Duperier v. Texas State Bank

Decision Date24 August 2000
Docket NumberNo. 13-97-756-CV,13-97-756-CV
Citation28 S.W.3d 740
Parties(Tex.App.-Corpus Christi 2000) FRANK DUPERIER, INDIVIDUALLY, AND HOWARD, WEIL, LABOUISSE, FRIEDRICHS, INC., Appellants, v. TEXAS STATE BANK, Appellee
CourtTexas Court of Appeals

On appeal from the 206th District Court of Hidalgo County, Texas. [Copyrighted Material Omitted]

Before Justices Dorsey, Hinojosa and Rodriguez.

OPINION

Opinion by Justice Hinojosa.

Appellee, Texas State Bank, ("the Bank") on its own behalf and on behalf of certain trust customers of the Bank, sued appellants, Frank Duperier ("Duperier"), individually, and Howard, Weil, Labouisse, Friedrichs, Inc. ("Howard Weil"), alleging Texas Securities Act ("the Act") violations and fraud. After a jury trial, the Bank elected recovery under the Act. Appellants filed this appeal after the trial court rendered judgment against them for damages and recission resulting from the Bank's purchase of notes issued by the International Bank for Reconstruction and Development (the "World Bank").

In the judgment, the trial court awarded the Bank $1,198,341.75, plus $1,707,044.60 in prejudgment interest for notes which the Bank sold prior to trial. For the notes which the Bank held on the date of the judgment, the Bank was to deliver the notes, worth $3,515,000.00, to appellants and to recover from them $3,356,825.00, plus $2,258,069.47 in prejudgment interest. If the notes held by the Bank matured before payment became due under the judgment, the Bank was to recover $3,356,825.00, plus $2,258,069.47 in prejudgment interest, less the $3,515,000.00 value of the matured notes. The court also awarded the Bank $285,000 in attorney's fees, plus contingent attorney fees to cover the costs of appeals.

Appellants raise ten issues for our review. We modify the judgment and, as modified, affirm.

A. The Move to a Unified European Currency

In 1978, Germany formed the European Monetary System ("EMS") in order to stabilize currency-exchange rates throughout Europe. The European Council Monetary Committee ("EC") monitored the EMS. The EMS developed the European Rate Mechanism ("ERM") to measure exchange rate volatility. Under rules established by the ERM, the parity of each member's currency was fixed to a weighted overall European Currency Unit, and a limit was set to control how much each currency could fluctuate against the others. There were two bands within which the currencies could fluctuate: (1) the broad band of 6%, which was applied to Spain and Portugal; and (2) the narrow band of 2.25%, which was applied to all other ERM members. When a currency reached the lower limits of its band, the national central banks of the other ERM currencies were obligated to intervene -- to prop up the weak currency -- by buying that currency on the open market. Spain and Germany were ERM members.

The first four years of the ERM brought seven realignments due to severe depreciation by member currencies. A realignment occurred when the government of a weak currency pro-actively devalued its currency.

In December 1991, the EC finalized and began soliciting ratification of the Maestricht Treaty (the "Treaty"), which was designed to bring all EC member currencies into alignment for an eventual issuance of one European central monetary unit. The Treaty had to be approved by all twelve EC members. The treaty increased the confidence that measures to produce economic convergence would be implemented throughout Europe, which in turn helped maintain stability within the ERM.

Also in December 1991, the Bundesbank, Germany's central bank, raised the discount rate to 8%, the highest level since World War II. After this action, other European governments, including Spain, raised interest rates to show their commitment to the ERM. In June 1992, Denmark rejected the Treaty, throwing the EC into a political crisis on how to resolve the situation. Shortly thereafter, France announced a September referendum on the Treaty.

On July 16, 1992, the Bundesbank, reacting to a growing money supply, raised the discount rate to 8.75%. This hike in the central discount rate placed a strain on the other European countries which were experiencing slower growth.

B. The World Bank Notes

During the summer of 1992, the World Bank issued $100 million in dual-index-structured notes for sale to investors. The underwriter for this issue was the First Boston Corporation ("First Boston"). The prospectus, drafted by First Boston, showed that the notes paid interest from August 7, 1992, semiannually on February 7 and August 7 of each year. The notes had a five-year term and matured on August 7, 1997. The first interest payment was due on February 7, 1993. The interest rate for the initial interest period, August 7, 1992 to February 7, 1993, was 9% per annum. The interest rate for each remaining interest period was described in the prospectus as:

the sum of two components: a specified "Coupon Base", which increases annually, and a variable "Exchange Rate Adjustment" which changes semiannually with the Spanish peseta/Deutsche mark exchange rate. The interest rate will be determined as described herein two Determination Business Days before the beginning of each such Interest Period. The interest rate on the Notes may not exceed 24% per annum or be less than 0% per annum for any Interest Period.

On its second page, the prospectus stated:

IMPORTANT INFORMATION

As described herein, changes in the exchange rate of the Spanish peseta relative to the Deutsche mark will affect the interest rate applicable to the Notes. Such changes may be significant. The rate of interest on the Notes will be positively affected by the appreciation of the Spanish peseta relative to the Deutsche mark and negatively affected by the appreciation of the Deutsche mark relative to the Spanish peseta.

Based upon the prospectus, the initial 9% interest rate would readjust, up or down, depending on the relationship between the Deutsche mark (the "D-mark") and the peseta. The interest rate would increase if the peseta appreciated in relation to the D-mark and would decrease if the peseta was devalued against the D-mark. At maturity, the investor's principal would be returned in full. Moody's rated the notes "Triple A" as to principal only.

On August 7, 1992, Frank Duperier, a bond salesman for Howard Weil, sold $12 million of these bonds to the Bank, $7 million to the trust department and $5 million to the banking department. On September 13, 1992, the EC executed the first realignment of the ERM in five years by devaluing the Italian lira by 7%. Three days later, the British pound sterling and the lira dropped by 11.2% and 18.1%, respectively. Both governments ceased participation in the ERM. This caused speculators to turn to the French franc, Irish pound, and Spanish peseta. Ireland and Spain immediately reacted to the speculators by instituting foreign exchange controls to protect their currency. Despite the controls, Spain could not support its currency and on September 16, 1992, the peseta was devalued by 5%. On November 22, 1992, the peseta was devalued by another 6%. These devaluations caused the interest rate paid on the notes to fall to zero after the expiration of the initial six-month guaranteed rate of 9% per annum. This deprived the Bank of interest income from the notes. The interest-rate collapse also caused the price of the notes to fall. The Bank sold some of the notes on various dates from December 1992 to December 1996 at prices ranging from 74% of par on the initial sale to 94% of par on the final sale.

The Bank, on its own behalf and on behalf of certain customers of the trust department, sued appellants, alleging that Duperier, in the course and scope of his employment with Howard Weil, made certain misrepresentations and omissions about the notes prior to the bank's purchase. The alleged misrepresentations are:

(1) Howard Weil had investigated this issue of notes very carefully. Specifically, Duperier stated that Howard Weil had done more due diligence on this issue than he was aware it had done on any other issue.

(2) The notes were a safe and suitable investment for the Bank and its trust department.

(3) There was no realistic chance the yield on the notes would fall to zero.

Alleged omissions include:

(1) The European political climate, the proposed union, and the ERM were increasingly unstable. In particular, Duperier did not inform the Bank of the repercussions from the Danish rejection of the Treaty.1

(2) Spanish equity and bond markets were in a tailspin and the peseta was overvalued.

(3) Some analysts believed a realignment of the ERM was imminent.

(4) The yield curve, as of August 7, 1992, showed the World Bank notes would be paying no interest before the maturity date.

(5) First Boston was willing to take a loss to encourage the sale of the bonds by offering Howard Weil one-half percentage point in commissions.

According to the Bank, Duperier's conduct, as reflected by these misrepresentations and omissions, violated the Act because he offered and sold securities to the Bank by means of untrue statements of material fact, as well as omissions of material facts necessary to make the statements made not misleading.

C. The Texas Securities Act

The Act establishes a cause of action for misrepresentations or omissions in connection with a securities transaction. The relevant portion of the act states:

Art. 581-33. Civil Liabilities

A. Liability of Sellers.

(2) Untruth or Omission. A person who offers or sells a security (whether or not the security or transaction is exempt under Section 5 or 6 of this Act) by means of an untrue statement of material fact or an omission to state a material fact necessary in order to make the statements made, in light of the circumstances under which they are made, not misleading, is liable to the person buying the security from him, who may sue either at law or in...

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