Kidder Peabody & Co., Inc. v. Unigestion Intern.
| Decision Date | 28 September 1995 |
| Docket Number | No. 94 Civ. 3241 (RWS).,94 Civ. 3241 (RWS). |
| Citation | 903 F. Supp. 479 |
| Parties | KIDDER PEABODY & COMPANY, INCORPORATED, Plaintiff, v. UNIGESTION INTERNATIONAL, LTD., Defendant and Third-Party Plaintiff, v. ASKIN CAPITAL MANAGEMENT, L.P., David Jaffrey Askin, and Dashstar Corporation, Third-Party Defendants. |
| Court | U.S. District Court — Southern District of New York |
COPYRIGHT MATERIAL OMITTED
Cleary, Gottlieb, Steen & Hamilton, New York City (Mitchell A. Lowenthal, Luigi L. De Ghenghi, Bernadette Miragliotta, of counsel), for Plaintiff.
Morvillo, Abramowitz, Grand, Iason & Silberberg, P.C., New York City (Michael C. Silberberg, Diana D. Parker, Emily Maranjian, of counsel), for Defendant and Third-Party Plaintiff.
Shereff, Friedman, Hoffman & Goodman, New York City (David S. Hoffner, of counsel), for Third-Party Defendants.
In this action, the complaint of plaintiff Kidder Peabody & Co., Inc. ("Kidder"), seeks damages for breach of contract, and Defendant Unigestion International, Ltd. ("Unigestion") has counterclaimed for: (i) fraud; and (ii) violations of § 12(2) of the Securities Act of 1933 (the "Securities Act"); (iii) Section 15(c)(3) of the Securities Exchange Act of 1934 (the "Exchange Act") and rule 15c3-3(b)(4)(i) promulgated under the Exchange Act; (iv) Section 15C(b)(7) of the Exchange Act and Regulation 403.4 promulgated under the Exchange Act and has interposed affirmative defenses on the grounds that third-party defendants Askin Capital Management, L.P. ("ACM"), David J. Askin ("Askin") and Dashstar Corporation ("Dashstar") were not authorized to transact business with Kidder on Unigestion's behalf and on grounds of fraud. Kidder moves pursuant to Rule 9(b), Fed.R.Civ.P., to dismiss Unigestion's fraud counterclaims and defenses for failure to plead fraud with particularity. Kidder has moved pursuant to Rules 12(c) and 12(f), Fed.R.Civ.P., for judgment on the pleadings with regard to Unigestion's Exchange Act counterclaims and defenses based on lack of authorization.
Unigestion cross-moved for leave to amend its counterclaims. At oral argument of the instant motions on June 21, 1994, Unigestion's Answer was deemed amended, as described further, infra.
For the reasons below set out below, Kidder's motion is granted in part and denied part.
Kidder is a Delaware corporation with its principal offices in New York City. Kidder is a broker-dealer registered pursuant to Sections 15 and 15C of the Exchange Act, 15 U.S.C. §§ 78o and 78o-5. Unigestion is a foreign corporation having its principal place of business in Guernsey, Channel Islands, United Kingdom.
ACM is a registered investment adviser. Dashstar is ACM's general partner. Askin is Dashstar's chief executive officer. (ACM, Dashstar and Askin are collectively referred to herein as "Askin/ACM"). Granite Partners L.P. ("Granite Partners"), registered in the State of Delaware, Granite Corporation, incorporated in the Cayman Islands ("Granite Corporation"), and Quartz Hedge Fund ("Quartz"), incorporated in the Cayman Islands, are investment funds established and managed by Askin (collectively, the "Askin Funds"). ACM is the investment adviser of the Askin Funds.
Kidder commenced this action by filing its Verified Complaint in New York State Supreme Court for New York County on April 14, 1994. The case was removed to the Southern District of New York on May 4, 1994, and assigned to this Court based on its relation to UBS Securities, Inc. v. Unigestion Int'l, Ltd., 94 Civ. 3238; Arbour Financial Corp. v. Unigestion Int'l, Ltd., 94 Civ. 3239; Lehman Government Securities, Inc. v. Unigestion Int'l, Ltd., 94 Civ. 3240; and Bear Stearns & Co., Inc. v. Unigestion Int'l, Ltd., 94 Civ. 4444. Unigestion filed its Answer and Counterclaims on June 17, 1994, and lodged a third-party complaint against ACM, Dashstar, and Askin on June 30, 1994. Kidder filed its Reply to Unigestion's counterclaims on July 21, 1994.
Discovery and discovery-related motion practice was conducted throughout the latter half of 1994 and early 1995. Kidder filed its motion to dismiss Unigestion's counterclaims for failure to plead fraud with particularity and for partial judgment on the pleadings on November 23, 1994. Unigestion filed its motion to amend its counterclaims on January 18, 1995. The parties consented to the rescheduling of these two motions so that they could be argued at the same time. The return date for these motions was subsequently adjourned on consent on three occasions. Oral argument was heard on June 21, 1995, the motions were deemed fully submitted at that time, and Unigestion's Answer, including Counterclaims (hereinafter the "Amended Answer" and the "Amended Counterclaims") was deemed so amended.
The dispute underlying this action grows out of the collapse, in February and March of 1994, of the specialized market in collateralized mortgage-backed securities and related derivatives ("CMOs"). Unigestion is a foreign investment corporation. ACM is a registered investment adviser. Askin is its president. Kidder is one of five broker-dealers who were active in the CMO market and with whom ACM entered into contracts and conducted trades on Unigestion's behalf.
Unigestion contacted ACM/Askin in 1993. During the first half of 1993, Askin and other ACM personnel made verbal and written representations that they were "Mortgage Derivative Security Specialists" and that ACM had developed a "market neutral" investment strategy for investment in various mortgage derivative securities which could be used to protect the value of an investment portfolio against price fluctuations in financial markets. ACM/Askin described this strategy as nonspeculative and involving "little risk." ACM/Askin represented that through the use of its own computer-analytical models and hedging techniques, it could select a portfolio of "bullish" (inversely responsive to interest rates) and "bearish" (directly responsive to interest rates) securities. ACM/Askin represented to Unigestion that such a portfolio could be balanced to create an investment whose performance would be "market neutral". ACM/Askin also represented that they were able to identify "mispriced" securities and to capitalize on this informational advantage. ACM/Askin further represented to Unigestion that the average yearly return from the Askin Funds had been over 15% for at least the previous three years. ACM/Askin compared that annual rate of return with other, lower-yielding investment instruments but did not disclose that the lower-yielding instruments were safer investments. Finally, ACM/Askin represented that the proposed portfolio would contain investments that were limited to terms of one year, thus further reducing the risk associated with interest rate volatility. The portfolio ultimately assembled on behalf of Unigestion had a duration of more than one year and was correspondingly more risky than had been originally represented.
On February 1, 1994, an Investment Management Agreement ("IMA") was executed by ACM and Unigestion, providing that ACM was to be Unigestion's investment advisor with respect to certain funds to be deposited in a custodial account at State Street Bank & Trust Co. ("State Street"). On February 2, 1994, Unigestion opened the custodian account at State Street; number 5450 (the "Account"). Unigestion deposited $10,000,000 in the Account on February 2, 1994, which was to be invested in accordance with the IMA. Under the IMA, Unigestion gave ACM the responsibility of managing the funds in the Account.
The Account was created pursuant to an agreement between Unigestion and State Street (the "Custodian Agreement"). ACM/Askin are not parties to the Custodian Agreement. By the Custodian Agreement, Unigestion employed State Street as custodian of "certain assets of Unigestion and assets beneficially owned by certain customers of Unigestion" and defined these assets as the "Account". No other meaning or description appeared in the Custodian Agreement concerning the "Account".
The Custodian Agreement also named ACM as "Investment Manager" and required the Custodian to accept any instruction from ACM as if an instruction of Unigestion, so long as such instructions conformed to the provisions of the Custodian Agreement's section of "Proper Instructions". That section set out the acceptable communications media by which instructions might be conveyed and required that such instructions be accepted by State Street only if they came from authorized representatives of ACM or Unigestion. The Custodian Agreement also set out the requirements under which State Street was permitted to pay out account moneys.
Officers of Unigestion signed all documents relating to the opening of the Account. The IMA provided that ACM would invest Unigestion's funds in accordance with the investment strategy that was outlined in the Investment Guideline (the "Guideline") which was an exhibit to the IMA and was incorporated by reference therein. The Guideline stated that the objective of the investment program that ACM was to undertake for Unigestion was "to generate monthly results largely free of correlation with equity and fixed income market monthly returns." In meetings and in documents described above, ACM represented that this strategy was "market neutral," like that employed for Granite Partners and Granite Corporation — investment vehicles with which Unigestion personnel were familiar.
By its incorporation of the Guideline, the IMA required that Unigestion's portfolio would "be broadly diversified by security type." One family of instruments, inverse floating rate interest only securities ("Inverse IOs"), comprised 56% of the portfolio that ACM assembled for Unigestion. The Guideline contains a non-exclusive list of instruments to be used in assembling the...
To continue reading
Request your trial
-
In re Adler, Coleman Clearing Corp.
...made pursuant to lawful contracts") (footnotes omitted), aff'd, 672 F.2d 901 (2d Cir.1981); Kidder Peabody & Co. v. Unigestion Int'l, Ltd., 903 F.Supp. 479, 498 (S.D.N.Y.1995) ("contracts to purchase securities were induced through fraud in violation of the anti-fraud provisions of the Exch......
-
U.S. Sec. & Exch. Comm'n v. Syron
...from the Exchange Act by designating the entity a federal instrumentality. (Defs.' Mem. 72–73 (citing Kidder Peabody & Co. v. Unigestion Int'l Ltd., 903 F.Supp. 479, 495–96 (S.D.N.Y.1995), which held that 12 U.S.C. § 1455(g) establishes that Freddie Mac is an instrumentality of the United S......
-
In re Adler, Coleman Clearing Corp.
...court properly applied here, that illegal contracts are voidable at the election of the victim. See Kidder Peabody & Co. v. Unigestion Int'l., Ltd., 903 F.Supp. 479, 498 (S.D.N.Y.1995) ("contracts to purchase securities were induced through fraud in violation of the anti-fraud provisions of......
-
Sciascia v. Rochdale Vill., Inc.
...as a condition precedent unless the language of the contract clearly imposes such a condition.” Kidder Peabody & Co., Inc. v. Unigestion Int'l, Ltd., 903 F.Supp. 479, 501 (S.D.N.Y.1995). Although the Defendant argues that the parties agreed to execute an indemnification agreement and to ame......