306 F.3d 1293 (2nd Cir. 2002), 01-7112, De Kwiatkowski v. Bear, Stearns & Co., Inc.

Docket Nº:01-7112
Citation:306 F.3d 1293
Party Name:Henryk DE KWIATKOWSKI, Plaintiff-Appellee v. BEAR, STEARNS & CO., INC., Bear, Stearns Securities Corporation, and Bear Stearns Forex Inc., Defendants-Appellants and Albert J. Sabini, Defendant.
Case Date:September 19, 2002
Court:United States Courts of Appeals, Court of Appeals for the Second Circuit
 
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Page 1293

306 F.3d 1293 (2nd Cir. 2002)

Henryk DE KWIATKOWSKI, Plaintiff-Appellee

v.

BEAR, STEARNS & CO., INC., Bear, Stearns Securities Corporation, and Bear Stearns Forex Inc., Defendants-Appellants

and

Albert J. Sabini, Defendant.

No. 01-7112

United States Court of Appeals, Second Circuit

September 19, 2002

Argued Jan. 7, 2002.

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[Copyrighted Material Omitted]

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Louis R. Cohen, Washington, DC (Charles E. Davidow, Paul A. Engelmayer, Wilmer, Cutler & Pickering, Washington, DC; Dennis J. Block, Jonathan D. Polkes, Cadwalader, Wickersham & Taft, New York, NY; John L. Warden, Kenneth M. Raisler, Sullivan & Cromwell, New York, NY; Bernard J. Rothbaum, Jr., Hartzog Conger Cason & Neville, Oklahoma City, OK, on the brief), for Appellants.

Myron Kirschbaum, New York, NY (Paul J. Curran, Daniel L. Reisner, Andrew K. Solow, Kaye Scholer L.L.P., New York, NY, on the brief), for Appellee.

Matthew D. Slater, Washington, DC (Giovanni P. Prezioso, Onnig H. Dombalagian, Petia Vretenarova, Cleary, Gottlieb, Steen & Hamilton, Washington, DC, on the brief), for The Bond Market Association, the Futures Industry Association, and the Foreign Exchange Committee, as amici curiae appearing on behalf of Appellant.

Richard A. Rosen, New York, NY (Lara Shalov, Paul, Weiss, Rifkind, Wharton & Garrison, New York, NY, on the brief), for the Securities Industry Association, as amicus curiae appearing on behalf of Appellant.

Daniel J. Roth, Executive Vice President and General Counsel, National Futures Association, Chicago, IL, for National Futures Association, as amicus curiae appearing on behalf of Appellant.

David C. Vladeck, Washington, DC (Alan B. Morrison, Public Citizen Litigation Group, Washington, DC, on the brief), for Public Citizen, as amicus curiae appearing on behalf of Appellee.

Before: JACOBS, F.I. PARKER, S0T0MAY0R, Circuit Judges.

JACOBS, Circuit Judge.

In a period of less than five months in 1994-95, plaintiff Henryk de Kwiatkowski ("Kwiatkowski") made and lost hundreds

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of millions of dollars betting on the U.S. dollar by trading in currency futures. Kwiatkowski traded on a governmental scale: At one point, his positions accounted for 30 percent of the total open interest in certain currencies on the Chicago Mercantile Exchange. After netting over $200 million in the first trading weeks, Kwiatkowski's fortunes turned; between late December 1994 and mid-January 1995, Kwiatkowski suffered single-day losses of $112 million, $98 million, and $70 million. He continued losing money through the winter. Having lost tens of millions over the preceding several days, Kwiatkowski liquidated all his positions starting on Sunday, March 5 and finishing the next day. In all, Kwiatkowski had suffered net losses of $215 million.

In June 1996, Kwiatkowski sued the brokerage firm (and related entities) that had executed his trade orders, Bear, Stearns & Co., Inc., Bear, Stearns Securities Corporation, and Bear Stearns Forex Inc. (collectively, "Bear Stearns" or "Bear"), as well as his individual broker, Albert Sabini ("Sabini"), alleging (inter alia) common law negligence and breach of fiduciary duty. At trial, Kwiatkowski contended that Bear and Sabini failed adequately to warn him of risks, failed to keep him apprised of certain market forecasts, and gave him negligent advice concerning the timing of his trades.

In May 2000, a jury in the United States District Court for the Southern District of New York (Marrero, J.) found Bear negligent and awarded Kwiatkowski $111.5 million in damages. The jury found for Bear on the breach of fiduciary duty claim. Sabini prevailed on both claims.

Bear made timely motions for judgment under Fed. R. Civ. P. 50, arguing principally that Kwiatkowski's account was a" nondiscretionary" trading account (i.e., one where all trades require the client's authorization), and that as to such accounts (as a matter of law) a broker has none of the advisory duties that Bear was found to have breached.

In an opinion dated December 29, 2000, the district court denied Bear's motion for judgment. Kwiatkowski v. Bear Stearns & Co., Inc., 126 F.Supp.2d 672 (S.D.N.Y. 2000). The court ruled that the unique facts and circumstances of the parties' relationship permitted the jury reasonably to find that Bear undertook to provide Kwiatkowski with services beyond those that are usual for nondiscretionary accounts, and that there was evidence sufficient to find that Bear provided those services negligently. The district court added $53 million to the jury's damages award for pre-judgment interest dating back to March 6, 1995, bringing Kwiatkowski's total recovery to $164.5 million.

On appeal, Bear argues principally: [1] that as a matter of law, because Kwiatkowski was a nondiscretionary customer, Bear had no ongoing duty to provide him with information and advice; [2] that Bear did not undertake to provide ongoing advice and account-monitoring services; and [3] that Bear was not negligent in performing any of the services it did provide.

We reverse.

Background

The facts of this case are recounted in scrupulous detail in the district court's opinion denying Bear's Rule 50(b) motion. Kwiaikowski 126 F.Supp.2d at 678-83. On appeal, we review the evidence (as the district court did) in the light most favorable to Kwiatkowski, resolving ambiguities in his favor. See Galdieri-Ambrosini v. Nat'l Realty & Dev. Corp., 136 F.3d 276, 289 (2d Cir. 1998) ("Judgment as a matter of law may not properly be granted under Rule 50 unless the evidence, viewed in the light most favorable to the opposing party,

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is insufficient to permit a reasonable juror to find in her favor.").

A. Facts

For the most part, the operative facts are undisputed. Kwiatkowski first opened an account at Bear Stearns in 1988, when his broker, Albert Sabini, relocated there from the defunct E.F. Hutton firm. The account was handled by Bear's "Private Client Services Group," which provides large private investors with enhanced services, including access if requested to the firm's executives and financial experts. As a member of this group, Sabini was in regular contact with Kwiatkowski, often communicating several times a day. Sabini provided his client with news and market reports, and sometimes sent him Bear Stearns documents containing market forecasts and investment recommendations.

At first, Kwiatkowski's account at Bear was limited to securities trading. His currency trading was conducted through Bank Leu, a bank in the Bahamas, where Kwiatkowski maintained his principal residence. In January 1991, Kwiatkowski opened a futures account at Bear by transferring from Bank Leu a position consisting of 4000 Swiss franc short contracts traded on the Chicago Mercantile Exchange ("CME"). Kwiatkowski effected the transfer because he thought Bear would be better able to service the account, Sabini having "extolled the capacity of Bear Stearns to provide him the full services and resources he needed for large-scale foreign currency trading." Kwiatkowski 126 F.Supp.2d at 679. The Private Client Services Group provided its clients with access to Bear's financial experts and executives, id. at 678, and advertised "a level of service and investment timing comparable to that which [Bear] offer[ed its] largest institutional clients." Id. at 702.

Kwiatkowski's futures account at Bear was at all times "nondiscretionary," meaning that Bear executed only those trades that Kwiatkowski directed.1 When the account was opened in January 1991, Kwiatkowski signed a number of documents and risk-disclosure statements (some of which were mandated by federal regulations). These reflect in relevant part that:

Kwiatkowski declared his net worth to be in excess of $100 million, with liquid assets of $80million; He was warned that "commodity futures trading is highly risky" and a "highly speculative activity," that futures "are purchased on small margins and . . . are subject to sharp price movements," and that he should "carefully consider whether such [futures] trading is suitable for [him]"; He was warned that because, under some market conditions, he "may find it difficult or impossible to liquidate a position"—meaning that he "may sustain a total loss" of his posted collateral—he should "constantly review [his] exposure . . . and attempt to place at risk only an amount which [he knew he could] afford to lose"; He was warned that if he chose to trade on margin, he could lose more than what he posted as collateral; Page 1298

He gave Bear a security interest in all his accounts at the firm, authorized Bear to transfer funds from his other account to his futures account if necessary to avoid margin calls, and authorized Bear to protect itself by liquidating his futures account if Kwiatkowski failed to meet margin requirements. 126 F.Supp.2d at 679.

Kwiatkowski's trading strategy reflected his belief in the long-term strength of the U.S. dollar. As he testified at trial, he had believed "the dollar should appreciate" over time, though he conceded that he always understood that the dollar would experience "ups and downs" in the near term. Tr.472-74.

Kwiatkowski had been an experienced currency trader before he opened his Bear Stearns futures account. As an entrepreneur and founder of Kwiatkowski Aircraft—which leases and sells airplanes internationally—he developed a background in trading to hedge the risks associated with his company's foreign currency transactions. Kwiatkowski also had experience betting on the dollar in hopes of earning speculative profit. In 1990, shortly before transferring his Bank Leu position to Bear Stearns, Kwiatkowski lost nearly $70 million in that account when the dollar declined against the...

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