With respect to Category C damages, Professor McConnell calculated the amount Three Crown would have earned through reinvestment of its capital from February 21, 1992 (the close of the Category B damage period) through the end of 1994. This calculation assumed that Three Crown's capital available for reinvestment would have included the profits set forth in McConnell's Category B calculations. (Schacter Aff. Exh. 3, McConnell Rpt. at 12-13). Then, based on a review of Three Crown's past performance over the years 1985-1993, McConnell arrived at a 36% annual rate of return to apply to Three Crown's "capital," he arrived at a lost profit figure of $ 10.14 million. (Schacter Aff. Exh. 3, McConnell Rpt. at 19-20).
Because Three Crown claims that it is entitled to relief based upon violations of several statutes and commission of common law fraud, the availability of damages of the type sought by Three Crown is examined under each theory of liability.
1. Antitrust Claims
Three Crown contends that summary judgment is inappropriate on its claims for Category B and C damages under the antitrust laws because it bears only a modest burden with respect to proof of damages and therefore the claims raise triable issues of fact. Three Crown contends that Bigelow v. RKO Radio Pictures Inc., 327 U.S. 251, 90 L. Ed. 652, 66 S. Ct. 574 (1946) and Story Parchment Co. v. Paterson Parchment Paper Co., 282 U.S. 555, 75 L. Ed. 544, 51 S. Ct. 248 (1931) support its claims for lost profits and lost future profits. With respect to violations of antitrust laws, the Bigelow Court, following the rule enunciated in Story Parchment, acknowledged that "the most elementary conceptions of justice and public policy require that the wrongdoer shall bear the risk of the uncertainty which his own wrongdoing has created." 51 S. Ct. at 265; See also United States Football League v. National Football League, 842 F.2d 1335 (2d Cir. 1988) ("where damages have been shown to be attributable to the defendant's wrongful conduct, but are uncertain in amount, the defendant bears the risk of those uncertainties." Id. at 1379). Despite such warnings to defendants in antitrust litigation, courts have made it clear that proof of causation is required to recover damages for violations of the antitrust laws. In Story Parchment, the Court described the contours of the causation requirement by quoting an earlier New York case. "The general rule is, that all damages resulting necessarily and immediately and directly from the breach are recoverable, and not those that are contingent and uncertain." Story Parchment, 282 U.S. at 563 (quoting Taylor v. Bradley, 4 Abb. Ct. App. at 363 (N.Y.)). See also United States Football League, 842 F.2d 1335 ("Whatever latitude is afforded antitrust plaintiffs as to proof of damages, however, is limited by the requirement that the damages awarded must be traced to some degree to unlawful acts...That latitude is thus circumscribed by the need for proof of causation." Id. at 1378 (internal citations omitted)).
With respect to Category B and C damages, Three Crown seeks to recover profits from investments it never made on securities it never purchased or sold, based on the theory that as a consequence of Defendants' manipulation of the market, Three Crown was not able to engage in those unnegotiated and unconsummated trades. Three Crown's theory of causation is based on Hauptfuhrer's assertions that he would have continued the butterfly strategy but for Defendants' alleged manipulation. Accordingly, whether the damages Three Crown seeks flow directly from Defendants' conduct must be scrutinized carefully. See Associated General Contractors of California v. California State Council of Carpenters, 459 U.S. 519, 74 L. Ed. 2d 723, 103 S. Ct. 897 (1983). ("The indirectness of the alleged injury also implicates the strong interest, identified in our prior cases, in keeping the scope of complex antitrust trials within judicially manageable limits." Id. at 543); Reading Indus. v. Kennecott Copper Corp., 631 F.2d 10 (2d Cir. 1980) cert. denied 452 U.S. 916, 69 L. Ed. 2d 420, 101 S. Ct. 3051 (1981) (antitrust laws preclude conjectural theories of injury and attenuated arguments as to causation of economic harm).
Three Crown's claim for damages under the antitrust laws relies upon the following propositions: Three Crown modified its relative value trading strategy in April and May, 1991 based on its perceptions of the discrepancies in market prices of each of the composite securities (Pl. Mem. 18, 22, 73); Three Crown failed to make additional trades that it believes it would have made but for Defendants' squeeze (Pl. Mem. 23-25, 42, 44, 63); Three Crown is entitled to direct damages calculated in Category A for unprofitable trades which it did enter (Pl. Mem. 61-62); Three Crown is entitled to Category B and C damages because Defendants' conduct caused it to go out of business.
This last premise of damages is based not upon proof that Defendants intended to cause Three Crown to go out of business, but upon proof that Defendants intended to make money at the expense of those in the short position.
Counsel have not cited and this Court has been unable to find a single case involving improper conduct in a horizontal market where, absent a specific intent to injure the plaintiff, a court has allowed recovery of damages for the type of future profits Three Crown seeks. Even where a cartel, monopolist, or price fixing conspiracy inflates the price of a product to the injury of its customers, damages are measured by the difference between the price paid and the uninflated price, with the result trebled pursuant to 15 U.S.C. § 15(a). Berkey Photo v. Eastman Kodak Co., 603 F.2d 263, 296-297 (2d Cir. 1979) cert. denied 444 U.S. 1093, 62 L. Ed. 2d 783, 100 S. Ct. 1061 (1980); Hawaii v. Standard Oil Co. of California, 405 U.S. 251, 262 n. 14, 31 L. Ed. 2d 184, 92 S. Ct. 885 (1972); New York v. Hendrickson Bros. Inc., 840 F.2d 1065, 1077 (2d Cir. 1988), cert. denied, 488 U.S. 848, 102 L. Ed. 2d 101, 109 S. Ct. 128 (1988); Strobl v. New York Mercantile Exchange, 582 F. Supp. 770, 779.
As support for the availability of Category B and C damages, Three Crown relies upon decisions in cases where mechanisms were used with an intent to harm specific parties, namely: boycotts, refusals to deal, terminations, and exclusions. Bigelow and Story Parchment Co., two of the primary Supreme Court decisions upon which Three Crown relies, both involved defendants that intended to exclude the plaintiffs from dealing in a particular market. See Bigelow, 327 U.S. 251, 90 L. Ed. 652, 66 S. Ct. 574 (1946); Story Parchment, 282 U.S. 555, 75 L. Ed. 544, 51 S. Ct. 248 (1931); See also Fishman v. Estate of Wirtz, 807 F.2d 520 (7th Cir. 1986) (affirming lost financial gain as appropriate measure of damages, where trial court found that defendants intentionally destroyed plaintiff's business opportunity by concerted efforts to exclude him from ownership of professional basketball team); Pierce v. Ramsey Winch Co., 753 F.2d 416, 429 n. 15 (5th Cir.1985) (endorsing lost profits as a measure of damages in distributor termination cases); Construction Aggregate Trans. v. Florida Rock Indus., Inc., 710 F.2d 752 (11th Cir. 1983) (explaining, with respect to damages in a case involving refusal to deal, that "loss of future profits is a well-established basis for determining the measure of economic injury resulting from an anticompetitive act which forces the victim out of business." Id. at 786). Here, in contrast, Three Crown has presented no evidence to indicate that Defendants intended to injure it or run it out of business, or even that Defendants' knew of Three Crown's investments in the short positions in the Notes.
Three Crown's reliance on Atlantic City Electric Co. v. General Electric, 226 F. Supp. 59 (S.D.N.Y. 1964) as support for the availability of lost profits is misplaced. In Atlantic City Electric, the court used the term "lost profits" to refer to a reduction of the full damages for overcharges sought by the plaintiffs, because the plaintiffs had partially passed on its inflated cost to its customers. The court awarded the amount of the overcharge.
Also with respect to lost profits, Three Crown seeks to rest its claims for Category B and C damages upon Minpeco S.A. v. Conticommodity Services Inc., 676 F. Supp. 486 (S.D.N.Y. 1987) and 718 F. Supp. 168 (S.D.N.Y. 1989), where the plaintiff was allowed to recover for its losses in closing out its short position in silver futures and for the profits it would have made on those transactions in an unmanipulated market. All of the damages allowed in Minpeco were caused by the defendants' manipulation of the market and related to the plaintiff's loss of the benefit of its bargain on positions it held within the market. Three Crown, in contrast, seeks to recover damages in Categories B and C for trades it never made on securities which concededly were not affected by Defendants' alleged manipulation. Minpeco is not support for the Category B and C damages Three Crown seeks on trades never negotiated or positions never held. Under Minpeco, Three Crown may, as an aspect of its claims for Category A damages, introduce evidence at trial of profits it would have reaped, absent Defendants' manipulation of the market, from positions it actually took in the April and May Notes. See Minpeco, 676 F. Supp. at 492-495; See also Strobl v. New York Mercantile Exchange, 582 F. Supp. 770, 779 (S.D.N.Y. 1984) aff'd, 768 F.2d 22 (2d Cir. 1985) cert. denied 474 U.S. 1006, 88 L. Ed. 2d 459, 106 S. Ct. 527 (1985).
Three Crown also places some weight on the statement by the court in Transnor (Bermuda) Ltd. v. BP North Amer. Petro., 736 F. Supp. 511 (S.D.N.Y. 1990): "once the fact of damages, i.e. injury and causation, is established, plaintiff has a lessened burden of proof in showing the amount of its damages." Id. at 514. Accordingly, the Transnor court refused to grant summary judgment to the defendants on the plaintiffs' claims for lost profits with respect to the Brent Oil market, in which they had made substantial investments which were rendered unprofitable by the defendants' manipulations of the market.
The Transnor plaintiffs' Brent Market claims parallel Three Crown's Category A damages, which should encompass all losses, including lost profits, sustained as a result of investments Three Crown in fact made or sold due to Defendants' alleged manipulation. In addition, however, the Transnor court recognized that "damages may not be determined based on speculation or guesswork." Transnor, 736 F. Supp. at 515. The Transnor court distinguished and granted partial summary judgment to defendants on elements of the plaintiffs' claims which were not supported by adequate evidence of damages stemming from an injury to the business or property of the plaintiff. See Transnor, 736 F. Supp. at 517. The court excluded claims for damages for lost profits on oil deals in other markets which plaintiff did not consummate or for profits based upon the assertion that the defendant's acts had precluded the plaintiffs from engaging in a line of business which otherwise would have been profitable. The court concluded that Transnor could "'not recover lost profits by projecting a course of business [it] deliberately didn't pursue.'" Id. at 518 (quoting Grip-Pak v. Illinois Tool Works, Inc., 651 F. Supp. 1482, 1504 (N.D.Ill. 1986)). Three Crown seeks to distinguish its position from that of the Transnor plaintiffs by stating that it did pursue the line of business, until the moment at which Defendants' misconduct rendered it impossible to do so. This argument, however, is unavailing. At the end of June, 1991, Three Crown concededly was left with $ 3.8 million in capital. (Wohl Aff. Exh. 2, Hauptfuhrer Dep. at 39). The firm made the choice to commit part of its remaining capital to Meadowlands and the remaining sum to another employee trader, Richard Ruttenberg. (Schacter Aff. Exh. 1, Horowitz Dep. 179, 808). Hauptfuhrer made no further attempt to leverage or to finance Three Crown's relative value trading or to raise funds to support that trading; instead, he switched his relative value trading to Meadowlands. (Wohl Aff. Exh. 2, Hauptfuhrer Dep. at 49) and once there, there is no evidence that he pursued his butterfly trading strategy. Three Crown could have replaced its lost capital from existing or new sources if potentially profitable trades were to be made, but it made no effort to obtain such funds. Despite its claim of inability to continue business, Three Crown did not enter bankruptcy or liquidation proceedings (Tr. 41-42). The only reasonable conclusion is that Three Crown deliberately chose not to pursue further trading on its butterfly strategy. Like the plaintiffs in Transnor, under such circumstances, Three Crown is responsible for its lost profits and cannot under the antitrust laws seek damages for business opportunities it failed to pursue.
Three Crown's assertions that it was unable to continue the butterfly strategy with the capital it possessed after selling the short positions in the April and May Notes and that it could not raise additional capital for such purposes are based wholly on conclusory and self-serving statements of its principals without supporting documentation. Assertions of this nature are insufficient evidence of causation to withstand a summary judgment motion. See Argus, Inc. v. Eastman Kodak Co., 801 F.2d 38 (2d Cir. 1986) (affirming summary judgment for defendant in antitrust suit based upon plaintiff's failure to demonstrate adequate causal relationship between all injuries for which it sought recovery and the defendants' alleged noncompetitive conduct). To survive summary judgment, the plaintiffs were obligated to provide more than "the 'isolated self-serving statements' of a plaintiff's corporate officers." Id. at 42 (quoting H & B Equipment Co. v. International Harvester Co., 577 F.2d 239, 247 (5th Cir. 1978) (quoting Yoder Bros., Inc. v. California-Florida Plant Corp., 537 F.2d 1347, 1371 & n. 25 (5th Cir. 1976)). Likewise here, Three Crown's claims for lost profits and lost future profits under the Section 4 of the Clayton Act, 15 U.S.C. § 15, for violations of Section 1 of the Sherman Act, 15 U.S.C. § 1, are based upon conclusory statements of Plaintiffs' officers that Three Crown was driven out of business, whereas the undisputed evidence shows that after cutting its losses, Three Crown still possessed assets with which it could have continued to utilize the butterfly strategy, albeit by taking smaller positions on a leveraged basis.
Secondly, based on the McConnell report Three Crown's calculation of damages assumes that in an unmanipulated market, Three Crown would have continued to roll forward its positions on the Two Year Notes each month until February 21, 1992. (Schacter Aff. Exh. 3, McConnell Rpt. at 8). Thus, after June or July 1991, the butterfly strategy would have had no positions in the securities that Defendants are alleged to have manipulated. The evidence is not sufficiently strong to support McConnell's assumption that Three Crown would have maintained a steady position in the butterfly strategy or that it in fact would have rolled forward its entire position in each month's issue throughout the remainder of 1991. (Hausman Aff. Exh. A). Under Hauptfuhrer's leadership, the company's trading strategy was admittedly discretionary, relative value trading. (Wohl Aff. Exh. 2, Hauptfuhrer Dep. at 17-19; 48). His strategy evolved to respond to and to reflect frequent changes in the market and other economic news. (Wohl Suppl. Aff. Exh. 2, Hauptfuhrer Dep. at 49-56). In this regard, Hauptfuhrer testified that "it was not at all unusual for me to adjust, modify a trade as it went forward." (Wohl Aff. Exh. 2, Hauptfuhrer Dep. at 1108). Indeed, Hauptfuhrer testified to the fact that the butterfly strategy which is the basis for Three Crown's claims did not take its "final form"--the form upon which Three Crown's claims rely, until the latter part of May, 1991, over a month after Three Crown first acquired its positions in the April Notes. (Wohl Aff. Exh 2, Hauptfuhrer Dep. at 296-298). Hauptfuhrer's willingness to take highly leveraged positions,
his testimony that his discretionary trading strategy led him to modify his trades frequently in order to keep pace with current events in the marketplace, and the natural volatility of the market in U.S. Treasury Securities weigh heavily against McConnell's assertions that he could predict with the requisite degree of certainty the final form Three Crown's trading would have taken or the ultimate financial outcome of the "strategy" implemented in April, 1991.
Thus, Three Crown's claims in antitrust for Category B and C damages cannot be recovered:  since there is no evidence that Defendants intended to run Three Crown out of business and  because those damages are not based upon adequate proof that Defendants' alleged manipulation caused Three Crown to be unable to continue trading the unmanipulated securities for which it seeks damages or that Three Crown would have carried on the butterfly strategy for any particular period of time. Since Category C damages are based on assumed profits to be made in Category B, and the evidence does not support its claim of being run out of business, Category C damages likewise are not recoverable in antitrust by Three Crown on its claims against Defendants.
2. Securities Fraud Claims
Three Crown argues that the Securities Exchange Act of 1934, § 10(b), 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5, support its claims for Category B and C damages because claims for lost profits are allowed in securities fraud cases. Section 28(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78bb(a) defines the damages to which a "party aggrieved" is entitled as "actual damages."
Three Crown suggests that the "actual damages" language is sufficiently broad to encompass its claims for Category B and Category C damages, given the Supreme Court's consideration of the meaning of § 28(a) with respect to another provision of the 1934 Act in Randall v. Loftsgaarden, 478 U.S. 647, 92 L. Ed. 2d 525, 106 S. Ct. 3143 (1986). In Randall, the Court stated that it "has never interpreted § 28(a) as imposing a rigid requirement that every recovery on claims under the 1934 Act must be limited to the plaintiff's net economic harm." Id. at 648.
The decision in Randall v. Loftsgaarden, however, did not disturb prior rulings by which the Supreme Court had defined and limited the scope of damages available in 10b-5 actions. Under Section 10(b) of the Securities and Exchange Act of 1934, 15 U.S.C. § 78j(b) and relevant case law, an entity is only entitled to sue for damages if it is a "purchaser or seller" of the allegedly manipulated securities. In Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 44 L. Ed. 2d 539, 95 S. Ct. 1917 (1975), the Court held that § 10(b) and Rule 10b-5 limit collection of damages to plaintiffs who are in fact purchasers or sellers in the securities alleged to have been manipulated. The Court explained that:
while the damages suffered by purchasers and sellers pursuing a § 10(b) cause of action may on occasion be difficult to ascertain...in the main such purchasers and sellers at least seek to base recovery on a demonstrable number of shares traded. In contrast, a putative plaintiff, who neither purchases nor sells securities but sues instead for intangible economic injury such as loss of a noncontractual opportunity to buy or sell, is more likely to be seeking a largely conjectural and speculative recovery in which the number of shares involved will depend on the plaintiff's subjective hypothesis.
Id. at 734-35. As previously explained, in its Category B and C damages, Three Crown seeks, in addition to trades it did make, recovery for trades it never made or negotiated. The rationale of Blue Chip Stamps precludes such recovery in Rule 10b-5 suits. See also First Equity Corp. of Florida v. Standard & Poor's Corp., 869 F.2d 175 (2d Cir. 1989) ("Under Blue Chip, plaintiffs suing under section 10(b) of the Securities Exchange Act of 1934 may recover only for losses that result from decisions to buy or sell, not from decisions to hold or refrain from trading." Id. at 180 n. 2); Deutschman v. Beneficial Corp., 841 F.2d 502 (3d Cir. 1988) ("The only standing limitation recognized by the Supreme Court with respect to Section 10(b) damages actions is the requirement that the plaintiff be a purchaser or seller of a security." Id. at 506).
The Second Circuit's decision in Zeller v. Bogue Elec. Mfg Corp., 476 F.2d 795 (2d Cir. 1973), cited by Three Crown in support of its argument that its Category B and C damages should be available as consequential damages, does not support Three Crown's Category B and C damages because the Zeller court was faced with a different set of circumstances.
In Zeller, the plaintiff met Rule 10b-5's purchaser or seller requirement and the court specifically cautioned that consequential damages would be limited to profits which would have been earned but for the defendants' fraudulent conduct which formed the basis for the 10b-5 claim. See id. at 803. Unlike Zeller, where the plaintiff's claims for consequential damages were supported by documentation that the corporation had planned the stock offering, Three Crown's category B and C claims are based upon Hauptfuhrer's and McConnell's assumptions about a myriad of trades Three Crown would have engaged in, but for Defendants' manipulation. Three Crown cannot seek consequential damages based on these speculative claims.
The Second Circuit's discussion of the meaning of Zeller in a subsequent decision provides further insight into limitations placed upon plaintiffs seeking damages in excess of their out-of-pocket losses on claims under Rule 10b-5. In Osofsky v. Zipf, 645 F.2d 107 (2d. Cir. 1981), the court allowed a plaintiff in securities litigation to proceed on claims for benefit-of-the-bargain damages where it had put forth nonspeculative evidence of the extent of damage it suffered as a result of the defendants' fraudulent acts. The Osofsky court explained:
We believe that the benefit-of-the-bargain rule should be applied under the 1934 Act to the limited situation involved in this case, where misrepresentation is made in the tender offer and proxy solicitation materials as to the consideration to be forthcoming upon an intended merger. But, of course, giving the plaintiff benefit-of-the-bargain damages is appropriate only when they can be established with reasonable certainty...In the case at bar...the amount of such damages--the difference between what was represented as coming to the B & W shareholders and what they actually received--can be determined with certainty.