Federal Deposit Ins. Corp. v. Cheng, Civ. A. No. 3-90-0353-H.

• Decision Date: 01 July 1991
• Docket Number: Civ. A. No. 3-90-0353-H.
• Citation: 787 F. Supp. 625
• Parties: FEDERAL DEPOSIT INSURANCE CORPORATION, as Manager of the FSLIC Resolution Fund, Plaintiff, v. Paul Sau-Ki CHENG, et al., Defendants.
• Court: U.S. District Court — Northern District of Texas

787 F. Supp. 625

FEDERAL DEPOSIT INSURANCE CORPORATION, as Manager of the FSLIC Resolution Fund, Plaintiff, v. Paul Sau-Ki CHENG, et al., Defendants.

Civ. A. No. 3-90-0353-H.

United States District Court, N.D. Texas, Dallas Division.

July 1, 1991.

Jim D. Hamilton, Steven L. Weathered, Ross, Banks, May, Cron & Cavin, Houston, Tex., John C. Hammock, Sr. Atty., Thomas Schulz, Asst. Gen. Counsel, Loretta Pitt and Floyd Robinson, Sr. Counsel, Dina L. Biblin, Federal Deposit Ins. Corp., Legal Div., Thomas J. Loughran, Douglas G. Thompson, Jr., Judith Heatherton, Finkelstein, Thompson & Loughran, Washington, D.C., for plaintiff.

Terry N. Christensen, Terry D. Avchen, Christensen, White, Miller, Fink & Jacobs, Los Angeles, Cal., Jerry K. Warren, Timothy P. Woods, Clements, Allen & Warren, Dallas, Tex., for defendants Cheng, Guar. Holding, Pacific Realty, Pacific Realty/New York Corp. and The Lau Trust.

Kenneth R. Wynne, Wynne & Maney, Houston, Tex., Gary D. Wilson, Jeffrey E. McFadden, Wilmer, Cutler & Pickering, Washington, D.C., for defendants E.F. Hutton & Co., Shearson Lehman Bros., Inc. and Shearson Lehman Hutton Holdings, Inc.

Timothy A. Duffy, Burleson, Pate & Gibson, Dallas, Tex., for defendants Heath and Heath Trust.

Joel Held, Mankoff, Hil, Held & Goldburg, Dallas, Tex., for defendants Drexel Burnham Lambert Inc. and Drexel Burnham Lamberg Gov. Securities, Inc.

Marshall Simmons, Dallas, Tex., for defendant Sorensen.

David C. Schick, Sumner & Schick, Dallas, Tex., for defendants Berger, Levin, Lewis and Watts.

MEMORANDUM OPINION AND ORDER

SANDERS, Chief Judge.

Before the Court is Plaintiff and counter-defendant Federal Deposit Insurance Corporation's ("FDIC") Motion to Dismiss the Counterclaim, Strike Certain Affirmative Defenses, and Limit Discovery, filed August 27, 1990; Defendants E.F. Hutton and Shearson Lehman Hutton Holdings, Inc.'s (jointly "Hutton") Response, filed September 19, 1990; Defendants Berger, Levin, Lewis, and Watts' Response, filed September 19, 1990; the FDIC's Reply, filed October 31, 1990; Hutton's Surreply, filed May 3, 1991; the FDIC's Supplemental Memorandum, filed April 25, 1991; Hutton's Response, filed May 10, 1991; Hutton's First Amended Counterclaim, filed May 10, 1991; the FDIC's Motion to Dismiss Hutton's First Amended Counterclaim, filed June 7, 1991; and Hutton's Response to the FDIC's Motion to Dismiss the Amended Counterclaim, filed June 24, 1991.

This is an action for money damages and equitable relief brought by the FDIC, as assignee of the claims of Guaranty Federal Savings and Loan Association ("Guaranty Federal"), to recover bond trading losses suffered by Guaranty Federal, an insolvent institution that was placed into receivership on September 30, 1988. In its First Amended Complaint, filed February 26, 1990, the FDIC asserts claims for securities, commodities, and common law fraud, breach of contract, breach of fiduciary duty, and negligence in connection with the purchase and sale of securities and commodity futures contracts. These claims arose in part out of bond trading conducted on behalf of Guaranty Federal in an account with Hutton.

The defendants in this case include Paul Sau-Ki Cheng and Simon Edward Heath, the sole shareholders and co-chairmen of Guaranty Federal; entities owned or controlled by Cheng and Heath; Berger, Levin, Lewis, and Watts, four salesmen employed by Hutton; and their employer, Hutton.¹

The FDIC brings this action as assignee of the claims of Guaranty Federal. Hutton has filed a counterclaim seeking recoupment from the FDIC for any damages for which Hutton is liable. The counterclaim is directed toward the activities of the Federal Home Loan Bank Board ("FHLBB") and the Federal Savings and Loan Insurance Corporation ("FSLIC") acting as regulatory agent of the FHLBB.

On August 27, 1990 the FDIC filed its motion (1) to dismiss the counterclaim of Hutton, (2) to strike certain affirmative defenses and limit discovery of defendants Hutton and Robert Keith Berger, Robert Alex Levin, Andrew Joseph Lewis, and Roger Wayne Watts, and (3) to limit discovery. Hutton subsequently amended its counterclaim after the Supreme Court issued its decision in United States v. Gaubert, ___ U.S. ___, 111 S.Ct. 1267, 113 L.Ed.2d 335, (1991), which effectively dissolved one of Hutton's theories of FDIC liability. Although Hutton's amended counterclaim states claims that appear to be beyond the protection afforded the FDIC by the Gaubert decision, the factual basis for the amended counterclaim is no different from that of the original counterclaim. Likewise, the FDIC's new motion to dismiss incorporates many of the arguments of its original motion. Accordingly, although Hutton's amended counterclaim is at issue here, the Court necessarily addresses arguments and authorities from earlier pleadings.

In its answer, Hutton asserts ten affirmative defenses. In addition to moving to dismiss Hutton's counterclaim, the FDIC moves to strike (1) the fifth affirmative defense of contributory/comparative negligence; (2) the seventh affirmative defense of waiver and estoppel; (3) the eighth affirmative defense of unclean hands; (4) the ninth affirmative defense of ratification; and (5) the tenth affirmative defense of in pari delicto. The FDIC also moves to strike the same affirmative defenses alleged by Berger, Levin, Lewis, and Watts.

For the reasons stated below, the FDIC's motion is GRANTED in part and DENIED in part.

I. Background.

In 1984, the FHLBB approved the sale of Guaranty Federal to Defendants Cheng and Heath and its conversion from a mutual savings and loan association to a capital stock savings and loan association. After their acquisition of Guaranty Federal, Cheng and Heath acted as co-chairmen and controlled the operations of Guaranty Federal.

On September 30, 1988, the FHLBB issued Resolution No. 88-1055 finding Guaranty Federal to be insolvent, closed the institution, and appointed FSLIC as its Receiver.² As Receiver of Guaranty Federal, the FSLIC succeeded to all the rights, titles, powers, and privileges of Guaranty Federal and its officers and directors.

On September 30, 1988, immediately after its appointment, the Receiver sold to the FSLIC in its corporate capacity certain assets including, without limitation, all right, title and interest in and to any claims arising out of the events occurring prior to September 30, 1988 against, inter alia, officers and directors and outside professionals who provided services to Guaranty Federal, including any securities or commodities dealer or person acting for or in concert with Guaranty Federal. The Receiver transferred Guaranty Federal's remaining assets to a newly-chartered federal stock savings bank, Guaranty Federal Savings Bank, Dallas, Texas.

The FHLBB and FSLIC were abolished on August 9, 1989, pursuant to the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"), Pub.L. No. 101-73, § 401(a)(1), (2), 103 Stat. 183 (1989) (codified at various sections of Titles 12 and 15, United States Code). Prior to the enactment of FIRREA, and during the time the events alleged in the counterclaim took place, the FHLBB was the regulatory agency in charge of federally chartered savings institutions and the operating head of the FSLIC, a corporate government agency charged with insuring accounts of all federally chartered savings and loan associations.³ With the enactment of FIRREA, the assets and liabilities of the FSLIC, including all claims, were transferred to the newly created FSLIC Resolution Fund.⁴ The FSLIC Resolution Fund is managed and separately maintained by the FDIC.

As Manager of the FSLIC Resolution Fund, the FDIC operates in two legally distinct capacities. With respect to Guaranty Federal and other failed financial institutions for which the FSLIC was appointed receiver prior to January 1, 1989, the FDIC has taken over the receivership function of administering the assets and liabilities of each individual receivership estate. In performing the functions of a receiver, the FDIC accounts for, manages, and controls the assets and liabilities of each individual receivership separately from the other assets of the FSLIC Resolution Fund. In addition to administering individual receiverships, the FDIC functions in a separate capacity, as manager of the entire FSLIC Resolution Fund, also known as its corporate capacity. This lawsuit was brought by the FDIC as statutory successor to FSLIC/Corporate, which was the assignee of the claims of Guaranty Federal prior to FIRREA.

The FDIC's complaint alleges that Cheng and Heath devised a plan involving highly speculative trading in government bonds in order to enrich themselves at the expense of Guaranty Federal, its depositors, and other creditors. As part of the scheme, Cheng and Heath used securities trading accounts in the names of Guaranty Federal and Pacific Realty Corporation ("PRC"), a private corporation completely owned by Cheng and Heath. The trading in the accounts of Guaranty Federal and PRC was allegedly manipulated after the fact so that losing trades were allocated to Guaranty Federal's accounts and profitable trades were allocated to PRC's accounts.

The complaint also alleges that Cheng placed orders for government bond purchases and sales through Hutton without designating the accounts for which the trades were intended until well after the trade had been made and the direction of price movement was known. In addition, the complaint alleges that the bond trading, even apart from the fraudulent allocation scheme, was extremely risky, excessively speculative, and constituted a grossly unsafe and unsound practice.

During the eight-month period of the alleged trading scheme, from September 1986 through April 1987, Guaranty Federal suffered estimated trading losses in excess of $19,000,000 in connection with the trading through its account with Hutton. Moreover, after the trading scheme period,...