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December 18, 1991


The opinion of the court was delivered by: Leval, District Judge.


Findings of Fact and Conclusions of Law

This is a dispute between a bank and its customer over credit extended to cover losses arising from an unsuccessful attempt to speculate in foreign currencies. The plaintiff is Bank Brussels Lambert, S.A. ("BBL"), a Belgian bank with a branch office at 630 Fifth Avenue, New York, New York. The defendant, Intermetals Corporation ("IM") is a New Jersey corporation with its principal place in New Jersey. IM counterclaims against BBL and crossclaims against three of its employees.

IM is engaged in the business of trading steel and other metals on an international basis. For several years prior to the facts giving rise to this dispute, IM had a banking relationship with BBL for the financing of IM's international trade in steel. On May 17, 1988 BBL and IM entered into a banking agreement. Under the agreement BBL had frequently extended credit to IM.

In October 1988 BBL undertook on IM's behalf a foreign exchange transaction to hedge IM's contract for the sale of steel payable at a future date in deutsche marks ("DM"). This hedge transaction was executed for IM by Viraf (Willie) Reporter, a foreign exchange trader servicing BBL's corporate desk. In the course of the discussions, Reporter spent time with Lawrence Traub, the principal of IM, and Michael Stock, an employee, explaining foreign exchange transactions. The hedge transaction was successfully carried out, protecting IM's profit in the steel sale by shielding it from the risks of fluctuation of the DM during the period of exposure.

The discussions of the hedge transaction led to discussions of speculative foreign exchange trading.*fn1 It was then decided that BBL would undertake to open and finance a discretionary account of speculative foreign exchange trading for IM which was to be traded by Reporter. BBL thus began to conduct a course of speculative foreign exchange trading for IM.

All of the transactions entered into by BBL for IM's account in the course of this speculative trading were in the "spot market." The "spot market" is essentially the current market, as distinguished from the futures market. Spot transactions in foreign currencies call for settlement within two days. See CFTC, Division of Trading and Markets, Report on Exchanges of Futures for Physicals, 124-127 (1987) ("CFTC Report"). The trader would cause IM to enter into a contract for the purchase or sale of a foreign currency at an agreed U.S. dollar price, to be performed in two days. A purchase of a foreign currency would be made to speculate that, before settlement, the U.S. dollar would weaken as against that foreign currency. A sale of the foreign currency would effect a speculation that, in the intervening two days, the U.S. dollar would gain as against that foreign currency. When such contracts would come due in two days, the trader would either realize and book the gain or loss of U.S. Dollars by entering into a spot transaction that reversed the prior long or short position in the foreign currency, or would project the speculative position another two days out by executing a rollover. A rollover of an existing position would be accomplished by executing a pair of opposite spot transactions that simultaneously (at a new price) closed the position out and reestablished it. On a number of occasions, by executing a series of rollovers at each successive two-day maturity, BBL extended IM's long or short speculative position in a particular currency for substantial periods of time. In no case, however, did BBL execute for IM a contract that called for settlement more than two days in the future. IM never entered into a futures contract. At no time was IM involved in a position that speculated on price change over a future period of more than two days.

BBL immediately notified IM of every trade. In virtually every case, Reporter would call Stock at IM and notify him of the details immediately upon conclusion of the transaction. IM received a further call shortly afterward from BBL's confirmation desk, and finally it received written confirmation of every transaction promptly by mail.

When a position was closed out, the result would be posted to IM's demand deposit account. If the position resulted in a profit, that profit would be credited to IM's demand deposit account. If a loss was incurred, it would be charged to IM's account. If losses sent IM's account into negative balance, this meant that BBL was extending credit to IM.

When contracts were rolled over, the gain or loss that had been incurred as the result of past price changes would not be posted to IM's account; however, by comparing the present market on any day with the price at which the position had initially been purchased, one could "mark the position to market," ascertaining exactly how much profit or loss had been incurred as the result of past price fluctuation.

The first phase of trading took place between February and May of 1989 when all positions were closed out. This phase of trading resulted in an aggregate loss to IM of $273,350. Thus, at the end of this period, IM's account had a negative balance of $273,350.

The speculative activity was resumed during a second phase from approximately June 19, 1989 through October 3, 1989. Willie Reporter's trading during this period was quite successful and realized a profit for IM of $503,251. IM's account went into positive balance. The second phase ended because Willie Reporter left for vacation. He closed out all the positions before he left. IM withdrew more than $200,000 it had realized as net profits of the trading.

On November 1, 1989, after his return from vacation, Reporter began the third phase of his speculative foreign exchange trading for IM. In this third phase, the sizes of the speculative positions taken were increased. The results, however, were less successful. IM's account included a very large short position of DM 80 million, which was maintained for some time through a succession of spot rollovers against the strengthening deutsche mark. In early January 1990, the management of BBL became aware that IM's losses in its foreign exchange account (when marked to market) exceeded $1,000,000. BBL became alarmed because the losses resulted in BBL extending credit to IM of over $1,000,000. It was of no functional significance that some of the positions remained open so that the losses incurred had not been formally posted to IM's account. The losses revealed by marking the positions to market (and the consequent inevitable increase in IM's debt to BBL) were no less real, notwithstanding that they had not been posted.*fn2 BBL asked Traub to attend a meeting, which was delayed until January 8, because Traub was on vacation in Puerto Rico. By the time of the meeting, IM's loss positions (and consequently the credit extended by BBL) had grown to approximately $1.8 million dollars.

At the meeting on January 8, BBL expressed concern that the loss position in the trading account exceeded the credit line of $1 1/2 million dollars BBL that had established for IM. IM agreed to transfer $300,000 to BBL in order to bring IM within its $1 1/2 million dollar credit line. It was decided that the speculative trading for IM's account should continue in an effort to bring its loss within more reasonable bounds. The next day BBL closed out IM's short position of DM 80 million. IM was surprised. Traub and Stock thought BBL had agreed to stick with its speculative positions in confidence that the market would turn in IM's direction.

The decision to sell out IM's short DM position was made by Joseph Botkier, BBL's Senior Vice President and Treasurer, who instructed Reporter to carry it out. Reporter disagreed with Botkier's assessment but carried out the instruction. As it turned out, the decision was unfortunate. A few days later, the DM weakened. Had the short position been maintained by rollovers until January 22, the loss position would have been eliminated. After January 8, Reporter was instructed by Botkier that he should not trade for the IM account without Botkier's approval.

Botkier later instructed Reporter to liquidate an Australian dollar position held for IM. Reporter disobeyed the instruction holding out for a better price. The market then turned against him causing additional losses. On January 23, Botkier ordered Reporter off the account and sent him on vacation; he was later let go.

At this point BBL assigned Robert Lostal to trade the IM account under Botkier's supervision. BBL told IM that Lostal would follow a tightly controlled technical approach that had produced substantial profits for BBL in its own foreign exchange trading over the past months. BBL told IM it was reasonable to expect that Lostal's trading would gradually work off IM's accumulated losses.

Immediately friction developed between Lostal and IM. IM sought to give instructions as to what trades should be made. Lostal understood that the trading was to be at the discretion of BBL and not under IM's instructions. Alexander Dinnell, who was in charge of BBL's foreign exchange operations, confirmed to IM that it could not "have it both ways." This meant that BBL agreed to extend financing for IM's speculation in foreign exchange on the understanding that this would be a discretionary account to be traded at BBL's discretion, but BBL would not finance speculation piloted by IM. In other words, BBL was not prepared both to finance IM's ...

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