The opinion of the court was delivered by: SWEET
In this action brought pursuant to Sections 12(2) and 17 of the Securities Act of 1933 (the "Securities Act"), 15 U.S.C. §§ 77b, 77q, Section 10(b) of the Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder, Sections 4b and 4o of the Commodity Exchange Act (the "CEA"), 7 U.S.C. §§ 6b(a)(2), 6o, Section 32.9 of the rules of the Commodity Futures Trading Commission (the "CFTC"), 17 C.F.R. 32.9, and related state law claims, Defendants Salomon Brothers International Limited ("SBIL"), Salomon Brothers Inc ("SBI") and Salomon Brothers Holding Company, Inc. ("SBHC") (collectively, "Salomon" or the "Defendants") have moved, pursuant to Federal Rules of Civil Procedure 12(b)(1), 12(b)(6) and 9(b) to dismiss the Complaint of Plaintiff Societe Nationale d'Exploitation Industrielle des Tabacs et Allumettes ("SEITA"). For the reasons set forth below, the motion will be granted and the case dismissed.
SBIL, an English corporation with offices in London, and SBHC and SBI, both Delaware corporations with offices in New York, are affiliated entities. Some or all of SBIL, SBHC, and SBI conduct at least some business through an office in Tampa, Florida.
SEITA filed its Complaint in this action on November 7, 1995. On January 10, 1996, Defendants filed their notice of the instant motion. The matter was argued on April 24, 1996, and further letter submissions were accepted from the parties through May 31, 1996, at which time the matter was deemed fully submitted.
The facts as presented here are drawn from the Complaint and do not represent findings of fact by the Court. In late 1993, after providing investment advice to SEITA over a number of years (Compl. PP 11, 14, 23-28, 99-102), Salomon, through its representative Gilles Albou ("Albou") in the London office of SBIL, proposed to SEITA's then-treasurer, Marc Tardieu ("Tardieu"), that SEITA invest in two financial products. Albou described these products as being very good investments from which SEITA could make millions of dollars. (Compl. P 30.) The products Albou suggested were the Swap Transactions, one based on the deutsche mark interest rate (the "DEM Swap"), and the other based on the exchange rate between the United States dollar and Japanese yen (the "USD/JPY Swap"). Unbeknownst to SEITA, the Swap Transactions were far riskier than any of the prior investments SEITA had done with Salomon over the years. (Compl. P 30.) After Albou had aggressively promoted the Swap Transactions to Tardieu, Tardieu agreed to them, based upon Albou's representations that (a) the risk of loss to SEITA was very small because of the range of the DEM interest rate and the USD/JPY exchange rate that would be part of the terms of the Swap Transactions, as structured by Salomon, and (b) if at any time it appeared that SEITA's principal would be at risk, Salomon would get SEITA out of the Swaps at minimal cost to SEITA. (Compl. P 32.) Tardieu relied completely on the integrity of Salomon, as an investment and financial advisor to SEITA, concerning the benefits and risks, of the Swap Transactions, as well as the fairness of their terms and pricing. (Compl. PP 39-40.)
Unlike other securities or commodities, derivative swaps are not traded on an exchange. Current market prices of derivatives are not publicly available, and assessing their underlying merits, risks and potential rewards is impossible for companies such as SEITA whose business is not based on trading in such instruments. Fixing a current price or value on a derivative swap is done by the designers and sellers of derivatives, like Salomon, a "major participant in markets for derivative instruments," who use sophisticated and complex computer models to perform the task. (Compl. PP 33, 34.)
Salomon failed to disclose to SEITA, inter alia, (a) the scope of the downside risks to SEITA posed by the Swap Transactions, (b) that Salomon was acting not as a broker and advisor to SEITA on the Swaps, but instead as the counterparty that stood to gain from losses suffered by SEITA, (c) that Salomon had structured the Swap Transactions disproportionately in its favor and against the interests of its customer, SEITA, and (d) that Salomon had access to computer models evaluating the risks and rewards of the Swaps, which Salomon would not make available to SEITA. (Compl. PP 37, 38, 103.)
Based upon Albou's representations to Tardieu, the DEM Swap was executed on or about January 31, 1994, and the USD/JPY Swap was executed on or about February 22, 1994. (Compl. PP 43, 46.) The DEM Swap was restructured once, on March 21, 1994. The USD/JPY was restructured twice, once on March 4, 1994, and once on April 19, 1994. The restructuring altered certain terms of the Swaps in ways that were supposed to benefit SEITA. (Compl. PP 50-53.) Each written agreement confirming the original and restructured Swaps, which were prepared by Salomon, stated that questions concerning the transaction could be directed to the "Swap Operations Department" in Tampa, Florida, at a phone number provided. (Compl. PP 49, 54.)
Salomon proposed other restructurings and modifications, through December 1994, supposedly to benefit SEITA. These proposals were not adopted. (Compl. PP 56, 69.) In connection with one of those proposals, Salomon represented that it would "immunize [SEITA] for the downside" of the USD/JPY Swap, and that SEITA "would keep the upside on that trade."
No payments were made by SEITA when the Swaps were executed or at any time prior to the termination of the Swaps in December 1994/January 1995. At termination, Salomon and SEITA were to "swap" payments, which would then be netted. SEITA's payment on each Swap was a fixed amount -- $ 20 million on the USD/JPY Swap, and $ 35 million on the DEM Swap. Salomon's payment was calculated by an equation tied to a fluctuating reference rate -- the interest rate on the deutsche mark on the DEM Swap, and the dollar/yen exchange rate on the USD/JPY Swap. (Compl. PP 43-44, 46-47, 51-53.)
Tardieu had no authority to enter into the Swap Transactions without prior approval from his superiors, which approval he neither sought nor received. (Compl. P 60.) Salomon knew or should have known of Tardieu's lack of authority due, inter alia, to the extremely risky nature of the Swaps, the large amount ( $ 55 million) at risk for SEITA in the two transactions, and the fact that government funds were at stake. (Compl. PP 23, 62.) No one at Salomon ever made an attempt to speak to any officer of SEITA other than Tardieu to disclose the nature of the Swap Transactions. (Compl. P 67.)
On April 11, 1994, Salomon sent a letter, in English, addressed to SEITA's financial director, Gilbert Dupont ("Dupont"), by which Salomon stated it was enclosing copies of confirmations on two "structured transactions." The letter asked Dupont to acknowledge receipt of the letter. The letter neither (a) described the nature of the transactions, (b) indicated that SEITA was in negative positions on them, nor (c) requested authorization for the Swap Transactions. Not knowing the nature of the transactions referred ...