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VANGUARD MUN. BOND v. CANTOR

March 22, 1999

VANGUARD MUNICIPAL BOND FUND, INC., ET AL., PLAINTIFFS,
v.
CANTOR, FITZGERALD L.P., ET AL., DEFENDANTS.



The opinion of the court was delivered by: Stein, District Judge.

ORDER

In a Report and Recommendation dated December 21, 1998, Magistrate Judge Andrew J. Peck recommended that defendants' motion to dismiss the complaint or in the alternative for summary judgment be granted.

After a de novo review of Magistrate Judge Peck's Report and Recommendation dated December 21, 1998,

IT IS HEREBY ORDERED that that Report and Recommendation is adopted by this Court, and that defendants' motion for summary judgment dismissing the complaint is granted.

SO ORDERED.

REPORT AND RECOMMENDATION

Plaintiffs Vanguard Municipal Bond Fund, Vanguard Ohio Tax-Free Fund, Vanguard New York Insured Tax-Free Fund, Vanguard New Jersey Tax Free Fund, Vanguard Pennsylvania Tax-Free Fund, Vanguard Fixed Income Securities Fund and Vanguard Admiral Funds (collectively "Vanguard"), mutual funds and members of the Vanguard Group of Investment Companies, are suing defendants Cantor Fitzgerald Municipal Brokers, Chapdelaine & Co., J.F. Hartfield & Co., J.J. Kenny Drake, Municipal Partners and Titus & Donnelly (collectively the "Pricing Brokers") for negligence and negligent misrepresentation arising out of the Pricing Brokers' December 19, 1995 pricing of The Bond Buyer Municipal Bond Index (the "BBI"), against which Vanguard's December 1995 Long-Term Municipal Bond Index Futures Contracts were settled. The Pricing Brokers have moved to dismiss the complaint for failure to state a claim upon which relief can be granted, or, in the alternative, for summary judgment. For the reasons set forth below, because the Pricing Brokers' did not owe any duty to Vanguard, I recommend that the Court grant defendants' motion.*fn1

FACTS

Long-Term Municipal Bond Index Futures Contracts

In 1985, the Chicago Board of Trade (sometimes referred to herein as the "CBOT") created and began trading in Long-Term Municipal Bond Index Futures Contracts ("Futures Contracts"). (2d Am.Compl. ¶ 20.) Futures Contracts "are issued and trade with various monthly settlement (i.e., expiration) dates. . . . The price at which [Futures Contracts] settle on their respective expiration dates is established by reference to the BBI." (2d Am.Compl. ¶¶ 22-23; see also Pricing Brokers & Vanguard Rule 56.1 Stmts. ¶ 3; Affidavit of Carol Burke, V.P. of Chicago Board of Trade, ¶ 2.)

Each of the Pricing Brokers entered into a contract with the CBOT — Bond Buyer partnership ("Pricing Broker Contract") to perform price evaluations "for the purpose of permitting The Bond Buyer[] to compute the value of the BBI." (2d Am.Compl. ¶ 26; Pricing Brokers & Vanguard Rule 56.1 Stmts. ¶¶ 11, 14; Burke Aff. ¶¶ 9, 12; Poto Cantor Fitzgerald) Aff. ¶¶ 3, 6; Hoerrner (Chapdelaine) Aff. ¶¶ 3, 6; Byram (J.J. Kenny) Aff. ¶¶ 3, 6; Caffrey (Titus & Donnelly) Aff. ¶¶ 3, 6; Cashman (Municipal Partners) Aff. ¶¶ 3, 6; Epstein (Hartfield) Aff. ¶¶ 3, 6. Under the Pricing Broker Contracts, the Pricing Brokers:

  (b) undertake to provide accurate actual price
  quotations for the Constituent Bonds or, in the event
  there is not a sufficient volume of timely and
  current trading activity in such bonds, to provide an
  evaluation of what actual price quotations would have
  been had there been a sufficient volume of trading
  activity;
  (c) expressly represent and warrant the accuracy of
  the actual and evaluated price quotations the Pricing
  Brokers submit; . . .

(2d Am.Compl. ¶ 26; see Burke Aff. Exs. G-L: Pricing Broker Contracts ¶¶ 2.1, 2.2.) The Pricing Broker Contracts provide for compensation to the Pricing Brokers based on a formula that takes into account the number of quotations they submit plus a "bonus" based on the "average daily trading volume of futures contracts." (2d Am.Compl. ¶ 26; Burke Aff. Exs. G-L, ¶¶ 4.1, 4.4.)

Pursuant to Regulation 1950.01(b) and the Pricing Broker Contracts, the Pricing Brokers evaluate the price of the Constituent Bonds twice each day in order that the Bond Buyer may compute the BBI twice daily. (2d Am.Compl. ¶ 28; Pricing Brokers & Vanguard Rule 56.1 Stmts. ¶ 14; Burke Aff.Ex. A at Reg.1950.01(b); Poto Aff. ¶¶ 4-5; Hoerrner Aff. ¶¶ 4-5; Byram Aff. ¶¶ 4-5; Caffrey Aff. ¶¶ 4-5; Cashman Aff. ¶¶ 4-5; Epstein Aff. ¶¶ 4-5.) The Pricing Brokers submit the morning valuation between 11:45 a.m. and 12:00 p.m. New York time and the afternoon valuation between 2:45 p.m. and 3:00 p.m. New York time. (2d Am.Compl. ¶ 28; Kreps Aff. ¶ 6; Poto Aff. ¶ 4; Hoerrner Aff. ¶ 4; Byram Aff. ¶ 4; Caffrey Aff. ¶ 4; Cashman Aff. ¶ 4; Epstein Aff. ¶ 4.)

"Any member of the investing public may purchase or sell a CBOT Futures Contract[], which are valued at $1,000.00 times the BBI." (Pricing Brokers & Vanguard Rule 56.1 Stmts. ΒΆ 16; see also Burke Aff.Ex. A at Reg.1904.01.) Vanguard does not dispute that any member of the investing public may purchase or sell a Futures Contract but adds that since the value of each Futures Contract exceeds $100,000, "[f]or the most part, . . . Futures contracts are regularly and routinely traded by sophisticated ...


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