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DONALDSON, LUFKIN & JENRETTE, INC. v. LOS ANGELES

July 8, 1982

DONALDSON, LUFKIN & JENRETTE, INC. and Donaldson, Lufkin & Jenrette Securities Corporation, Plaintiffs,
v.
LOS ANGELES COUNTY and Sol Levin, Defendants



The opinion of the court was delivered by: EDELSTEIN

MEMORANDUM OPINION

The instant action was filed by Donaldson, Lufkin & Jenrette, Inc., and Donaldson, Lufkin & Jenrette Securities Corp. (collectively, "DLJ") against Los Angeles County ("LA") and Sol Levin, an employee of LA, on May 4, 1982. An earlier action was filed by LA against DLJ and Douglas J. Robbins, a DLJ representative, on April 26, 1982 in the Central District of California ("California action"). On May 17, 1982 LA moved under Fed.R.Civ.P. 13(a) to dismiss or stay the instant action on the ground that the claims in DLJ's complaint are compulsory counterclaims in the California action. On May 18, DLJ moved herein to enjoin the California action on the ground that the California action was anticipatory of the present action. *fn1"

FACTUAL BACKGROUND *fn2"

 Sometime in 1978, LA opened a non-discretionary securities account with DLJ. The parties had an understanding that DLJ would not effectuate transactions for LA without prior authorization from an LA representative. Since the account was opened, LA has placed a substantial number of buy and sell orders for securities with DLJ. In 1981 and 1982 DLJ conducted over 2,000 transactions for LA involving securities valued in excess of $ 11 billion.

 In late March 1982, a dispute arose between LA and DLJ. DLJ advised LA that their account had numerous "open positions," (i.e., securities transactions where LA had agreed to purchase a security but had not paid for it or had agreed to sell a security but had not delivered it). DLJ informed LA that as a result of these open positions, LA owed DLJ a substantial amount of interest, and DLJ demanded that the open positions be closed by LA and the interest paid. At the prevailing market rates, LA had to pay approximately $ 13.5 million to close the positions in their DLJ account.

 In a letter dated March 15, 1982, under the signature of Elaine Lindsay, a securities investment analyst in the LA Treasurer's Office, LA disavowed twenty-four transactions ("repudiated transactions") involving government securities which DLJ had effectuated for the LA account. These transactions occurred between March 1981 and February 1982. LA claims, however, that DLJ fraudulently executed the twenty-four transactions as well as other transactions in LA's account without prior authorization from LA. *fn3"

 On April 7 and April 8, representatives of the parties met in Los Angeles to attempt to resolve the dispute. On April 8, the parties entered into a written agreement that LA would settle the repudiated transactions, without prejudice to any claims it might have. LA's payment of $ 13.5 million was conditioned on DLJ providing an irrevocable and unconditional $ 13.5 million letter of credit to LA payable on demand within thirty days of its issuance. The stated purpose of the April 8 agreement was "(to) preserve all rights and claims of each party against the other and to afford the parties additional time to investigate matters further."

 Both parties allege that the April 8 agreement was an accommodation to the other party. DLJ alleges the agreement was an alternative to its immediately initiating suit for its $ 13.5 million claim, and that it wanted to allow LA to have an opportunity to investigate the status of its account. LA argues that it agreed to the April 8 arrangement on the basis of DLJ's representation that if the open positions were not closed, DLJ would have to reflect a large loss and that this loss would reduce its net capital ratio close to the regulatory limit.

 On April 26, without prior notice to DLJ, LA filed an action against DLJ and Douglas J. Robbins, the DLJ registered representative responsible for the LA account, in the United States District Court for the Central District of California ("California action"). *fn4" The complaint alleges various securities law violations and other statutory and common law violations concerning the transactions in LA's account at DLJ, and seeks damages of $ 17.5 million. LA asserts that the $ 4 million difference above the amount of the disputed transactions, represents LA's estimate of its losses caused by DLJ's other unauthorized securities transactions in the LA account.

 On May 3, LA exercised its right to payment under the April 8 letter of credit and received back $ 13.5 million comprising the losses it had previously incurred in settling the disputed transactions. *fn5" The following day, DLJ filed the summons and complaint commencing the action against LA and Sol Levin, the Cash Management Officer for LA, in this court. DLJ's complaint herein seeks compensatory damages of $ 13.5 million and consequential and punitive damages caused by LA's alleged securities law violations, breach of its contract with DLJ, and gross negligence in the supervision of its investments.

 On May 17, LA moved under Fed.R.Civ.P. 13(a) to dismiss or stay the instant action on the ground that the claims in DLJ's complaint should have been pleaded in the California action as compulsory counterclaims. On May 18, DLJ moved herein to enjoin LA from prosecuting the California action. The basis for DLJ's motion was that LA had allegedly brought the California action solely to secure a California forum in anticipation of claims it knew would be raised by DLJ as soon as LA drew down on the letter of credit. *fn6" On June 17, the court heard oral argument on LA's and DLJ's motions.

 While the instant motions were being made before this court, the parties were making reciprocal motions in the California action. On May 20, DLJ filed in the California action a motion to dismiss or stay the prosecution of that action on the same basis argued before this court, namely that the California action was anticipatory. LA opposed DLJ's motion in California on essentially the same grounds that LA argued here.

 On June 18, DLJ filed in the California action a copy of the transcript of the oral argument before this court on June 17, and DLJ requested Judge Manuel Real, before whom the California action is pending, to defer consideration of the motion filed in California until a ruling is made in this action. On June 21, after oral argument, Judge Real denied DLJ's motion to dismiss the California ...


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