The Relationship Between The Parties
In the early 1990's, Lisa Addeo began earning a significant salary, and sizeable bonuses, in her capacity as an officer and employee with Steinhardt Management Company and as a general partner with Steinhardt Partners and Institutional Partners. Though the parties do not agree on whether Mrs. Addeo is a sophisticated investor, she is -- at a bare minimum -- a college educated woman accustomed to substantial responsibility in the world of high finance. Along with her husband, Mrs. Addeo decided to secure her new found wealth by pursuing a conservative investment strategy. It was in connection with this decision that the Addeos became involved with the defendant, a broker employed by MKI Securities, Inc ("MKI").
In January 1991, the Addeos opened an account with MKI, which was subsequently transferred to Braver Stern Securities Corp., and gave defendant full discretion to trade on their behalf. According to plaintiffs' allegations, they advised defendant that they sought to avoid placing their funds at any significant risk. (L. Addeo Aff. P 4). Over the first two to three years of the parties' relationship, defendant invested plaintiffs' money primarily in United States Government Agency bonds. These low risk investments, according to plaintiffs, were appropriate for the conservative approach they desired to take, and paid off in substantial interest earned on their account. This conservative strategy, however, apparently gave way to a more aggressive, and more risky, approach beginning in early 1993.
The Alleged Fraud
Plaintiffs allege that, beginning in 1993, defendant urged plaintiffs to make significant purchases on margin, i.e., on borrowed money. (L. Addeo Aff. P 7). At around the same time, defendant also began investing substantial amounts of the funds in plaintiffs' account -- borrowed and otherwise -- in a more risky variety of bonds, "inverse floaters," than he had previously purchased on their behalf. In advising plaintiffs on this new course, defendant assured plaintiffs that their investments were still safe, and that they could remain confident that their bonds would mature in four to five years. According to plaintiffs, however, defendant omitted to mention, and misrepresented, several important facts and considerations.
As noted, throughout the course of his dealings with plaintiffs, defendant allegedly assured them that their investment was extremely safe, and that their bonds were certain to pay off in full within four to five years. In fact, and unbeknownst to plaintiffs, there was no basis for any such guarantee, particularly in connection with the "inverse floaters" that defendant purchased beginning in 1993. As explained by plaintiffs in their Complaint, "these securities were highly illiquid and the average maturities of these securities was not fixed but would substantially increase (far beyond 4-5 years) if interest rates increased." (Complaint P 27). This exposed plaintiffs to the risk that the value on their account would fluctuate far beyond anything ever suggested by defendant, and that they would not be able to sustain such fluctuations with the assurance of a full return within the narrow four to five year window emphasized by defendant. At oral argument, plaintiffs also highlighted defendant's alleged failure to alert them to the risk of a margin call, a scenario in which plaintiffs would have to increase their investment in order to avoid a complete, or near complete, loss on their account. In sum, plaintiffs complain that they were promised a conservative portfolio, but were left with a variety of "highly sophisticated and complex securities" carrying an "extreme risk" of loss associated with high sensitivity to changing interest rates. (Id. PP's 43, 52).
Aside from misleading plaintiffs as to the particular risks associated with their investments, defendant also allegedly failed to disclose to plaintiffs a possible conflict of interest he had in recommending certain of the investments. (Complaint P 30). In connection with those of plaintiffs' investments made on margin, defendant recouped a .25% commission on interest payments by plaintiffs to Bear Sterns, the brokerage firm where plaintiffs' account was held. Defendant ultimately earned approximately $ 7,000 pursuant to this arrangement.
Though plaintiffs allege that they were unaware of any of the aforementioned risks associated with their account, they were concerned, in early 1993, by the fact that the "names of the bonds in their account began to change." (Opposition at 7; L. Addeo Aff. P 7). They also were generally uncomfortable with the notion of investing on margin. Not satisfied with defendant's assurances during a series of phone calls over the course of the year, plaintiffs arranged a face-to-face meeting with defendant to reiterate their desire that their funds be invested safely and conservatively. During this meeting, which took place in the summer of 1993, defendant assured plaintiffs that their portfolio was extremely safe. Defendant told plaintiffs that they should not be concerned by any market fluctuations that might occur in the extreme short term, because their bonds were certain to pay off in full in four to five years. When asked by plaintiffs how it was that he earned money on their account, defendant failed to mention his commission tied to margin investments; defendant instead indicated generally that he recovered a small spread between the prices that his firm paid for bonds and the prices at which he sold the bonds to plaintiffs' account. In short, defendant assuaged plaintiffs' concerns by persisting to mislead them with respect to the status of their account and his personal incentives in connection with that account. It appears, however, that plaintiffs were not placed fully at ease; they disregarded defendant's advice that they continue investing on margin, and instructed him, in early 1994, to make no more of these purchases on their account. (L. Addeo Aff. P 15).
In 1994, interest rates increased, and the market value of the bonds in plaintiffs' account began to decline. Plaintiffs contend that they were unaware of their losses until the Fall of 1994, at which time they confronted defendant with their concerns. Defendant conceded that plaintiffs' account had declined in value, but he maintained that their bonds would pay off, in full, in four to five years. By this time, however, plaintiffs had lost confidence in defendant. They consulted a friend from Mrs. Addeo's office regarding their investments, and were informed that there was no basis for defendant's promise of a four to five year maturity on the bonds. Upon further investigation, plaintiffs determined that defendant had exposed them to the risk of a complete loss on their account. Fearful of losing their "nest egg," plaintiffs liquidated their bonds, in December 1994, recovering approximately $ 900,000. They subsequently commenced this action on June 21, 1995.
Throughout the time that defendant was investing on plaintiffs' behalf, plaintiffs were receiving prospectuses and account statements concerning their holdings. Defendant contends that these materials were replete with information which directly contradicted his alleged misrepresentations.
Plaintiffs received a series of at least seven prospectuses in 1993 and early 1994. On the cover page of these materials, "Final Payment Dates" are listed for several of plaintiffs' bonds; these dates routinely extend well beyond the four to five year maturity promised by defendant. (See Bolton Aff. Ex.'s L-R). For instance, one prospectus refers to a "Final Payment Date" in the year 2024 on one of the bonds purchased on plaintiffs' account. (Bolton Aff. Ex. L, at AD00143). This same report provided that there was no assurance that a secondary market would develop for plaintiffs' bonds, and that it was therefore possible that investors would "not be able to sell their Multiclass PC's readily or at prices that will enable them to realize their desired yield." (Id. at AD00144). The prospectus also noted that the value of plaintiffs' securities, and their rate of return, could fluctuate over time in connection with changing interest rates and other market forces. (Id.).
The prospectuses also included more general warnings. For instance, plaintiffs were cautioned that "Multiclass PC's are not appropriate investments for any investor that requires a single lump sum payment on a predetermined date or an otherwise certain payment stream." (Bolton Aff. Ex. L at AD00157). Also, it was indicated that:
MULTICLASS PC'S ARE NOT SUITABLE INVESTMENTS FOR ALL INVESTORS. IN PARTICULAR, NO INVESTOR SHOULD PURCHASE MULTICLASS PC'S OR ANY CLASS UNLESS THE INVESTOR UNDERSTANDS AND IS ABLE TO BEAR THE PREPAYMENT, YIELD, AND LIQUIDITY RISKS ASSOCIATED WITH THAT CLASS.
(Id. at AD00144). Plaintiffs were provided additional information in monthly account statements they received for the period between 1991 and 1994, as well as in purchase confirmations and Form 1099's for 1993 and 1994. (Bolton Aff. Ex.'s S-T). Most notably, these materials displayed "maturity dates" for certain bonds purchased on plaintiffs' behalf that extended well beyond the four to five year period which defendant had guaranteed. (See, e.g., Bolton Aff. Ex. S, AD00810).
In sum, plaintiffs received a variety of materials which contained information directly contrary to certain of defendant's representations, and which were inconsistent with the high level of confidence he displayed in the investments he made on plaintiffs' behalf. Plaintiffs contend, however, that they never thoroughly reviewed these materials, and that -- in any event -- the information contained therein did not even hint at the magnitude of those risks to which plaintiffs had actually been exposed.
I. Summary Judgment
Rule 56(c), Fed. R. Civ. P., provides that 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.