MINPECO, SA v. Conticommodity Services, Inc.

• Decision Date: 22 December 1987
• Docket Number: No. 81 Civ. 7619 (MEL).,81 Civ. 7619 (MEL).
• Citation: 676 F. Supp. 486
• Parties: MINPECO, S.A., Plaintiff, v. CONTICOMMODITY SERVICES, INC., Conticapital Management, Inc., Conticapital Limited, Norton Waltuch, Nelson Bunker Hunt, Lamar Hunt, William Herbert Hunt, International Metals Investment Co., Ltd., Sheik Mohammed Aboud Al-Amoudi, Sheik Ali Bin Mussalem, Naji Robert Nahas, Gilion Financial, Inc., ACLI International Commodity Services, Inc., Banque Populaire Suisse, Advicorp Advisory and Financial Corporation, S.A., Mahmoud Fustok, Merrill Lynch, Pierce, Fenner & Smith, Inc., Bache Halsey Stuart Shields, Inc., E.F. Hutton & Company, Inc., Commodity Exchange Inc., the Board of Trade of the City of Chicago, Continental Company, and Walter Goldschmidt, Defendants.
• Court: U.S. District Court — Southern District of New York

676 F. Supp. 486

MINPECO, S.A., Plaintiff, v. CONTICOMMODITY SERVICES, INC., Conticapital Management, Inc., Conticapital Limited, Norton Waltuch, Nelson Bunker Hunt, Lamar Hunt, William Herbert Hunt, International Metals Investment Co., Ltd., Sheik Mohammed Aboud Al-Amoudi, Sheik Ali Bin Mussalem, Naji Robert Nahas, Gilion Financial, Inc., ACLI International Commodity Services, Inc., Banque Populaire Suisse, Advicorp Advisory and Financial Corporation, S.A., Mahmoud Fustok, Merrill Lynch, Pierce, Fenner & Smith, Inc., Bache Halsey Stuart Shields, Inc., E.F. Hutton & Company, Inc., Commodity Exchange Inc., the Board of Trade of the City of Chicago, Continental Company, and Walter Goldschmidt, Defendants.

No. 81 Civ. 7619 (MEL).

United States District Court, S.D. New York.

December 22, 1987.

Cole & Corette, Washington, D.C. for plaintiff Minpeco, S.A.; Mark A. Cymrot, of counsel.

Kaye, Scholer, Fierman, Hays & Handler, New York City, Gardere & Wynn, Dallas, Tex., for defendants Nelson Bunker, William Herbert and Lamar Hunt; Robert E. Wolin, Dallas, Tex., Aaron Rubinstein, Fred A. Freund, Robert B. Bernstein, Stanley D. Robinson, New York City, of counsel.

Curtis, Mallet-Prevost, Colt & Mosle, New York City, for defendant Mahmoud Fustok; Herbert Stoller, Turner P. Smith, of counsel.

Rogers & Wells, New York City, for defendants ACLI Intern. Commodity Services, Inc., and Merrill Lynch, Pierce, Fenner & Smith Inc.; William R. Glendon, of counsel.

Debevoise & Plimpton, New York City, for defendant ACLI Intern. Commodity Services, Inc.; Andrew C. Hartzell, Jr., of counsel.

Sullivan & Cromwell, New York City, for defendants Prudential-Bache Securities, Inc. and Bache Group Inc.; Richard H. Klapper, of counsel.

Finley Kumble, Wagner Heine, Underberg, Manley Myerson & Casey, Washington, D.C., for defendant Intern. Metals Inv. Co., Ltd.

LASKER, District Judge.

Various defendants¹ move for summary judgment on all of plaintiff Minpeco's damage claims on the ground that Minpeco has failed to prove actual damages because its damage calculations do not take into account the extent to which Minpeco benefitted from defendants' allegedly manipulative behavior. The motion is granted in part and otherwise denied.²

Minpeco's Damage Claims³

On its manipulation claims, Minpeco seeks to recover both its alleged actual or "out-of-pocket" damages and its alleged "lost profits" in the total amount of $225-$252 million.⁴ Minpeco alleges that it lost approximately $107.7 million in so-called actual or "out-of-pocket" damages on short futures positions opened prior to November 30, 1979 and subsequently closed at a loss. Minpeco also alleges that it is entitled to its "lost profits" from these short positions in the amount of $100.2-126.4 million, representing "the gains to Minpeco which it is claimed would have occurred if the market had acted in a normal unmanipulated manner in December 1979."⁵ Similarly, on long positions allegedly unhedged on the advice of Minpeco's brokers and on which hedges were subsequently reestablished at a loss, Minpeco claims an additional $17.2-18.5 million in damages, representing the difference between Minpeco's actual losses on these transactions and the gains which would have occurred but for the manipulation.⁶

In addition to these manipulation damages, Minpeco claims out-of-pocket losses of $49 million on its breach of fiduciary duty claim against Merrill Lynch: $38 million on short trades and $11 million on unhedged long trades.

The following example illustrates generally Minpeco's damage theory. Assume that a jury concluded that 1) Minpeco sold silver futures short at $18 per ounce in November 1979; 2) Minpeco closed its short positions at $25 per ounce in January 1980; 3) the unmanipulated price of per ounce silver in November 1979 would have been $10; and 4) the unmanipulated price per ounce of silver in January 1980 would have been $8. Under Minpeco's damage theory, Minpeco would then be entitled to recover from these transactions 1) out-of-pocket losses in the amount of $7 per ounce, representing the difference between the actual manipulated price at which the positions were opened ($18) and the actual manipulated price at which the positions were closed ($25); and 2) lost profits in the amount of $10 per ounce, representing the difference between the actual manipulated price at which the positions were opened ($18) and the price at which the positions could have been closed on an unmanipulated market ($8).⁷

Discussion

I. Out-of-Pocket Losses

Defendants take the position that as a matter of law any damages which Minpeco suffered on the silver futures market as a result of the alleged manipulation were completely offset by profits gained on Minpeco's physical silver positions. At the core of this argument are two important undisputed facts. First, Minpeco has admitted that all of its silver futures trades from October to December 1979 were "hedges"⁸ backed by physical silver.⁹ Second, it is undisputed that Minpeco's damage calculations do not take into account any profit that Minpeco may have made as a result of its physical silver.¹⁰

Based on these facts, defendants contend that Minpeco's damage calculations do not represent Minpeco's net economic loss because whatever losses Minpeco incurred on its futures positions when the price of silver increased were offset by the simultaneous increase in value of Minpeco's physical silver. In other words, using the numerical example posited earlier, defendants argue that the $7 per ounce loss which Minpeco incurred by opening short positions at $18 and closing them at $25 was completely offset by the corresponding $7 per ounce increase in the value of the physical silver owned by Minpeco which the short positions were intended to hedge. Finally, defendants argue that this flaw in Minpeco's damage calculations is irreparable because Minpeco lacks the documentation necessary to establish the size of the appropriate offset.

a) Legal Issues

Defendants' "offset" argument has considerable force. Under most circumstances, it is clear that a plaintiff both injured and enriched by illegal activity cannot choose to recover for his injuries yet retain his windfall. This principle has been applied both in securities actions, see, e.g., Abrahamson v. Fleschner, 568 F.2d 862, 878 (2d Cir.1977), cert. denied, 436 U.S. 913, 98 S.Ct. 2253, 56 L.Ed.2d 414 (1978) (securities fraud plaintiff may not recover for losses, while ignoring his profits, "where both result from a single wrong") (emphasis in original); Byrnes v. Faulkner, Dawkins & Sullivan, 550 F.2d 1303, 1313-14 (2d Cir.1977) (securities fraud losses must be offset by corresponding gains since "the transaction cannot be fractionated"), and antitrust actions, see Los Angeles Memorial Coliseum Commission v. NFL, 791 F.2d 1356, 1366-67 (9th Cir.1986), cert. denied, ___ U.S. ___, 108 S.Ct. 92, 98 L.Ed.2d 53 (1987); Kypta v. McDonald's Corp., 671 F.2d 1282, 1285-86 (11th Cir.), cert. denied, 459 U.S. 857, 103 S.Ct. 127, 74 L.Ed.2d 109 (1982); cf. Merit Motors, Inc. v. Chrysler Corp., 569 F.2d 666, 671-72 n. 25 (D.C.Cir.1977).

The rationale of these cases is perhaps best articulated in Los Angeles Memorial Coliseum, an antitrust action involving the Raiders football team's move from Oakland to Los Angeles. There, the Ninth Circuit held that the district court erred in limiting the National Football League's damage offset defense by excluding from the jury's consideration in calculating damages the benefits which the Raiders incurred as a result of the NFL's anticompetitive behavior. The court based its decision in part on what it described as a

non-fault based offset theory which is simply a corollary of the general principle, applicable outside the antitrust context, that an award of damages should put a plaintiff forward into the position it would have been "but for" the defendant's violation of the law.... Under this theory, the ultimate relief awarded must take into account any benefits which would not have been received by plaintiff "but for" the defendant's anticompetitive conduct, or amounts a plaintiff would have expended in the absence of the violation. An antitrust plaintiff may recover only to the "net" extent of its injury; if benefits accrued to it because of an antitrust violation, those benefits must be deducted from the gross damages caused by the illegal conduct.

Los Angeles Memorial, 791 F.2d at 1367. Under this offset theory, Minpeco would be entitled only to its "net" economic injury and would be required to subtract from its gross damages on the futures market any benefits which accrued to it on its physical silver holdings.

Minpeco responds that its damages should not be subject to an offset under the rationale of the Supreme Court's decision in Randall v. Loftsgaarden, 478 U.S. 647, 106 S.Ct. 3143, 92 L.Ed.2d 525 (1986). In Loftsgaarden a group of investors in a tax shelter real estate scheme brought a securities fraud action seeking rescissionary damages from the general partner. The Court of Appeals for the Eighth Circuit held that under an "actual damages principle," an award of rescissionary damages must be "`reduced by any value received as a result of the fraudulent transaction,'" Austin v. Loftsgaarden, 675 F.2d 168, 181 (8th Cir.1982) (quoting Garnatz v. Stifel, Nicolaus & Co., 559 F.2d 1357, 1360 (8th Cir.1977), cert. denied, 435 U.S. 951, 98 S.Ct. 1578, 55 L.Ed.2d 801 (1978)), rev'd, Randall v. Loftsgaarden, 478 U.S. 647, 106 S.Ct. 3143, 92 L.Ed.2d 525 (1986), and held that the district court had erred in refusing to reduce plaintiff's damage award by an amount equal to any tax benefits they received as a result of the investment.

The Supreme Court reversed. Stating that "this Court has never interpreted the `actual damages' limitation of § 28(a) of the 1934 Act as imposing a rigid requirement that every recovery ... under the 1934 Act must be limited to the net...