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October 19, 1995


Robert P. Patterson, Jr., U.S.D.J.

The opinion of the court was delivered by: PATTERSON


 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. *fn1" Defendant Salomon Brothers also moves the court in limine to preclude testimony by John J. McConnell, damages expert for Plaintiffs.


 Three Crown was created in New Jersey on July 2, 1990. *fn3" 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). *fn4" 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. *fn5" 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"). *fn6"

 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" *fn7" 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). *fn8"

 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. P252-53). 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, *fn9" 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. P3). 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). *fn10"

 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 butterfly; [2] Category B totals $ 11.02 million and represents what Three Crown asserts it would have earned on the butterfly strategy until February 21, 1992, but for Defendants' manipulation of the Notes; and [3] Category C, which totals $ 10.14 million, represents Three Crown's estimate of additional profits it would have earned, from February 1992 through December 1994, had it reinvested profits from its butterfly strategy in an unmanipulated market. *fn11" (Schacter Aff. Exh. 3, McConnell Rpt. 12-17). Defendants' motion is addressed *fn12" primarily to eliminating Category B and C damages and all damages sought by Plaintiff Meadowlands.


 Summary judgment is appropriate "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed. R. Civ. P. 56(c). Summary judgment cannot issue if "the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 91 L. Ed. 2d 202, 106 S. Ct. 2505 (1986). The initial burden rests on the moving party to demonstrate that there exists no genuine issue of material fact and that it is entitled to judgment as a matter of law. See Adickes v. S.H. Kress & Co., 398 U.S. 144, 157, 26 L. Ed. 2d 142, 90 S. Ct. 1598 (1970). The moving party may satisfy its burden by showing the absence of evidence which would support the claims made by the non-moving party. See Celotex Corp. v. Catrett, 477 U.S. 317, 325, 91 L. Ed. 2d 265, 106 S. Ct. 2548 (1986). The Court must view the facts in the light most favorable to the non-moving party. See United States v. Diebold, Inc., 369 U.S. 654, 655, 8 L. Ed. 2d 176, 82 S. Ct. 993 (1962). If, however, the evidence presented by the nonmoving party "is merely colorable, or is not significantly probative, summary judgment may be granted." Anderson v. Liberty Lobby, 477 U.S. at 249-250 (internal citations omitted); See also Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 89 L. Ed. 2d 538, 106 S. Ct. 1348 (1986) ("Where the record taken as a whole could not lead a rational trier of fact to find for the non-moving party, there is no 'genuine issue for trial. '...It follows from these settled principles that if the factual context renders respondents' claim implausible...respondents must come forward with more persuasive evidence to support their claim than would otherwise be necessary." Id. at 587 (internal citations omitted)).

 I. Three Crown's Claims for Category B Damages (lost profits) and Category C Damages (lost future profits)

 Defendants contend that they are entitled to summary judgment on Three Crown's Category B and Category C claims for lost profits and lost future profits because, given Three Crown's failure to pursue its butterfly trading strategy after June 28, 1991, the figures lack the requisite causational proof and are purely speculative. Three Crown counters that Defendants' arguments raise questions regarding the scope of recovery which should be left to the jury.

 Three Crown's Category B and C damages both are grounded upon Hauptfuhrer's testimony that he would have continued the butterfly strategy until the target Federal Funds rate exceeded the Three Month T-Bill rate and upon Category B calculations by Three Crown's expert, Professor John J. McConnell, as to the profitability of the butterfly strategy but for Defendants' manipulative actions. *fn13" McConnell's Category C calculations include estimates of what Three Crown's returns on investment would have been based in part on profits it would have made if the butterfly strategy continued. The accuracy of McConnell's calculations cannot be determined without considering the underlying assumptions McConnell made about market conditions in U.S. Treasury Securities and about the sort of trades Three Crown would have made in that market over the course of seven months for Category B and in other trading activity during a period of almost three years from February, 1992, for Category C. (Schacter Aff. Exh. 3, McConnell Rpt. at 7, 11-12). To generate his lost profits (Category B) figure, McConnell made the assumptions that a trading strategy existed (Wohl Suppl. Aff. Exh. 5, McConnell Dep. at 79), the starting and ending dates of that strategy, *fn14" what the prices of the April and May Notes would have been absent the alleged manipulation, *fn15" what financing rates Three Crown would have received and paid in maintaining its leveraged positions during its execution of the strategy, and what investments and other trading activity would have sued if Three Crown had maintained its positions. (Schacter Aff. Exh. 3, McConnell Rpt. at 7). *fn16" McConnell further assumed that Defendants' actions caused Three Crown to deviate from its butterfly strategy, but did not attempt to control for other possible reasons--such as more profitable opportunities--for deviating from that strategy subsequent to June 28, 1991. (Wohl Suppl. Aff. Exh. 5, McConnell Dep. at 80).

 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)). *fn17"

 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. ...

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