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August 25, 1998



The opinion of the court was delivered by: SWEET

Sweet, D.J.

Defendants Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"), Bear, Stearns & Co. Inc., Bear, Stearns Capital Markets Inc. (collectively, "Bear Stearns"), Howard Rubin ("Rubin), and Merrill Lynch, Pierce, Fenner & Smith Inc. ("Merrill Lynch") (together with DLJ, Bear Stearns, and Rubin, the "Brokers") have moved for partial dismissal of the First Amended Complaint ("Complaint") pursuant to Rules 12(b)(6) and 9(b) of the Federal Rules of Civil Procedure for failure to state a claim upon which relief can be granted and for failure to plead fraud with particularity. Specifically, the Brokers move to dismiss the following claims against them: (1) inducing and participating in breach of fiduciary duty (Count I), (2) tortious interference with contract (Counts II, XII, and XXI, which is against Merrill Lynch), (3) rescission of unauthorized trades (Count III), (4) breach of duty due to wrongful margin calls and liquidation (Count V), (5) conversion (Count VI), (6) violations of the Sherman and Donnelly Acts (Counts VII and VIII), (7) prima facie tort against Bear Stearns (Count IX), (8) breach of contract due to commercially unreasonable liquidations (Count X), (9) breach of duty to liquidate in a commercially reasonable manner (Count XI), (10) common law fraud (Count XIII), (11) negligent misrepresentation (Count XIV), (12) innocent misrepresentation (Count XV), (13) breach of express warranty (Count XVI), (14) unjust enrichment (Count XVII), and (15) equitable subordination (Count XX).

 For the reasons set forth below, the Brokers' motion will be granted in part and denied in part.


 Plaintiff Granite Partners, L.P. ("Granite Partners"), a Delaware limited partnership, was established in January 1990 as an investment fund to invest primarily in mortgage-related securities on behalf of individuals and entities subject to United States taxation.

 Plaintiff Granite Corporation ("Granite Corp."), a Cayman Islands corporation, was organized in January 1990 to invest primarily in mortgage-backed securities on behalf of offshore investors and domestic tax-exempt entities, including foundations and pension funds.

 Plaintiff Quartz Hedge Fund ("Quartz") (collectively with Granite Partners and Granite Corp, the "Funds"), a Cayman Islands corporation, was established in January 1994 as a vehicle to invest primarily in mortgage-related securities on behalf of offshore investors and others exempt from United States taxation.

 The Funds bring this action by and through the Litigation Advisory Board (the "LAB"), which was given the exclusive authority on behalf of and in the name of the Funds' estates to commence, prosecute, settle, or otherwise resolve all unresolved claims and causes of action of the Funds' estates by order of the United States Bankruptcy Court for the Southern District of New York.

 DLJ, Bear Stearns, and Merrill Lynch, all Delaware corporations with their principal places of business in New York City, are broker-dealers that transacted business with the Funds.

 Rubin, a resident of New Jersey, was at all relevant times a senior managing director and the head CMO trader at Bear Stearns.

 Relevant Nonparties

 At all relevant times to this action, nonparty Askin Capital Management, L.P. ("ACM"), a Delaware limited partnership, was a registered investment advisor; whose exclusive place of business was New York City. ACM was, at all relevant times, controlled by nonparty David J. Askin ("Askin"), who owned and controlled ACM's sole general partner, Dashtar Corporation. Askin also served as ACM's sole limited partner, president, chief executive officer, and chief financial officer. ACM became the investment advisor to Granite Corp. and Granite Partners (and Granite Partners' sole general partner) on January 26, 1993. ACM has been the investment advisor to Quartz since its formation.

 Prior Proceedings

 On April 7, 1994, the Funds filed petitions for relief under chapter 11 of the United States Bankruptcy Code. The chapter 11 trustee for the Funds (the "Trustee") initially filed this action in the United States Bankruptcy Court for the Southern District of New York on September 12, 1996. The case was referred to this Court on October 18, 1996. On consent, this Court withdrew the reference from the Bankruptcy Court on December 3, 1996.

 On January 27, 1997, the Trustee submitted a Third Amended Joint Plan of Liquidation for the Funds (the "Plan"). Following the Bankruptcy Court's confirmation of the chapter 11 Plan on March 2, 1997, this action has been pursued by the LAB, appointed pursuant to the Liquidation Plan.

 The LAB filed the Complaint in this action on August 4, 1997, naming, in addition to Bear Stearns, Rubin, DLJ, and Merrill Lynch as defendants.

 In the Complaint, the LAB asserts the following claims: breach of contract, inducing and participating in breach of fiduciary duty, tortious interference with contracts, rescission of unauthorized trades, breach of duty, conversion, federal and state antitrust violations, prima facie tort, common law fraud, negligent and innocent misrepresentation, breach of express warranty, unjust enrichment, objection to claims and interest, and equitable subordination.

 Merrill Lynch and DLJ filed their motions to dismiss on November 10, 1997, and Bear Stearns filed its motion on November 12, 1997. Oral argument was heard on May 20, 1998, at which time the motions were deemed fully submitted.

 On March 24, 1998, the Bond Market Association (the "BMA") moved for leave to file a memorandum of points and authorities as amicus curiae for the purpose of bringing to the Court's attention its views regarding the treatment of repurchase agreements ("repos") under the applicable state law and informing the Court of the importance of repos to the debt capital markets. The motion was granted on May 20, 1998.


 In considering a motion to dismiss, the facts alleged in the complaint are presumed to be true and all factual inferences must be drawn in the plaintiff's favor and against the defendants. See Scheuer v. Rhodes, 416 U.S. 232, 236, 40 L. Ed. 2d 90, 94 S. Ct. 1683 (1974); Mills v. Polar Molecular Corp., 12 F.3d 1170, 1174 (2d Cir. 1993); Cosmas v. Hassett, 886 F.2d 8, 11 (2d Cir. 1989); Dwyer v. Regan, 777 F.2d 825, 828-29 (2d Cir. 1985). Accordingly, the factual allegations considered here and set forth below are taken primarily from the LAB's Complaint and do not constitute findings of fact by the Court. They are presumed to be true only for the purpose of deciding the present motion.

 This case arises out of the collapse in early 1994 of the Funds that were managed by Askin and ACM. The major claims brought in this lawsuit fall into two categories: (1) that the Brokers injured the Funds by selling to them inappropriate securities purchased by Askin and ACM, and (2) that the Brokers injured the Funds by making improper margin calls and liquidating the Funds' reverse repurchase positions when the margin calls were not satisfied.

 The Funds invested primarily in collateralized mortgage obligations ("CMOs") created by the Brokers and other broker-dealers. ACM, through its president, Askin, purchased the securities for the Funds. The Brokers are alleged to be "among the principal sellers of CMOs to the Funds." (Compl. P 4.)

 CMOs are bonds created from and collateralized by mortgage-backed securities formed from pools of residential mortgages or securities backed by such mortgages. They are divided into various classes, or "tranches," each of which is entitled to a different portion of the principal and/or interest payments made by the underlying mortgage obligors. The tranches differ from one another with respect to their sensitivity to interest rate changes and the certainty with which their reaction to such changes can be predicted. The Brokers referred to the riskiest tranches - those most prone to large and unpredictable swings in value - as "toxic" or "nuclear waste."

 The two larger Funds, Granite Partners and Granite Corp., were designed to invest in "market-neutral" portfolios of high-quality CMOs. They were intended to acquire balanced holdings of "bullish" bonds and "bearish" bonds. A bullish security is likely to increase in value when interest rates fall and decrease in value when interest rates rise. A bearish security is likely to decrease in value when interest rates fall and increase in value when interest rates rise. By purchasing offsetting positions in predictable securities, the Funds would enjoy the high returns associated with rate-sensitive CMOs while hedging against the risk attendant upon interest rate fluctuations. Quartz was intended to be "market-directional" - to maintain a bullish or bearish portfolio depending on the predicted direction of interest rates.

 Askin and ACM, the Funds' investment advisor, had fiduciary and contractual duties to the Funds to make investments with due care and in accordance with the Funds' stated investment objectives. ACM was to accomplish these respective goals by rigorously and continuously analyzing each proposed acquisition for each Fund with a sophisticated, proprietary computer model that would allow ACM and Askin to determine the impact of interest rate changes on the price and value of each bond.

 Askin and ACM, however, managed the Funds negligently and repeatedly breached their contractual and fiduciary duties. They did not perform a rigorous analysis of the securities they bought, and they were unable to gauge how those securities would respond to interest rate movements. Moreover, they did not use, or even have, sophisticated computerized analytical techniques. In fact, "ACM and Askin often made purchase decisions based on little or no analysis or research. They instead relied on Broker recommendations, representations, valuations, and reports, Askin's 'instincts,' and unsophisticated analysis to select the Funds' securities." (Compl. P 70.) As a result, ACM and Askin failed to create market-neutral portfolios for Granite Partners and Granite Corp., instead creating portfolios that were dramatically bullish, and that contained a number of highly volatile, unpredictable, toxic CMOs. Similarly, at the time when Askin believed that interest rates would rise, he constructed an inappropriate bullish portfolio for Quartz.

 The Complaint alleges that throughout 1993 and early 1994, the Brokers took advantage of Askin's shortcomings. Although they knew of Askin's obligation to create market-neutral portfolios for Granite Partners and Granite Corp., knew of Askin's inability to analyze the impact of interest rate changes on esoteric CMO tranches, and knew of the Funds' dangerous bullish tilt, the Brokers induced Askin to buy inappropriate, toxic, bullish CMOs that eroded in value when short-term interest rates rose in early 1994. For example, from January 1993 to February 1994, the Brokers sold the Funds $ 34 million in bearish CMOs but $ 740 million in inappropriate securities. The Complaint maintains that the Brokers misrepresented many of these strongly bullish and toxic securities as bearish or only slightly bullish.

 The Brokers sold these toxic and inappropriate securities to the Funds because it was profitable for them to do so. The sale of the toxic tranches of a CMO offering makes the entire offering economically feasible. The Brokers are committed to buying any unsold tranches for their own accounts, and they do not wish to own nuclear waste themselves. Accordingly, they are unwilling to market a new offering unless they are assured they will be able to sell the toxic securities. For this reason, the toxic tranches are referred to as the "deal drivers."

 To generate demand for the more volatile tranches of their CMO offerings, the Brokers cultivated relationships with a small number of managers of investment funds, including ACM. They steered investors to ACM to enable ACM to purchase the more volatile, esoteric CMOs from the Brokers and granted ACM extensive credit (at times in violation of their own internal credit guidelines) to increase the amount of such CMOs that ACM could purchase. ACM, acting on the Funds' behalf, became one of the largest volume purchasers of these volatile and esoteric tranches from the Brokers. In early 1994, the Funds owned, in the aggregate, more than $ 1.5 billion of such CMOs, approximately half of which were purchased from the three Brokers (and another quarter from Kidder, Peabody & Co. Inc. ("Kidder")). In short, the Brokers all were "in bed" with ACM. (Compl. P 40.)

 As a result of the Brokers' sales of numerous inappropriate securities to the Funds, by the beginning of 1994 the Funds' portfolios were dangerously "tilted" in a way that exposed the Funds to substantial losses in the event of an increase in interest rates. When interest rates rose in February and March 1994, the Funds experienced an erosion in value. In March 1994, the Brokers issued improper margin calls on the Funds, based on arbitrary security valuations.

 The Funds acquired most of their securities pursuant to repos, a financing mechanism that allowed the Funds to pay only a fraction of the cost of each CMO in cash, borrowing the balance from the Brokers. In such a transaction, one party to the agreement agrees to sell a security to a buyer/lender for a given sum (the "repo amount") and to buy the security back from the buyer/lender at a later date (the "buy-back date") for the repo amount plus a market rate of interest (the "repo rate"). In effect, the Complaint alleges that the repos were collateralized loans - the Brokers loaned the Funds most of the purchase price for each CMO and took possession of the bonds as collateral. The use of repos benefitted the Brokers, allowing the Funds to increase their purchases from the Brokers.

 The contracts between the Funds and the Brokers *fn1" allowed the Brokers to make margin calls on the Funds if the value of the securities on repo fell below the amount that the Funds had borrowed (plus an agreed-upon "haircut"). In that instance, a "margin deficit" exists. In making margin calculations, the market value of the securities must be the price obtained from a "generally recognized source agreed to by the parties or the most recent closing bid quotation from such a source," plus accrued income not included therein. (Compl. P 55.) In March 1994, however, the Brokers issued a blizzard of margin calls that were not based on fair market prices, but on unreasonably low, manipulated valuations.

 When the Funds were unable to meet the Brokers' improper margin calls, the Brokers liquidated the Funds' portfolios. Under the PSA Agreements, if a proper margin call is not met, the broker-dealer may liquidate the collateral upon one business day's notice, including by selling the securities to itself in a "deemed" sale and crediting the customer in an amount equal to the price of the securities obtained from a generally recognized source or the most recent closing bid quotation from such a source. According to the Complaint, the liquidations were not conducted in good faith and in a commercially reasonable manner. Instead of seeking to maximize the prices paid for the Funds' securities in the liquidations by soliciting bids from their retail customers, the Brokers in nearly all cases simply "deemed" the CMOs sold to themselves, at unreasonably low prices.

 The Brokers agreed to facilitate each other's liquidations by providing each Broker with sham bids for the Fund securities that each of them held. These were not bona fide offers to purchase the securities at market prices, but artificially low "accommodation" bids solicited and provided in an effort to justify the prices at which the Brokers then deemed the Funds' CMOs sold to themselves.

 The Complaint alleges that by selling the inappropriate toxic securities to the Funds, by generating artificial and improper margin calls, and then by liquidating the portfolios in a commercially unreasonable and collusive manner, the Brokers netted profits, whereas the Funds lost more than $ 400 million.


 I. Legal Standards

 A. Rule 12(b)(6)

 In deciding the merits of a motion to dismiss for failure to state a claim, all material allegations composing the factual predicate of the action are taken as true, for the court's task is to "assess the legal feasibility of the complaint, not assay the weight of the evidence which might be offered in support thereof." Ryder Energy Distribution v. Merrill Lynch Commodities, Inc., 748 F.2d 774, 779 (2d Cir. 1984) (quoting Geisler v. Petrocelli, 616 F.2d 636, 639 (2d Cir. 1980)). Thus, where it is beyond doubt that plaintiff can prove no set of facts in support of his or her claim which would warrant relief, the motion for judgment on the pleadings must be granted. See H.J. Inc. v. Northwestern Bell Tel. Co., 492 U.S. 229, 250, 106 L. Ed. 2d 195, 109 S. Ct. 2893 (1989); Hishon v. King & Spalding, 467 U.S. 69, 73, 81 L. Ed. 2d 59, 104 S. Ct. 2229 (1984); Conley v. Gibson, 355 U.S. 41, 45-46, 78 S. Ct. 99, 2 L. Ed. 2d 80 (1957).

 Additionally, on a Rule 12(b)(6) motion, consideration is limited to the factual allegations in the complaint, "to documents attached to the complaint as an exhibit or incorporated in it by reference, to matters of which judicial notice may be taken, or to documents either in plaintiff['s] possession or of which plaintiff[] had knowledge and relied on in bringing suit." Brass v. American Film Technologies, Inc., 987 F.2d 142, 150 (2d Cir. 1993); see Cortec Indus., Inc. v. Sum Holding L.P., 949 F.2d 42, 47-48 (2d Cir. 1991).

 B. Rule 9(b)

 Federal Rules of Civil Procedure 9(b) requires that in all allegations of fraud, the circumstances constituting the fraud must be stated with particularity. See Shields v. Citytrust Bancorp, Inc., 25 F.3d 1124, 1127 (2d Cir. 1994); In re Time Warner, Inc. Sec. Litig., 9 F.3d 259, 265 (2d Cir. 1993); Shemtob v. Shearson, Hammill & Co., 448 F.2d 442, 444-45 (2d Cir. 1971). The pleading must be sufficiently particular to serve the three goals of Rule 9(b), which are (1) to provide a defendant with fair notice of the claims against him; (2) to protect a defendant from harm to his reputation or goodwill by unfounded allegations of fraud; and (3) to reduce the number of strike suits. See Di Vittorio v. Equidyne Extractive Indus., Inc., 822 F.2d 1242, 1247 (2d Cir. 1987); O'Brien v. Price Waterhouse, 740 F. Supp. 276, 279 (S.D.N.Y. 1990), aff'd, 936 F.2d 674 (2d Cir. 1991).

 The Court of Appeals has required that allegations of fraud adequately specify the statements made that were false or misleading, give particulars as to the respect in which it is contended that the statements were fraudulent, and state the time and place the statements were made and the identity of the person who made them. See McLaughlin v. Anderson, 962 F.2d 187, 191 (2d Cir. 1992); Cosmas, 886 F.2d at 11.

 The pleading must give notice to each opposing party of its alleged misconduct. Thus, a claim may not rely upon blanket references to acts or omissions by all the defendants, for each defendant named is entitled to be apprised of the circumstances surrounding the fraudulent conduct with which he is individually charged. See Jacobson v. Peat, Marwick, Mitchell & Co., 445 F. Supp. 518, 522 n.7 (S.D.N.Y. 1977). This requirement facilitates the preparation of an adequate defense while protecting a party's reputation from groundless accusations. See de Atucha v. Hunt, 128 F.R.D. 187, 189 (S.D.N.Y. 1989), aff'd, 979 F.2d 846 (2d Cir. 1992); Posner v. Coopers & Lybrand, 92 F.R.D. 765, 768 (S.D.N.Y. 1981), aff'd, 697 F.2d 296 (2d Cir. 1982). It also serves to prevent abuse of process and gratuitous disruption of normal business activity. See Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 740-41, 44 L. Ed. 2d 539, 95 S. Ct. 1917 (1975).

 II. Count XIII Alleging Common Law Fraud Against the Brokers Is Dismissed

 There are five elements necessary to sustain a claim of fraud under New York law: (1) misrepresentation of a material fact; (2) the falsity of that misrepresentation; (3) scienter, or intent to defraud; (4) reasonable reliance on that representation; and (5) damage caused by such reliance. May Dep't Stores Co. v. International Leasing Corp., 1 F.3d 138, 141 (2d Cir. 1993); Katara v. D.E. Jones Commodities, Inc., 835 F.2d 966, 970-71 (2d Cir. 1987); Red Ball Interior Demolition Corp. v. Palmadessa, 874 F. Supp. 576, 584 (S.D.N.Y. 1995). Additionally, the plaintiff must comply with the heightened pleading standard of Rule 9(b), Fed. R. Civ. P.

 The Complaint alleges that, to sell the Funds the toxic, "deal driver" tranches of their CMO offerings, the Brokers 2 misrepresented certain securities, particularly inverse IOs, *fn2" as bearish or only slightly bullish when, in fact, they were strongly bullish or their reaction to interest rate changes was impossible to predict. In reliance on the Brokers' misrepresentations, the Funds purchased securities that they would not otherwise have, and they held onto securities that they would otherwise have sold.

 Because some of the allegations do not meet the requirement of Rule 9(b), and the remaining fail to adequately allege justifiable reliance, the fraud claim must be dismissed.

 A. Allegations of Fraud Specific to Bear Stearns Do Not Meet the Pleading Requirements of Rule 9(b)

 There are three fraudulent allegations set forth in the Complaint particular to Bear Stearns. Because they do not comply with Rule 9(b), Bear Stearns' motion to dismiss is granted.

 The LAB invokes the deposition testimony of Askin in another matter as one of its allegations of fraud against Bear Stearns. Askin testified at a January 5, 1995, deposition:

A: It's also not my testimony that each inverse IO shown to ACM by any or all dealers were bearish, but rather that some of the inverse IOs that were represented to ACM by some of the dealers were represented as bearish securities.
Q: Was Kidder, Peabody one of the brokers who misrepresented an inverse IO as bearish?
A: Kidder Peabody is one of the brokers that on more than one occasion represented that the inverse IOs that it wanted to sell were bearish. . . .
Q: Does your last answer apply to Bear Stearns as well?
A: I believe it does, yes.

 (Compl. P 77.)

 This exchange lacks the specificity required under Rule 9(b). It not only fails to allege a statement by Bear Stearns, but it also fails to state the time and place the statement was made, as well as the identification of the speaker. See Primavera Familienstiftung v. Askin, 173 F.R.D. 115, 123 (S.D.N.Y. 1997). Such a vague reference cannot form the basis for a fraud claim under Rule 9(b).

 The LAB also alleges that on March 31, 1993, "Bear Stearns faxed marketing materials to ACM indicating that four inverse IO residual CMOs were '1000 basis points cheap to benchmark I/Os' and that these same bonds were '25% cheaper than Trust IOs.'" (Compl. P 79.) The same fax allegedly included the sentence, "I would suggest a smaller long position (as the off-setting hedge) than we have been using in the IO analysis." (Id.) The LAB contends that upon translation of the broker's jargon Bear Stearns is representing that the four inverse IOs are less expensive substitutes for benchmark and Trust IOs, both well known to be bearish securities. According to the LAB, these statements mean that Bear Stearns advised ACM to purchase these securities as a hedge against Granite Corp. and Granite Partners' bullish securities.

 Whereas the LAB maintains that Bear Stearns made a representation about the fundamental properties of inverse IOs upon which the Funds relied to their detriment, Bear Stearns asserts that the statements in the fax do not constitute a "representation" at all, much less a "misrepresentation" that certain securities are bearish. The first portion of the alleged statement, maintains Bear Stearns, is a relative price quotation, and the second part is, by its own terms, a suggestion - a statement of opinion.

 The plain words of the allegation do not support the LAB's contention. The first portion of the fax states that four particular bonds are cheaper than certain other classes of bonds. The LAB does not claim that the statement was false - that the bonds were not, in fact, cheaper than the other classes of bonds. Instead, the LAB explains that this was a misrepresentation about the fundamental characteristics of these four securities. This is not a reasonable inference to be drawn in the LAB's favor since it requires the Court to take words that are concededly accurate and interpret them into a misrepresentation. See Cohen v. Litt, 906 F. Supp. 957, 961 (S.D.N.Y. 1995) ("In evaluating a motion to dismiss, a court need not accept a complaint's legal conclusions and unwarranted factual deductions.").

 The second portion of the fax is, as stated by Bear Stearns, a suggestion rather than a representation of fact. See Schlaifer Nance & Co., Inc. v. Estate of Warhol, 927 F. Supp. 650, 661 (S.D.N.Y. 1996) (finding that "statements cannot support a fraud claim as a matter of law because they were simply not representations of fact"), aff'd, 119 F.3d 91 (2d Cir. 1997). *fn3" Additionally, the alleged statement does not indicate the type of security the suggested "offsetting hedge" would be. Because there can be no fraud without a misrepresentation, see Cumberland Oil Corp. v. Thropp, 791 F.2d 1037, 1044 (2d Cir. 1986), this allegation cannot form the basis for fraud against Bear Stearns. *fn4"

 Finally, the LAB alleges on information and belief that Bear Stearns described one of the forwards *fn5" as bearish in order to induce ACM to purchase it. Yet "fraud pleadings generally cannot be based on information and belief." Stern v. Leucadia Nat'l Corp., 844 F.2d 997, 1003 (2d Cir. 1988). The exception to this rule is that "fraud allegations may be so pleaded as to facts peculiarly within the opposing party's knowledge; even then, however, the allegations must be accompanied by a statement of facts upon which the belief is founded." Id. ; see Campaniello Imports, Ltd. v. Saporiti Italia S.p.A., 117 F.3d 655, 664 (2d Cir. 1997); see also Wexner v. First Manhattan Co., 902 F.2d 169, 172 (2d Cir. 1990) ("This exception to the general rule must not be mistaken for license to base claims of fraud on speculation and conclusory allegations. Where pleading is permitted on information and belief, a complaint must adduce specific facts supporting a strong inference of fraud or it will not satisfy even a relaxed pleading standard.").

 The LAB represents that its basis for belief is that Bear Stearns described the identical security as bearish in written marketing materials faxed to the Clinton Group, another purchaser of CMOs. However, an alleged statement by Bear Stearns to a third party unrelated to the Funds cannot form the basis for LAB's fraud claim. It is nowhere alleged that the Funds ever heard or relied on this alleged misrepresentation, nor that the same representation was ever made to them. Furthermore, this specific allegation is not "peculiarly" within the defendant's knowledge, as it must for a fraud pleading premised on "information and belief," see Campaniello Imports. Ltd., 117 F.3d at 664, because the LAB must allege that the Funds heard it and relied on it. Thus allegation must also be dismissed for failure to meet the specificity required by Rule 9(b).

 B. The Fraud Claim Against the Brokers Will Be Dismissed Because the Lab Has Not Adequately Pleaded Reasonable Reliance

 Under New York law, the LAB must establish actual, direct reliance upon the representations of bearishness made by the Brokers. See Golden Budha Corp. v. Canadian Land Co., 931 F.2d 196, 202 (2d Cir. 1991); Belin v. Weissler, 1998 U.S. Dist. LEXIS 10492, No. 97 Civ. 8787, 1998 WL 391114, at *5 (S.D.N.Y. July 14, 1998); Turtur v. Rothschild Registry Int'l, Inc., 1993 U.S. Dist. LEXIS 11939, No. 92 Civ. 8710, 1993 WL 338205, at *6 (S.D.N.Y. Aug. 27, 1993); Devaney v. Chester, 709 F. Supp. 1255, 1264 (S.D.N.Y. 1989). Once allegations of actual, direct reliance are adequately pleaded, the inquiry does not stop there. Under New York law, "the asserted reliance must be found to be justifiable under all the circumstances before a complaint can be found to state a cause of action in fraud." Danann Realty Corp. v. Harris, 5 N.Y.2d 317, 322, 157 N.E.2d 597, 599-600, 184 N.Y.S.2d 599, 603 (1959); see Lazard Freres & Co. v. Protective Life Ins. Co., 108 F.3d 1531, 1541 (2d Cir.) (stating that "in order to sustain a claim of fraud, a party must establish, inter alia, justifiable reliance"), cert. denied, 139 L. Ed. 2d 112, 118 S. Ct. 169 (1997); Palmadessa, 874 F. Supp. at 588 (dismissing common law fraud claim in part because plaintiff failed to show that "he was justified in taking action in reliance" upon defendant's representations).

 As against DLJ, the LAB asserts as an allegation of fraud that on February 1, 1994, DLJ's salesperson represented that "an inverse IO being offered by DLJ, GECMS 1993 16-A6, was 'a good bearish bond.'" (Compl. P 82.) However, the LAB concedes that the Funds never purchased that security. Thus, the LAB has failed to allege actual, direct reliance upon this representation of bearishness.

 Also regarding DLJ, the LAB alleges that in September 1993, DLJ provided the Funds with a portfolio valuation analysis stating that three inverse IOs had a negative effective duration -- as per the LAB, an explicit representation that they were bearish; this proved to be false in March 1994 when, in a rising interest rate environment, DLJ marked each of these securities down from 40 to 61%. (Id. P 105, 110). Similarly, as against all of the Brokers, the LAB maintains that at the end of February 1994, each of the Brokers ascribed values - or "marks" - to the Funds' inverse IOs. The LAB contends that the marks were tantamount to a misrepresentation that those securities were bearish or only slightly bullish when they were actually very bullish or unpredictable. In purported reliance on such representations, the LAB claims that the Funds retained the securities rather than selling them and subsequently purchased other, unidentified, securities. As to these allegations, the Funds' reliance was neither justified nor reasonable.

 Before reaching the issue of justifiable reliance, the question of whether the marks constitute representations as to bearishness must be addressed. According to the Brokers, the LAB does not allege that any of the February marks were incorrect, much less fraudulently made. Rather, the LAB claims that the manner in which the prices changed from one month to another constituted a representation about the characteristics of the securities. The Brokers continue that the LAB is engaging in an Alice-in-Wonderland effort to create representations where none exist, for the February marks - simple price quotations without explanation for all of the bonds the Funds had with the Brokers - simply do not constitute representations as to bearishness. The marks were nothing more than the Brokers' valuation of the securities at that time, in the context of existing market conditions. ...

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