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DRAGON CAPITAL PTNRS. L.P. v. MERRILL LYNCH CAPITA

January 14, 1997

DRAGON CAPITAL PARTNERS L.P., Plaintiff, against MERRILL LYNCH CAPITAL SERVICES INC., MERRILL LYNCH INTERNATIONAL INC., MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED, and MERRILL LYNCH & CO., INC., Defendants.


The opinion of the court was delivered by: BATTS

 DEBORAH A. BATTS, United States District Judge.

 Merrill Lynch *fn1" Capital Services Inc., Merrill Lynch International Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated and Merrill Lynch & Co., Inc. (collectively "the Defendants" or "ML") move to dismiss the Complaint in deference to proceedings pending in Hong Kong and on the basis of Forum Non Conveniens. In the alternative, Defendants move to stay the action based on the same grounds. For the reasons set forth below, this action is dismissed.

 I. BACKGROUND

 In July 1993, Vladen Ninkov ("Ninkov"), Dragon's exclusive agent, approached Richard Klein ("Klein"), an acquaintance employed in the ML London office. (Compl. PP 10, 15; Ninkov Aff. P 1.) After conducting one transaction for Dragon, (Compl. P 15), Klein allegedly explained that any future direct investments by Dragon in Asia-Pacific entities would have to be made through a ML Asian broker. (Compl. P 17.) In January 1994, at Klein's suggestion, Ninkov met with two ML Asian brokers, Anthony Stalker ("Stalker") and Scott Ashton ("Ashton"), both of whom were based in Hong Kong. (Compl. PP 17-18.) During the meeting, the brokers described what services ML could provide in the event that Dragon chose to invest further in the Asia-Pacific Area. (Compl. P 18.)

 A. The Quanto Options

 Dragon's first investment through the ML Asian brokers was the purchase of unlisted Nikkei Index Quanto Call Options ("the Quanto Options"), a set of synthetic instruments developed specifically by ML and traded in over-the-counter markets. (Compl. PP 25, 27.) Allegedly relying on various ML representations and guarantees regarding the valuation and liquidity of the options, on February 25, 1994, Ninkov instructed Stalker to purchase for Dragon, 1,867.746 Quanto Options with a strike price *fn2" of US$ 19,684.00, for a total premium of US$ 5,000,000.88. (Compl. PP 26, 28-29, 33.)

 Also on February 25, 1994, Ninkov received both oral and written confirmation of the Quanto Options purchase. (Compl. P 34.) Apparently reiterated on March 1, March 2 and March 4 of 1994, all confirmations listed Merrill Lynch Capital Services Inc. ("ML Capital") as counterparty to the Quanto Options; Merrill Lynch, Pierce, Fenner & Smith as agent under the Quanto Options; and ML & Co. as guarantor for the obligations of ML Capital thereunder. (Compl. PP 36-37.) The confirmations were delivered to Dragon on ML New York letterhead. (Ninkov Aff. Ex. A.) On March 9, 1994, Ninkov signed and returned this requisite paperwork to the ML Tokyo office *fn3" (Compl. P 38.) On March 4, 1994, Dragon paid into ML's New York bank account, the US$ 5,000,000.88 premium for the Quanto Options. (Ninkov Aff. P 7; Compl. P 38.)

 Stalker and Ninkov discussed the valuation of the Quanto Options on an almost daily basis between February and early June 1994. (Compl. PP 39-40.) Thereafter, communication between the parties became less frequent. (Id.) Plaintiff alleges that the Defendants were neither tracking the rising Nikkei Index as ML had promised, nor reporting the valuation of the Quanto Options. (Compl. P 40.) Plaintiff required the Defendants' valuation of the options because the instruments were not listed. (Compl. P 62.) Plaintiff alleges that it ordered the liquidation of the Quanto Options at various points in June of 1994; however, the Options were not sold at that time. (Compl. PP 54-61.)

 Seeking to monitor and confirm the terms of Dragon's investment in the Quanto Options, Michael Fitzgerald ("Fitzgerald"), a director of Dragon, wrote to Jonathan Moseley ("Moseley") at the ML Hong Kong office. (Compl. P 48.) On August 30, 1995, Fitzgerald met with Moseley, Stalker and other ML representatives in Hong Kong to discuss Dragon's dissatisfaction with ML and the Quanto Options. (Compl. PP 49-50.) Similarly, on December 4, 1995, Graeme Prior, a Dragon accountant, telephoned Stephen Sze, a ML representative stationed in Singapore, requesting an explanation of the Quanto Options valuation methods. (Compl. P 51.)

 B. The HSBC Options

 In March of 1994, Ashton suggested to Ninkov that Dragon purchase a quantity of unlisted, over-the-counter, synthetic Hong Kong Shanghai Bank Options ("the HSBC Options") created specially by ML. (Compl. P 67.) Although Ninkov denies having agreed to the purchase, on July 19, 1994, he was contacted by Anne Romito ("Romito") of ML Equity Derivatives in Tokyo, who claimed that Dragon was delinquent in its payment of the HSBC Options premium of approximately US$ 500,000.00. (Compl. PP 69, 76; Ninkov Aff. PP 8-9.)

 In an effort to dispute ML's right to the premium, Ninkov wrote to Romito in Tokyo and then spoke by phone with her and her supervisor, Richard Dunne ("Dunne"), who was also based in Tokyo. (Compl. PP 81-82). As ML attempted to collect the payment, Ninkov was contacted and allegedly threatened by Dunne, as well as Stalker and Ashton. (Compl. PP 83-86.) In August of 1994, David Underhill ("Underhill") of ML International Inc. ("ML Int'l"), Hong Kong, became involved in the alleged HSBC Options contract by writing to Ninkov and Fitzgerald and threatening to liquidate Dragon's position in the HSBC Options. (Compl. P 87.) Dragon continued to deny responsibility for the transaction and consequently, the HSBC Options position was liquidated by Andreas Klainguti of ML Int'l, Hong Kong. (Compl. PP 88-89.)

 On October 4, 1994, Dragon received yet another letter from Underhill *fn4" requesting payment for debts owed to ML as a result of the HSBC Options transactions. (Compl. P 92.) If such payment was not received within 24 hours, ML threatened to liquidate Dragon's position in the Quanto Options. (Id.) On October 5, 1994, ML Capital liquidated a portion of Dragon's holdings in ML Quanto Options ("the Initial Liquidation"). (Compl. P 94.)

 Over a year later, on January 31, 1996, Ninkov ordered Stalker to liquidate the rest of the Quanto Options owned by Dragon ("the Final Liquidation"). (Compl. PP 98-100.) Although ML was allegedly reluctant to do so, Ninkov repeated his request by fax to Stalker and the sale was promptly consummated by ML. (Compl. PP 100-01.) On the evening of January 31, 1996, Ninkov was informed that Dragon's remaining Quanto Options had been liquidated at a price of US$ 1,238.43 per option for a total amount of US$ 1,993,656.86. (Compl. P 102.) Dragon has not yet received this sum, despite having given ML remittance instructions. (Compl. PP 102-05.)

 C. The Hong Kong Action

 On October 7, 1994, two days after ML's Initial Liquidation of Dragon's position in Quanto Options, Dragon brought an action seeking injunctive relief in the Hong Kong courts in an effort to reverse the effects of the allegedly wrongful liquidation. (Lane Aff. P 4; Firth Aff. P 7.) *fn5" However, on October 10, 1995, Dragon voluntarily withdrew this action. (Lane Aff. P 5; Firth Aff. P 7.)

 On October 11, 1994, Dragon instead brought an action for damages in the Hong Kong Court against ML Capital, seeking to recover for breach of the agreement relating to the Initial Liquidation of the Quanto Options. (Lane Aff. P 6; Ex. A; Firth Aff. P 8.) At the time, ML related to Dragon that they would reserve their right to contest jurisdiction in Hong Kong. (Lane Aff. P 7.) In addition, ML Capital's counsel in Hong Kong, Linklaters & Paines, was instructed not to accept service of process in Hong Kong. (Lane Aff. at 7; Ex. B.) As a result, Dragon served ML Capital in New York. (Id. P 8; Firth Aff. P 8.) In February 1995, ML Capital filed a "Defence and Counterclaim" denying Dragon's claims and alleging, inter alia, that ML Capital had been justified in "setting off" Dragon's HSBC Options debt by partial liquidation of its Quanto Options investment and that the Quanto Options Purchase was subject to an ISDA Master Agreement. *fn6" (Lane Aff. P 9; Ex. C; Firth Aff. P 9.) In March 1995, pleadings in the Hong Kong action were closed; in other words, any amendment to the pleadings or additional parties may now only be done on consent of the parties or with leave of the court. (Lane Aff. P 10; Firth Aff. PP 26-28.)

 During the summer of 1995, the parties engaged in discovery, with both sides filing a "Summons for a Further and Better List of Documents and for Discovery of Particular Documents." (Firth Aff. P 13.) These applications were scheduled to be heard on October 27, 1995. (Firth Aff. P 13; Lane Aff. P 16.) While the parties differ as to the extent of completed discovery in the Hong Kong action, (Firth Aff. P 13; Lane Aff. PP 14-17), approximately one year elapsed between the time that ML Capital was served in New York and the time the Hong Kong action was stayed.

 In late September 1995, a Security Costs order ("Costs Order") was issued by Master O' Donnell, *fn7" ordering Dragon to pay HK$ 300,000.00 within 21 days or else face a stay of the action. (Firth Aff. P 14; Lane Aff. P 11.) Several days after the Costs Order was entered, Dragon declined to pay the sum and instead filed a Notice of Appeal. (Lane Aff. P 12.) However, as the 21 day period for payment elapsed pursuant to the Cost ...


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