Cresswell v. Sullivan & Cromwell

• Citation: 922 F.2d 60
• Decision Date: 10 December 1990
• Docket Number: D,No. 721,721
• Parties: Edward CRESSWELL, Agriconsultants Incorporated, American Growth Properties Management Company Ltd., Eric Appleton, Befors Finance Ltd., John Bird, Nora Bird, Peter Burkhardt, Peter Byk, John A.L. Chettoe, David E. Cope, Dennis R. Dudeney, V.S. Dwivedi, Lars Feuk, Fletcher Investments Ltd., John H. Fletcher, Noel Fox, Stuart J. Gardiner, C.L. Gavzey, F. George, Kenneth E.F. George, Verity Anne Gibbons, Robert Grant, Polly Gregory, A.D. Harris, David G. Hart, John M. Hawkins, Patricia Hawkins, Spencer Hayes, Hilary Corporation, Inc., Anthony Hyde, Izrada, S.A., Gordon Walter James, Joval Investments Ltd., Jad Kabban, Philip J. Knight, Pierre Lamarche, Roger Landau, Andrew Lewis, Horace G. Lovegrove, James J. Mather, Malcolm Milton, Gregoire Mozdyniewicz, Collin David Parker, Pezco Overseas, Inc., John Pirie, Matthew H. Pridgeon, A. Remini, Julia A. Robin, Roger Y. Robin, Claudine Seikaly, John B. Shaw, Robert W. Shields, Sianplan Ltd., Reginald E. Silletto, Basilla L.W. Abel Smith, David F. Smith, Alec Snobel, Geoffrey W. Sutcliffe, R.L. Thomas, Mary C. Wallace, Jan Wallin, Patricia Wilkinson, as Executrix, and Gord N. Wilson, Plaintiffs-Appellants, Damer Harrisson, S.A., Plaintiff. v. SULLIVAN & CROMWELL and Prudential-Bache Securities, Inc., Defendants-Appellees. ocket 89-7914.
• Court: U.S. Court of Appeals — Second Circuit

Page 60

922 F.2d 60

Edward CRESSWELL, Agriconsultants Incorporated, American Growth Properties Management Company Ltd., Eric Appleton Befors Finance Ltd., John Bird, Nora Bird, Peter Burkhardt Peter Byk, John A.L. Chettoe, David E. Cope, Dennis R Dudeney, V.S. Dwivedi, Lars Feuk, Fletcher Investments Ltd. John H. Fletcher, Noel Fox, Stuart J. Gardiner, C.L. Gavzey, F. George, Kenneth E.F. George, Verity Anne Gibbons, Robert Grant, Polly Gregory, A.D. Harris, David G. Hart, John M. Hawkins, Patricia Hawkins, Spencer Hayes, Hilary Corporation, Inc., Anthony Hyde, Izrada, S.A., Gordon Walter James, Joval Investments Ltd., Jad Kabban, Philip J. Knight, Pierre Lamarche, Roger Landau, Andrew Lewis, Horace G. Lovegrove, James J. Mather, Malcolm Milton, Gregoire Mozdyniewicz, Collin David Parker, Pezco Overseas, Inc., John Pirie, Matthew H. Pridgeon, A. Remini, Julia A. Robin, Roger Y. Robin, Claudine Seikaly, John B. Shaw, Robert W. Shields, Sianplan Ltd., Reginald E. Silletto, Basilla L.W. Abel Smith, David F. Smith, Alec Snobel, Geoffrey W. Sutcliffe, R.L. Thomas, Mary C. Wallace, Jan Wallin, Patricia Wilkinson, as Executrix, and Gord N. Wilson, Plaintiffs-Appellants, Damer Harrisson, S.A., Plaintiff. v. SULLIVAN & CROMWELL and Prudential-Bache Securities, Inc., Defendants-Appellees.

No. 721, Docket 89-7914.

United States Court of Appeals, Second Circuit.

Argued Jan. 29, 1990.

Final Briefs Submitted Feb. 7, 1990.

Decided Dec. 10, 1990.

Richard B. Cooper, New York City (James M. Latimer, Cooper, Brown & Behrle, P.C., New York City, on the brief), for plaintiffs-appellants.

Bernard W. Nussbaum, New York City (Kenneth B. Forrest, Jeffrey I. Lang, Wachtell, Lipton, Rosen & Katz, on the brief), for defendants-appellees.

Before OAKES, Chief Judge, and KEARSE and FLETCHER ^*, Circuit Judges.

KEARSE, Circuit Judge:

Plaintiffs Edward Cresswell, et al., appeal from a final judgment of the United States District Court for the Southern District of New York, Robert W. Sweet, Judge, 704 F.Supp. 392, principally (1) dismissing so much of their second amended complaint as charged defendant Sullivan & Cromwell ("S & C") with fraudulent nondisclosure during discovery in a prior action by plaintiffs against S & C's client, defendant Prudential-Bache Securities, Inc. ("Bache"), and (2) voiding agreements relating to plaintiffs' representation in the present action by their former attorney. The district court granted summary judgment dismissing the complaint against S & C on the ground that plaintiffs could not show justifiable reliance on the challenged nondisclosure; it barred plaintiffs' former attorney from representing them and receiving a contingent fee in the present action because he would be an essential witness at trial. On appeal, plaintiffs contend principally that summary judgment was inappropriate because the question of whether their reliance was justifiable raised a genuine issue of material fact; and they contend that the orders with regard to their former attorney should be set aside. For the reasons below, we vacate the judgment dismissing the claims against S & C and remand for further consideration by the district court.

I. BACKGROUND

This case has its roots in Bache's 1981-1982 offering in Europe of certain financial instruments (the "Spreads") based on the price differential between two types of futures contracts. Many of the facts are undisputed.

In October 1982, this price differential widened beyond its historical norms and caused holders of the Spreads, who included the present plaintiffs, to liquidate them at a loss. In March 1983, plaintiffs and several others brought suit against Bache in the district court for the Southern District of New York ("Cresswell I "), alleging that Bache had engaged in materially false and misleading marketing practices in connection with the Spreads. Cresswell I was settled by the present plaintiffs and Bache in early 1985 for approximately $3 million, enabling each of these plaintiffs to recover some 46% of his losses. Two other groups settled with Bache in July 1986 and January 1987, recovering some 94% and 71% of their respective losses.

The present suit was commenced in April 1987 against both Bache and S & C, asserting principally that during discovery in Cresswell I, Bache and S & C had fraudulently failed to produce certain documents that, if disclosed, would have led to a substantially higher settlement recovery for the present plaintiffs. The documents related to stock exchange inquiries into Bache's marketing of the Spreads.

A. The New York Stock Exchange Investigation

In January 1983, Polly Gregory, an investor who had suffered losses when she liquidated her Spreads and who would later become a plaintiff in Cresswell I, wrote to the New York Stock Exchange ("NYSE" or "Exchange"), complaining that the information Krupinski responded to Gregory by letter dated April 29, 1983, stating that the Exchange had been in contact with Bache concerning her complaint, and sent her a copy of the March 28 letter the Exchange had received from Goldenblum. Krupinski's letter advised Gregory that the "Exchange staff does not adjudicate monetary claims or pass upon the merits of them," and suggested that Gregory might wish to consider requesting arbitration. The letter concluded as follows:

provided her by Bache with respect to the Spreads had been misleading. Gregory's letter was routed to Barbara Krupinski in NYSE's Division of Member Firm Regulatory Services ("Services Division"), which handled customer complaints about member firms. Krupinski forwarded a copy to William Goldenblum, a Paris-based Bache attorney. Goldenblum responded to Krupinski by letter dated March 28, 1983, stating that Gregory had signed, inter alia, a "risk disclosure statement" and that Bache's marketing pamphlets were not misleading.

As part of our regulatory responsibilities, the staff of he [sic ] Exchange examines all customer complaints to determine whether a firm or its representatives committed any violations of Exchange rules or ethical business practices. However, findings of any violations are made only after a full investigation and an administrative hearing before an Exchange hearing panel. Any disciplinary actions taken are made public only through the news media.

Communications between the Exchange and Goldenblum continued during the spring of 1983 and included, inter alia, a request by Krupinski for information concerning a 1981 advertisement for the Spreads.

In the meantime, other disgruntled Spreads investors, represented by Edward Swan, Esq., had commenced Cresswell I in March 1983. Bache was represented by S & C, which assigned attorneys Marvin Schwartz, a partner, and Howard Burnett and John L. Hardiman, associates, to handle the matter. On June 6, 1983, Bache's Goldenblum informed Hardiman of NYSE's interest in the 1981 advertisement and forwarded to Hardiman copies of Bache's correspondence with NYSE in connection with Gregory's complaint. Bache in-house attorney Barbara Salmanson, after consulting with Schwartz, prepared a response to NYSE's request for information. She sent the response to Krupinski at NYSE on June 8 and sent a copy to Hardiman.

In August 1983, NYSE's Services Division referred the matter of the Bache Spreads to the Exchange's Division of Enforcement ("Enforcement"). On December 5, 1983, Donald E. Shippy, a Senior Enforcement Investigator, wrote Bache General Counsel Loren Schechter, indicating that Enforcement was investigating possible violations by Bache of NYSE's advertising standards. On December 9, Schechter responded that he would look into the matter. In the spring of 1984, there was further correspondence between Bache and Enforcement, and on July 11, 1984, Salmanson wrote Shippy describing the brochure promoting the Spreads and other documents, and stating that investors had been fully informed of the risks involved. A copy of the July 11 letter was sent to Burnett at S & C, who forwarded copies to Hardiman and Schwartz.

In August 1985, a settlement was reached between NYSE and Bache whereby, without admitting or denying guilt, Bache consented to a censure and a $5,000 fine. Based on this settlement, NYSE issued a decision in October stating that Bache had failed to disclose sufficiently the risks associated with the Spreads. The settlement was reported in the Wall Street Journal on February 12, 1986.

B. The Pretrial Discovery and Settlements in Cresswell I

By the time of the NYSE settlement and decision, most of the plaintiffs in Cresswell I had settled their suit. Prior to settlement, they had sought discovery concerning, inter alia, any stock exchange inquiries or investigations into the Bache Spreads.

Promptly after filing the Cresswell I complaint in March 1983, Swan made a request to Bache for the production of documents. In response, Bache produced more than 2,600 pages of documents in November 1983, including documents indicating that the Chicago Board of Trade ("CBOT") and the London Department of Trade ("LDOT") were investigating Bache's marketing of the Spreads. In December 1983, Swan served on S & C a second request for Bache documents demanding, inter alia,

[a]ny and all documents relating to any investigation or inquiry by any exchange, regulatory agency, or governmental body (whether in the United States or abroad) relating to defendant's marketing of the GNMA/T-Bond Spread which is the subject of this action.

This request was forwarded by Hardiman to Goldenblum at Bache, and though additional documents were produced, including some related to the CBOT and LDOT investigations, no documents relating to NYSE inquiries were produced.

On December 7, 1983, Gregory wrote to Swan, seeking to join the plaintiffs in Cresswell I. Gregory informed Swan in her letter that she had lodged a complaint with NYSE with regard to Bache's promotion of the Spreads. Gregory promptly became a plaintiff in Cresswell I and gave Swan some...