Three Crown Ltd. Partnership v. SALOMON BROS. INC.
| Decision Date | 19 October 1995 |
| Docket Number | No. 92 Civ. 3142 (RPP).,92 Civ. 3142 (RPP). |
| Citation | 906 F. Supp. 876 |
| Parties | THREE CROWN LIMITED PARTNERSHIP, Three Crown Capital Partners and Meadowlands Fund, L.P., Plaintiffs, v. SALOMON BROTHERS, INC., Paul Mozer, Steinhardt Management Company, Inc., Steinhardt Partners, L.P., SP Investors International N.V., Michael Steinhardt, Ernest Theurer, George Soros, Individuals and d/b/a Soros Fund Management, Quantum Fund N.V., Quasar International Partners C.V., Caxton Corporation, Bruce Kovner, Luttrell Capital Management and D. Scott Luttrell, Defendants. |
| Court | U.S. District Court — Southern District of New York |
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Richards & O'Neil, L.L.P., New York City by Kenneth I. Schacter and Patricia K. Lang, for Plaintiffs.
Cadwalader, Wickersham & Taft, New York City by Richard J. Wiener, Haven Roosevelt, and Gary M. Rosen, for Defendant Caxton Corporation.
Lankler, Siffert & Wohl, New York City by Frank H. Wohl and Susan L. Sommer, for Defendant Bruce Kovner.
Zuckerman, Spaeder, Goldstein, Taylor & Kolker, New York City by Lisa A. Cahill, for Defendant D. Scott Luttrell and Luttrell Capital Management.
Cravath, Swaine & Moore, New York City by Frederick A.O. Schwartz, Jr. and Robert H. Baron, for Defendant Salomon Brothers.
Lowenstein, Sandler, Kohn, Fisher & Boylan, Roseland, NJ by Theodore V. Wells, Jr., for Defendant Michael Steinhardt.
Schulte, Roth & Zabel, New York City by Frederick P. Schaffer, for Defendants Steinhardt Management Co., Inc., and Steinhardt Partners, L.P.
Defendants Salomon Brothers, Caxton Corporation, et. al., move pursuant to Federal Rule of Civil Procedure 56(b) for summary judgment dismissing the claims of Plaintiff Meadowlands, Inc. and for partial summary judgment limiting Three Crown's claims for damages.1 Defendant Salomon Brothers also moves the court in limine to preclude testimony by John J. McConnell, damages expert for Plaintiffs.
The Plaintiffs are Three Crown Limited Partnership ("Three Crown"), which engaged in the business of trading in, among other things, United States Treasury Securities and the financial derivatives of such securities; Three Crown Capital Partners ("TCCP"), general partner and commodity pool operator of, and commodity trading advisor to, Meadowlands Funds L.P.; and Meadowlands Fund L.P. ("Meadowlands"), a commodity pool registered with the Commodity Futures Trading Commission, which was in the business of trading, among other things, in Treasury Securities. Plaintiffs allege that Defendants' manipulation of the market for certain United States Treasury Securities injured them and, in the case of Three Crown, destroyed its business. The following facts are deemed to be admitted.2
Three Crown was created in New Jersey on July 2, 1990.3 Its general partner was H. Barndt Hauptfuhrer and its limited partners were Hauptfuhrer Associates, L.P., and Allgrain International, Inc. The business of Three Crown was "to engage in speculative trading in any market, of any product, specifically futures and forward contracts on commodities, financial instruments, currencies and physical commodities." (Wohl Aff.Exh. 3, Notes to Consol.Fin.Stmt., June 30, 1993 at 1).4 Three Crown is a general partner in TCCP, as was Peter Horowitz, Ltd. (Wohl Aff.Exh. 3, Notes to Consol.Fin.Stmt., June 30, 1993 at 1). The Meadowlands Fund was formed in 1990 by Peter Horowitz and H. Barndt Hauptfuhrer; it is managed by TCCP and trades based upon a computer driven model created by Horowitz. Meadowlands is a separate entity with different ownership from Three Crown and is publicly traded. (Wohl Aff.Exh. 2, Hauptfuhrer Dep. at 19).
Plaintiffs allege collusion by Defendants to manipulate the market for United States Treasury April and May Two Year Notes beginning in April 1991. Plaintiffs contend that defendants Steinhardt and Kovner, managers of Steinhardt Partners' Investment Fund and Caxton Corporation, respectively, believed that the Federal Reserve Bank would cause short term interest rates to be lowered and decided to take an extremely large long position in the April auction of two-year treasury notes ("the April Notes"), both by direct purchases and by repo purchases.5 This long position would increase in value if short term rates in fact became lower. Plaintiffs contend that the Steinhardt and Caxton Defendants agreed to accumulate large, concentrated long positions in the April Notes and attempted to conceal their accumulation by obtaining their position in the Notes through many different primary dealers. (Wohl Aff.Exh. 1, Hauptfuhrer Rpt. at 4). Subsequently, Plaintiffs allege, the Steinhardt and the Salomon Defendants colluded to accumulate massive long positions in the May Two Year Treasury Notes auctioned in May 1991 ("The May Notes").6
During this same period, Three Crown acquired a substantial short position in the April Notes and a smaller short position in the May Notes. Three Crown acquired its short positions in the Notes as part of what Hauptfuhrer states evolved in the latter part of May as a "butterfly trading strategy". The butterfly strategy involved relative value trading pursuant to which Hauptfuhrer took positions on three different securities—a short position in two year treasury notes, hedged by a long position in treasury securities maturing in 16 to 18 months, and a short position in Three Month Treasury Bills ("T-Bill") Futures Contracts. (Wohl Aff.Exh. 2, Hauptfuhrer Dep. at 302-04). According to Hauptfuhrer, Three Crown intended to profit by maintaining its butterfly trading strategy until a perceived discrepancy in pricing in these securities remedied itself. Three Crown contends that it would have maintained the short position it acquired in April by "rolling forward"7 into the current two year Note every month and rolling forward on a quarterly basis its positions in the treasury securities and Three Month T-Bills Futures Contracts. (Schacter Aff.Exh. 3, McConnell Rpt. at 10-11). Under this strategy, Three Crown would have rolled its position in the April Notes forward into the May Notes at prices prevailing on the auction date for the May Notes—May 22, 1991, the May Notes forward into June Notes, the June Notes forward into July Notes, and so on. (Schacter Aff.Exh. 3, McConnell Rpt. at 10-11).8
Plaintiffs contend that Defendants' accumulation of both April and May Notes enabled Defendants to "squeeze" the market by refusing to sell the Notes; this caused the price of the Notes to rise artificially. Defendants thus were able to use their domination of the market for the Notes to obtain lower rates on repo transactions from dealers who needed to conduct reverse repos with Defendants to maintain short positions in the Notes. (Wohl Aff.Exh. 1, Hauptfuhrer Rpt. at 2). Plaintiffs contend that on May 20, 1991, Defendants commenced a campaign of squeezing the financing of entities short on the April Notes. (Schacter Aff.Exh. 3, McConnell Rpt. at 2-3).
Plaintiffs contend that they were injured because Defendants' manipulations adversely affected Three Crown's ability to finance the positions it held as part of the butterfly strategy. As Defendants squeezed the market, the demand for the Notes increased, and Three Crown was forced to pay inflated prices to purchase and inflated rates to borrow the April and May Notes they required to cover their positions. (Compl. ¶ 252-53). Thus, Three Crown's expectations regarding the relationship between the Notes and Treasury Securities having a 16 to 18 month maturity were not fulfilled. Throughout May and June, 1991, the yields of the Notes increased and the losses Three Crown sustained in maintaining its leveraged short position in the Notes grew. At the end of June, 1991, Three Crown's losses had passed their "stop loss" of $1.7 million,9 and Three Crown closed out its short position in the Notes on June 28, 1991 and abandoned its butterfly strategy. At this time, Hauptfuhrer stopped trading and transferred $1.1 million to the other Three Crown trader, Richard Ruttenberg; shortly thereafter, Three Crown transferred the bulk of its remaining securities purchased for the butterfly strategy to Meadowlands. (Schacter Aff.Exh. 2, Hauptfuhrer Dep. at 15). Subsequently, Meadowlands closed out the positions which had been part of the original butterfly trade at a loss of $601,000. (Horowitz Aff. ¶ 3). Mr. Ruttenberg continued to trade for Three Crown until June, 1992 (Wohl Suppl.Aff.Exh. 3, Horowitz Dep. at 179), and then closed out his positions so that Three Crown could apply the proceeds to its legal fees in this case. (Tr. 49).10
The Second Amended Complaint ("Complaint"), filed on April 1, 1993, consists of seventeen claims asserted by Plaintiffs. Counts I-IV of the Complaint allege violations of the Sherman Act, 15 U.S.C. § 1, by Defendants in connection with an unlawful combination and conspiracy in restraint of trade in the April and May Notes. Counts V-VIII allege violations of Section 10(b) and Rule 10b-5 by various of the Defendants in defrauding participants in the market for April and May Notes. Counts IX-XVI allege violations of the Racketeer Influenced and Corrupt Organizations Act ("RICO") 18 U.S.C. § 1962(b), (c), and (d) by Defendants with respect to their agreement to manipulate the market. Counts XVI-XVII allege commission of common law fraud by Defendants with respect to their manipulation of the market for the April and May Notes.
Plaintiffs seek actual damages totalling over $24 million and treble damages of $73.8 million, as well as punitive damages. The alleged actual damages are divided into three categories: 1 Category A totals $3.59 million in trading losses suffered by Plaintiffs during the period May 20, 1991 to June 28, 1991. $2.99 million of this figure represents losses of Three Crown; the remaining .6 million represents losses suffered by Meadowlands on the remainder of the...
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