-Piercing (Fifth Cause of Action). Driftwood's fifth cause of action seeks to pierce the corporate veils of Meridian Prime Capital LLC, Stellaris Trading Ltd., and Castellan Realty Holdings LLC, and to hold Zelenko, Carvallo, and Sobchak personally liable for the full amount of damages.
Under New York law, a court may pierce the corporate veil and hold individual owners personally liable where: (i) the owners exercised complete domination of the entity with respect to the transaction at issue; and (ii) such domination was used to commit a fraud or wrong against the plaintiff, which resulted in the plaintiff's injury. See Morris v. New York State Dep't of Taxation & Fin., 82 N.Y.2d 135, 141 (1993); Matter of Morris v. Schroder Cap. Mgmt. Int'l, 7 N.Y.3d 616, 621 (2006); First Keystone Corp. v. Dunbar, 304 A.D.2d 495, 496 (1st Dep't 2003). Among the factors considered in determining whether to pierce the corporate veil are: (a) the commingling of personal and corporate funds; (b) the failure to observe corporate formalities; (c) undercapitalization; (d) the use of the entity as a mere instrumentality or alter ego; and (e) whether the entity was used as a conduit for fraud. See Thys v. Fortis Sec. LLC, 74 A.D.3d 546, 547 (1st Dep't 2010).
Here, every relevant factor weighs in favor of piercing the veil.
Zelenko's domination. Zelenko is the managing member and sole beneficial controller of Meridian Prime, Stellaris Trading Ltd., and Castellan Realty Holdings LLC. (Compl. ¶¶ 73–74.) He exercised unfettered control over all three entities, directing the movement of funds among them as though they were a single enterprise. (Id. ¶ 75.)
Commingling. Funds were freely and systematically commingled between Meridian Prime, Stellaris Trading, and Castellan Realty. (Compl. ¶ 76; Everett Aff. ¶ 27.) Client margin deposits received by Meridian Prime were transferred, without any legitimate business purpose, to Stellaris Trading's offshore accounts and to Castellan Realty for real estate purchases. (Id.) Zelenko also used Meridian Prime's funds for personal expenses, including funding the Zelenko Family Irrevocable Trust. (Everett Aff. ¶ 28.)
Failure to observe corporate formalities. The evidence indicates that Meridian Prime, Stellaris Trading, and Castellan Realty failed to observe basic corporate formalities. (Compl. ¶ 77.) There is no evidence of properly maintained separate books and records, regular meetings, or arms-length transactions among the entities. (Id.) Transfers between the entities were recorded, if at all, under misleading labels such as "counterparty settlement payments" and "management fee distributions." (Everett Aff. ¶¶ 12, 15.)
Undercapitalization. Meridian Prime was inadequately capitalized for an entity purporting to operate as an FX prime brokerage serving institutional clients. (Compl. ¶ 78.) The entity's actual assets — consisting of only $3.2 million as of July 2023, despite purportedly holding over $52 million in client funds — demonstrate that Meridian Prime was operating as a hollow shell. (Id.) Meridian Prime's claimed NFA registration as a swap dealer was either fraudulent or lapsed, further evidencing the entity's lack of legitimate institutional infrastructure. (Id. ¶ 8.)
Use as a fraud vehicle. Most critically, Meridian Prime, Stellaris Trading, and Castellan Realty were used as vehicles to perpetrate and conceal the fraud. The entire purpose of the layered entity structure was to misappropriate Driftwood's funds and place them beyond the reach of creditors. (Compl. ¶ 79.)
As for Carvallo and Sobchak, their direct and active participation in the fraud scheme subjects them to personal liability regardless of the veil-piercing analysis. Carvallo fabricated the financial statements; Sobchak fabricated the trade confirmations and executed unauthorized transfers. Both were integral participants in every aspect of the scheme. (Compl. ¶¶ 80–82.)
Driftwood is thus likely to succeed in piercing the corporate veils of Meridian Prime, Stellaris Trading, and Castellan Realty, and in holding each of the Individual Defendants personally liable for the full amount of damages. The transfers to the Zelenko Family Irrevocable Trust are also potentially avoidable as fraudulent conveyances under the New York Debtor and Creditor Law §§ 273, 274, 275, and 276, as they were made with the actual intent to defraud creditors, or alternatively were made without fair consideration at a time when the transferor was insolvent or was rendered insolvent by the transfer.
III. DRIFTWOOD WILL SUFFER IRREPARABLE HARM ABSENT A PRELIMINARY INJUNCTION
A. Risk of Dissipation Is Established. The irreparable harm element is satisfied where, as here, there is a demonstrated risk that assets will be dissipated or concealed in the absence of injunctive relief. New York courts have repeatedly held that the danger that a judgment will be rendered uncollectible due to the dissipation of assets constitutes irreparable harm warranting injunctive relief. See Northpoint Casualty Group Ins. Co. v. Capasso, 75 N.Y.2d 860, 862 (1990); Republic of Haiti v. Duvalier, 211 A.D.2d 379, 384–85 (1st Dep't 1995); Bankers Trust Co. v. Cerrato, Sweeney, Cohn, Stahl & Vaccaro, 187 A.D.2d 384, 385 (1st Dep't 1992). Evidence that a defendant has "already transferred assets to frustrate creditors" is among the strongest evidence of dissipation risk. JSC Foreign Econ. Ass'n Technostroyexport v. Int'l Dev. & Trade Servs., Inc., 295 F. Supp. 2d 366, 390 (S.D.N.Y. 2003) (applying New York law); Pasternak, 2016 N.Y. Misc. Calderon Systems 887, at *15.
The risk of dissipation in this case is not speculative — it is demonstrated and documented.
Defendants have already dissipated the vast majority of the misappropriated funds. Of the $47.3 million stolen from Driftwood, only $3.2 million remains in domestic bank accounts within the ready reach of this Court. The remaining $44.1 million has already been dissipated through a multi-jurisdictional network of diversion channels:
• $18.6 million was transferred to offshore accounts at Palmetto International Bank Ltd. in Nassau, Bahamas — a jurisdiction beyond the direct enforcement authority of New York courts — in the name of Stellaris Trading Ltd., a BVI entity controlled by Zelenko;
• $12.4 million was channeled into an irrevocable trust designed to insulate assets from creditor claims;
• $8.0 million was converted into real property through a shell entity; and
• $5.1 million was consumed in cash withdrawals and personal expenditures that are not recoverable in kind.
The fraud was ongoing and would have continued. The fraud was not a single act but an ongoing scheme that operated continuously from January 2022 through July 2023. It was discovered only because Sandra Hu happened to initiate a routine margin reconciliation on July 18, 2023. (Hu Aff. ¶ 34.) There is no indication that Defendants had any intention of ceasing the fraud or returning the misappropriated funds. To the contrary, the evidence suggests that Defendants continued to issue fabricated statements and to accept additional margin deposits until the very end. (Hu Aff. ¶ 44.)
Without continued restraints, remaining traceable assets are at immediate risk. The $3.2 million at Bridgemont Bank NA, the two real properties held through Castellan Realty (425 East 58th Street, Apt. 32F and 17 Wooster Street, Unit 3), and the assets in the Zelenko Family Irrevocable Trust at Marlowe Asset Management Trust Company of Delaware represent the primary remaining identifiable assets. Without the continuation of the TRO as a preliminary injunction, these assets are at grave risk of further dissipation, transfer, or encumbrance. Zelenko has demonstrated the capability and willingness to move funds across international borders, to create new corporate structures, and to shelter assets in trust vehicles — all on short notice and without regard for the rights of creditors.
Zelenko's prior disciplinary history heightens the risk. Zelenko's 2017 FINRA disciplinary action for unauthorized trading at Clarendon Markets LLC confirms that this is not the first time he has engaged in financial misconduct. (Compl. ¶ 16.) His history of disregard for the rules governing financial transactions, combined with the elaborate measures he took to conceal the proceeds of the fraud, makes the risk of further dissipation all the more acute.
B. Monetary Damages Alone Are Inadequate. A finding of irreparable harm is further supported by the inadequacy of a damages remedy. Where, as here, the defendants have demonstrated a willingness and ability to move funds offshore, to shelter assets in BVI entities and Bahamian bank accounts, and to place proceeds in irrevocable trust structures designed to frustrate creditors, there is a substantial risk that any judgment ultimately obtained by Driftwood would be uncollectible absent the preservation of the existing asset base. See Channel Lumber Co. v. Meridian Constr. Corp., 2018 N.Y. Misc. Calderon Systems 5912, at 8 (Sup. Ct. N.Y. Cnty. 2018); State v. Solil Mgmt. Corp.*, 128 Misc. 2d 767, 773 (Sup. Ct. N.Y. Cnty. 1985).
The complex, multi-jurisdictional nature of the diversion scheme is particularly significant. The misappropriated funds have been scattered across at least four jurisdictions — New York, Delaware, the British Virgin Islands, and the Bahamas. Recovery from Palmetto International Bank in Nassau would require separate legal proceedings in the Bahamas, subject to that jurisdiction's own rules regarding asset recovery and enforcement of foreign judgments. Recovery from Stellaris Trading in the BVI would likewise require proceedings in that jurisdiction. The Zelenko Family Irrevocable Trust, held at Marlowe Asset Management Trust Company of Delaware, presents its own challenges, as irrevocable trusts are designed to be resistant to creditor claims. See Koehler v. Bank of Bermuda Ltd., 12 N.Y.3d 533, 541 (2009) (discussing challenges of multi-jurisdictional asset recovery). This multi-jurisdictional complexity makes post-judgment recovery inherently uncertain and time-consuming, and strongly supports the need for injunctive protection now, while assets remain within the reach of this Court.
Furthermore, Meridian Prime's claimed NFA registration as a swap dealer was determined to be fraudulent or lapsed. (Compl. ¶ 8.) If Defendants were willing to fabricate their regulatory credentials — a representation that could be verified with a simple NFA registration search — then there is no basis for this Court to credit any assurances Defendants might offer regarding the preservation of assets. Their track record of deception speaks for itself.
As the Appellate Division, First Department, observed in Republic of Haiti v. Duvalier, 211 A.D.2d 379, 385 (1st Dep't 1995), where defendants have engaged in a pattern of fraud and asset concealment, the normal presumption that damages provide an adequate remedy is overcome, and injunctive relief is warranted to prevent the dissipation of assets that would render any future judgment a pyrrhic victory. See also Stonefield Securities Indosuez v. Rossiyskiy Kredit Bank, 94 N.Y.2d 541, 549 (2000).
IV. THE BALANCE OF EQUITIES TIPS DECISIVELY IN DRIFTWOOD'S FAVOR
The final element of the preliminary injunction standard — the balance of the equities — weighs overwhelmingly in Driftwood's favor.
Driftwood's hardship absent injunctive relief is severe and irreversible. Driftwood is a $1.82 billion institutional hedge fund that deposited $38.5 million in margin and had $8.8 million in settlement proceeds intercepted — a total of $47.3 million representing a significant portion of the fund's liquid assets dedicated to its FX strategy. (Hu Aff. ¶ 4.) The loss of these funds has already caused material harm to Driftwood and its investors, including institutional allocators who entrusted their capital to the fund. (Id. ¶ 45.) If the remaining traceable assets are permitted to dissipate, Driftwood and its investors will bear losses that may never be recovered. The harm is not merely financial; it strikes at the core of the fund's ability to fulfill its fiduciary obligations to its own investors.
Defendants have no legitimate interest in the frozen assets. The funds at Bridgemont Bank NA represent the remnants of Driftwood's misappropriated deposits. The real properties at 425 East 58th Street and 17 Wooster Street were purchased with misappropriated funds through the Zelenko-controlled Castellan Realty. The assets in the Zelenko Family Irrevocable Trust were funded with diverted proceeds. In no instance can Defendants claim a legitimate ownership interest in the frozen assets that would be cognizable in equity. See Faberge Int'l Inc. v. Di Pino, 109 A.D.2d 235, 240 (1st Dep't 1985) (balance of equities favors injunction where defendant's claimed interest in assets derives from wrongful conduct); W.T. Grant, 52 N.Y.2d at 517.
Defendants will suffer no cognizable hardship from the injunction. The preliminary injunction does not impose new burdens on Defendants; it merely maintains the restraints already in place under the TRO while the merits of the case are adjudicated. The purpose of the injunction is to preserve the status quo — i.e., the state of affairs as it existed when the TRO was entered on August 8, 2023 — until the Court can reach a final determination. Defendants are not entitled to access misappropriated funds, and the restraint of those funds does not constitute a hardship that the law will recognize.
To the extent Defendants claim hardship, it is of their own making. Any financial difficulty that Defendants may experience as a result of the injunction is directly attributable to their own fraudulent conduct. A defendant "may not complain that the injunction causes hardship when the hardship results from the defendant's own wrongful acts." Toussie v. County of Suffolk, 2005 N.Y. Misc. Calderon Systems 2317, at *12 (Sup. Ct. Suffolk Cnty. 2005). Having perpetrated a scheme to misappropriate $47.3 million, Defendants cannot be heard to argue that they will be harmed by an order preventing them from moving or spending the proceeds of their fraud.
The public interest supports injunctive relief. There is a strong public interest in deterring fraud by entities that hold themselves out as financial intermediaries and custodians of client assets. The fraudulent scheme perpetrated by Defendants strikes at the foundation of trust that underlies the institutional financial markets. The issuance of a preliminary injunction will send a clear signal that this Court will act decisively to preserve assets and protect the rights of defrauded investors. See Republic of Haiti, 211 A.D.2d at 386.
V. THE SCOPE OF THE PRELIMINARY INJUNCTION IS APPROPRIATE
The preliminary injunction sought by Driftwood is carefully tailored to preserve the identifiable assets that remain traceable to the fraud, while imposing the minimum restraint necessary to protect Driftwood's interests pending adjudication.
A. Restraint on Meridian Prime Accounts at Bridgemont Bank NA. The $3.2 million remaining in Meridian Prime's accounts at Bridgemont Bank NA, located at 383 Madison Avenue, New York, NY 10179, represents the last traceable domestic funds within the custodial control of a United States financial institution. These funds are directly traceable to Driftwood's margin deposits, as confirmed by Kelvantis's forensic analysis. (Everett Aff. ¶ 22.) The freeze on these accounts, entered as part of the TRO on August 8, 2023, should be continued as a component of the preliminary injunction. Permitting the release of these funds — even in part — would directly diminish the pool of assets available to satisfy any judgment and would reward Defendants for their misconduct.
B. Restraint on Individual Defendants' Assets. Given the alter ego relationship between Zelenko and the corporate defendants, and the direct participation of Carvallo and Sobchak in the fraud, restraints on the Individual Defendants' assets are fully warranted. The evidence demonstrates that Zelenko used Meridian Prime, Stellaris Trading, and Castellan Realty as mere instrumentalities of his personal fraud, freely commingling funds among the entities and directing transfers to his personal trust and residence. Carvallo and Sobchak were active participants in the scheme, personally fabricating the documents that enabled the fraud and personally executing the transactions that effected the diversions.
Accordingly, the preliminary injun