The opinion of the court was delivered by: Stein, District Judge.
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.
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
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.)
The Chicago Board of Trade has promulgated regulations to
govern the trading of Futures Contracts. (See Pricing Brokers &
Vanguard Rule 56.1 Stmts. ¶ 4; Burke Aff. ¶ 3 & Ex. A: Chapter 19
of the CBOT Regulations.) As provided in Regulation 1950.01(a),
the BBI is comprised of 40 long-term municipal bonds (the
"Constituent Bonds") that "must meet various
criteria as to size, rating, maturity and other factors." (2d
Am.Compl. ¶ 24; see also Pricing Brokers & Vanguard Rule 56.1
Stmts. at ¶¶ 4-5; Affidavit of Matthew Kreps, Statistics Editor
at The Bond Buyer, ¶ 5; Burke Aff.Ex. A at Reg. 1950.01(a).) The
BBI is calculated by and published in The Bond Buyer, pursuant to
Regulation 1950.01(b) and agreement with the Chicago Board of
Trade, which granted The Bond Buyer "a license to compute and
publish the BBI in accordance with price evaluations submitted by
major municipal bond dealer-to-dealer brokers." (2d Am.Compl. ¶¶
23, 25; see also Pricing Brokers & Vanguard Rule 56.1 Stmts. ¶¶
7, 9 12; Burke Aff. ¶ 9 & Ex. A at Reg. 1950.01(b); Burke Aff.
Ex. B: 1985 CBOT — Bond Buyer Agreement.)*fn2 Each day, the prior
day's BBI is published in The Bond Buyer. (Pricing Brokers &
Vanguard Rule 56.1 Stmts. ¶ 2; Kreps' Aff. ¶¶ 2, 3.)
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
(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.)
"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. ¶ 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 ...