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KIDDER PEABODY & CO. v. UNIGESTION INTL.

September 26, 1995

KIDDER PEABODY & COMPANY INCORPORATED, Plaintiff, against UNIGESTION INTERNATIONAL, LTD., Defendant and Third-Party Plaintiff, - against - ASKIN CAPITAL MANAGEMENT, L.P., DAVID JAFFREY ASKIN, and DASHSTAR CORPORATION, Third-Party Defendants.

ROBERT W. SWEET, U.S.D.J.


The opinion of the court was delivered by: SWEET

Sweet, D.J.

 In this action, the complaint of plaintiff Kidder Peabody & Co., Inc. ("Kidder"), seeks damages for breach of contract, and Defendant Unigestion International, Ltd. ("Unigestion") has counterclaimed for: (i) fraud; and (ii) violations of § 12(2) of the Securities Act of 1933 (the "Securities Act"); (iii) Section 15(c)(3) of the Securities Exchange Act of 1934 (the "Exchange Act") and rule 15c3-3(b)(4)(i) promulgated under the Exchange Act; (iv) Section 15C(b)(7) of the Exchange Act and Regulation 403.4 promulgated under the Exchange Act and has interposed affirmative defenses on the grounds that third-party defendants Askin Capital Management, L.P. ("ACM"), David J. Askin ("Askin") and Dashstar Corporation ("Dashstar") were not authorized to transact business with Kidder on Unigestion's behalf and on grounds of fraud. Kidder moves pursuant to Rule 9(b), Fed. R. Civ. P., to dismiss Unigestion's fraud counterclaims and defenses for failure to plead fraud with particularity. Kidder has moved pursuant to Rules 12(c) and 12(f), Fed. R. Civ. P., for judgment on the pleadings with regard to Unigestion's Exchange Act counterclaims and defenses based on lack of authorization.

 Unigestion cross-moved for leave to amend its counterclaims. At oral argument of the instant motions on June 21, 1994, Unigestion's Answer was deemed amended, as described further, infra.

 For the reasons below set out below, Kidder's motion is granted in part and denied part.

 The Parties

 Kidder is a Delaware corporation with its principal offices in New York City. Kidder is a broker-dealer registered pursuant to Sections 15 and 15C of the Exchange Act, 15 U.S.C. §§ 78o and 78o-5. Unigestion is a foreign corporation having its principal place of business in Guernsey, Channel Islands, United Kingdom.

 Relevant Non-Parties

 ACM is a registered investment adviser. Dashstar is ACM's general partner. Askin is Dashstar's chief executive officer. (ACM, Dashstar and Askin are collectively referred to herein as "Askin/ACM"). Granite Partners L.P. ("Granite Partners"), registered in the State of Delaware, Granite Corporation, incorporated in the Cayman Islands ("Granite Corporation"), and Quartz Hedge Fund ("Quartz"), incorporated in the Cayman Islands, are investment funds established and managed by Askin (collectively, the "Askin Funds"). ACM is the investment adviser of the Askin Funds.

 Prior Proceedings

 Kidder commenced this action by filing its Verified Complaint in New York State Supreme Court for New York County on April 14, 1994. The case was removed to the Southern District of New York on May 4, 1994, and assigned to this Court based on its relation to UBS Securities, Inc. v. Unigestion Int'l, Ltd., 94 Civ. 3238; Arbour Financial Corp. v. Unigestion Int'l, Ltd., 94 Civ. 3239; Lehman Government Securities, Inc. v. Unigestion Int'l, Ltd., 94 Civ. 3240; and Bear Stearns & Co., Inc. v. Unigestion Int'l, Ltd., 94 Civ. 4444. Unigestion filed its Answer and Counterclaims on June 17, 1994, and lodged a third-party complaint against ACM, Dashstar, and Askin on June 30, 1994. Kidder filed its Reply to Unigestion's counterclaims on July 21, 1994.

 Discovery and discovery-related motion practice was conducted throughout the latter half of 1994 and early 1995. Kidder filed its motion to dismiss Unigestion's counterclaims for failure to plead fraud with particularity and for partial judgment on the pleadings on November 23, 1994. Unigestion filed its motion to amend its counterclaims on January 18, 1995. The parties consented to the rescheduling of these two motions so that they could be argued at the same time. The return date for these motions was subsequently adjourned on consent on three occasions. Oral argument was heard on June 21, 1995, the motions were deemed fully submitted at that time, and Unigestion's Answer, including Counterclaims (hereinafter the "Amended Answer" and the "Amended Counterclaims") was deemed so amended.

 The Factual Allegations *fn1"

 The Askin/Unigestion Relationship

 Unigestion contacted ACM/Askin in 1993. During the first half of 1993, Askin and other ACM personnel made verbal and written representations that they were "Mortgage Derivative Security Specialists" and that ACM had developed a "market neutral" investment strategy for investment in various mortgage derivative securities which could be used to protect the value of an investment portfolio against price fluctuations in financial markets. ACM/Askin described this strategy as nonspeculative and involving "little risk." ACM/Askin represented that through the use of its own computer-analytical models and hedging techniques, it could select a portfolio of "bullish" (inversely responsive to interest rates) and "bearish" (directly responsive to interest rates) securities. ACM/Askin represented to Unigestion that such a portfolio could be balanced to create an investment whose performance would be "market neutral". ACM/Askin also represented that they were able to identify "mispriced" securities and to capitalize on this informational advantage. ACM/Askin further represented to Unigestion that the average yearly return from the Ask in Funds had been over 15% for at least the previous three years. ACM/Askin compared that annual rate of return with other, lower-yielding investment instruments but did not disclose that the lower-yielding instruments were safer investments. Finally, ...


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