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July 26, 1999


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


The Brokers have also moved to dismiss Counts XIII through XXI of the Second Amended Complaint, which have been reasserted merely for the purposes of plaintiffs' contemplated appeal. Plaintiffs have agreed, both in their papers and in correspondence to the Court, (see Letter from Seiler to Judge Sweet of 10/16/98, at 2), that these counts are deficient under the logic of Granite Partners, L.P. v. Bear, Stearns & Co., 17 F. Supp.2d 275 (S.D.N.Y. 1998) ("Granite II"), and that they should therefore be summarily dismissed.

For the reasons set forth below, the Brokers' motions 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-related 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.

Comerford, a resident of New York, was at all relevant times a senior vice president of DLJ.

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

David J. Askin ("Askin") is a resident of New Jersey.

At all times relevant to this action, non-party Askin Capital Management, L.P. ("ACM"), a Delaware limited partnership, was a registered investment advisor, whose principal place of business was New York City. ACM was formed in January 1993 by Askin. Askin also served as ACM's president, chief executive officer, and chief financial officer. ACM became the investment advisor to both Granite Corp. and Granite Partners (and Granite Partners' sole general partner) on or about January 26, 1993. ACM has been the investment advisor to Quartz since its formation.

Prior Proceedings

The facts and prior proceedings in this action are set forth in prior opinions of this Court, familiarity with which is assumed. See Granite II, 17 F. Supp.2d at 275; Granite Partners v. Bear, Stearns & Co., 184 F.R.D. 49 (S.D.N.Y. 1999).

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 its First Amended Complaint in this action on August 4, 1997, naming, in addition to Bear Stearns, Rubin, DLJ, Comerford, and Merrill Lynch as defendants.

In its First Amended Complaint, the LAB asserted 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.

On August 25, 1998, the lion's share of the LAB's claims were dismissed in Granite II, 17 F. Supp.2d at 275. That decision granted the LAB leave to replead.

On October 16, 1998, the LAB filed the Complaint that is the subject of the Brokers' current motions to dismiss. Oral argument was heard on the instant motions on April 29, 1999, at which time the motions were deemed fully submitted. Additional materials were received from the parties through June 2, 1999.


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. See 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), modified by, 793 F.2d 457 (2d Cir. 1986). 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 motions.

Though the LAB's Complaint differs in significant respects from its First Amended Complaint, the basic facts remain the same. As was explained in more detail in Granite II, this case arises out of the collapse in early 1994 of the Funds that were managed by Askin and ACM. The Funds invested primarily in collateralized mortgage obligations ("CMOs") created by the Brokers and other broker-dealers. As the Complaint states, "CMOs are securities created from and collateralized by mortgage-backed securities formed from pools of residential mortgages or securities backed by such mortgages." Compl. ¶ 26. ACM, through its president, Askin, purchased the securities for the Funds. The advisory and fiduciary relationships between ACM, or its predecessors, and the Funds were governed by investment advisory agreements. Because CMOs of the type purchased by the Funds vary in their sensitivity to interest rate fluctuations, and the Funds themselves had distinct investment strategies, ACM's selection of the Funds' securities was critical.

Askin and ACM, the Funds' investment advisor, had fiduciary and contractual obligations to the Funds to make investments with due care and in accordance with the Funds' stated investment objectives. Askin and ACM, however, did not fulfil those obligations, and repeatedly breached their fiduciary and contractual duties. As a result, the Funds acquired portfolios that were full of bullish CMOs, esoteric and highly "toxic" CMOs, and otherwise inappropriate securities. When short-term interest rates rose in early 1994, these securities radically eroded in value.

The Complaint alleges that the Brokers took advantage of ACM and Askin's shortcomings by recommending and selling to the Funds inappropriate and, at times, highly toxic CMOs. The Complaint also alleges that the Brokers deliberately supplied ACM and the Funds with erroneous "marks" purportedly representing the Brokers' own valuations of the Funds holdings — a claim not explicitly made in the First Amended Complaint — despite contracts between the Funds and the Brokers requiring the provision of accurate and timely Broker marks. In their sales of securities to the Funds, the Brokers recouped significant profits — in part due to the Brokers' charging of excessive markups. The LAB's claims concerning the Brokers' charging of excessive markups were also not explicitly made in the First Amended Complaint.

The Funds obtained the majority of their CMOs 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. After the Funds' value began to erode in early 1994, the Funds' holdings were liquidated pursuant to Public Securities Association Master Repurchase Agreements ("PSA Agreements") between the Funds and the Brokers. Under these agreements, the Brokers were allowed to make margin calls on the Funds if the value of the securities held on "repo" fell below the amount that the Funds had borrowed, plus an agreed-upon "haircut."*fn1 Unable to meet margin calls issued by the Brokers, the Funds' portfolios were liquidated.

The Complaint alleges that the Brokers once again took advantage of the Funds during these liquidations. In particular, the Brokers are alleged to have liquidated the Funds' holdings by "deeming" sales of the Funds' securities to themselves at unreasonable, below-market prices. The Brokers allegedly colluded with each other to exchange sham bids, thus facilitating this bad-faith liquidation. Having obtained the Funds' securities at artificially low prices, the Brokers then proceeded to sell those same securities on the open market — recovering profits far in excess of those they would have obtained had they liquidated the Funds' portfolios in a non-collusive manner.

The Brokers have moved to dismiss several repleaded claims that were present in the First Amended Complaint, as well as a few that were not. The Complaint realleges antitrust claims under the Sherman and Donnelly Acts that were dismissed in Granite II (Counts VI and VII). The Complaint also includes claims of common law fraud (Count IV) and breach of contract (Count III), not present in the LAB's First Amended Complaint, based upon the Brokers' provision of erroneous marks, as well as a common law fraud claim premised upon the Brokers' failures to disclose the excessive markups they charged the Funds for securities (Count V). Finally, the Complaint realleges claims for tortious interference with contracts similar to those that were dismissed in Granite II (Counts XI and XII). The Brokers have moved to dismiss these claims, but not several others that are not the subject of the instant opinion.


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 to assay the weight of the evidence which might be offered in support thereof.'" Ryder Energy Distribution Corp. 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 that would warrant relief, a motion to dismiss must be granted. See H.J. Inc. v. Northwestern Bell Tel. Co., 492 U.S. 229, 249-50, 109 S.Ct. 2893, 106 L.Ed.2d 195 (1989); Hishon v. King & Spalding, 467 U.S. 69, 73, 104 S.Ct. 2229, 81 L.Ed.2d 59 (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 Techs., Inc., 987 F.2d 142, 150 (2d Cir. 1993) (citing Cortec Indus., Inc. v. Sum Holding L.P., 949 F.2d 42, 47-48 (2d Cir. 1991)); Bissell v. Merrill Lynch & Co., 937 F. Supp. 237, 239 (S.D.N.Y. 1996), aff'd, 157 F.3d 138 (2d Cir. 1998), cert. denied, ___ U.S. ___, 119 S.Ct. 1039, 143 L.Ed.2d 47 (1999).

The parties have submitted numerous exhibits, including deposition transcripts, that could not appropriately be considered on a motion to dismiss. Despite the voluminous nature of these exhibits, and the alacrity with which the parties have interwoven quarrels based upon these materials with contentions based upon the LAB's actual pleadings, these exhibits have been ignored. However, certain documents not attached to the Complaint or explicitly incorporated by reference have been consulted where appropriate under the above standard.

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, 445 (2d Cir. 1971). Allegations of fraud must 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.

II. The LAB Has Not Adequately Pleaded Violations of the
    Sherman and Donnelly Acts (Counts VI and VII)

The LAB has brought suit against Bear Stearns, Rubin, DLJ, and Merrill Lynch pursuant to section 4 of the Clayton Act, which provides:

  [A]ny person who shall be injured in his business or
  property by reason of anything forbidden in the
  antitrust laws may sue . . . and shall recover
  threefold the damages by him sustained, and the cost
  of suit, including a reasonable attorney's fee.
  15 U.S.C. § 15(a) (1997). According to the LAB, the Brokers committed underlying violations of section 1 of the Sherman Act, 15 U.S.C. § 1 (1997), by engaging in a conspiracy to exchange "lowball," accommodation bids during the initial liquidation of the Funds' holdings. These bids were then used by the Brokers to justify deeming sales of those holdings to themselves at below-market prices. The LAB alleges that by agreeing to forestall a competitive auction the Brokers engaged in a conspiracy in violation of the Sherman Act. The LAB also asserts that the Brokers' collusive bidding scheme was illegal under New York's Donnelly Act, N.Y. Gen. Bus. Law § 340 (McKinney's 1996).

Section 1 of the Sherman Act reads, in relevant part:

  Every contract, combination in the form of trust or
  otherwise, or conspiracy, in restraint of trade or
  commerce among the several States, or with foreign
  nations, is hereby declared to be illegal. Every
  person who shall make any contract or engage in any
  combination or conspiracy hereby declared to be
  illegal shall be deemed guilty of a felony. . . .

15 U.S.C. § 1.

While the Sherman Act, by its terms, prohibits any agreement or combination "in restraint of trade or commerce," id., it has long been recognized that the Act was only intended to outlaw unreasonable restraints. See Bogan v. Hodgkins, 166 F.3d 509, 513 (2d Cir. 1999) ("[T]he Supreme Court has read the Act to forbid only `unreasonable' restraints, as a literal reading would absurdly bar all contracts. In particular not all cooperative conduct has a deleterious effect on competition; indeed, some cooperative arrangements foster rather than harm competition.") (citations omitted). As a result, most antitrust claims are evaluated under a "rule of reason," according to which "the finder of fact must decide whether the questioned practice imposes an unreasonable restraint on competition, taking into account a variety of factors, including specific information about the relevant business, its conditions before and after the restraint was imposed, and the restraint's history, nature, and effect." State Oil Co. v. Khan, 522 U.S. 3, 118 S.Ct. 275, 279, 139 L.Ed.2d 199 (1997); see Bogan, 166 F.3d at 513 n. 4. To allege unreasonable restraint of trade, something more than a private dispute must be alleged. The relevant product market must be identified, and the plaintiff must "`allege how the net economic effect of the alleged violation is to restrain trade in the relevant market, and that no reasonable alternate source is available' to consumers in that market." International Television Productions Ltd. v. Twentieth Century-Fox Television, 622 F. Supp. 1532, 1534 (S.D.N.Y. 1985) (quoting Gianna Enters. v. Miss World (Jersey) Ltd., 551 F. Supp. 1348, 1355 (S.D.N Y 1982)); see North Jersey Secretarial School, Inc. v. McKiernan, 713 F. Supp. 577, 583 (S.D.N.Y. 1989). The economic impact in the relevant market must be specified, and the plaintiff must show that "the alleged restraint on trade tends or is reasonably calculated to prejudice the public interest." Larry R. George Sales Co. v. Cool Attic Corp., 587 F.2d 266, 273 (5th Cir. 1979).

However, because certain types of restraints have both a predictable and pernicious effect on competition, they are deemed unlawful per se. In the motions considered in Granite II, the Broker defendants maintained that the LAB had only alleged injury to the Funds themselves, not injury to the relevant market, and that this failure to plead restraint of trade required dismissal of the LAB's antitrust claims. By contrast, the LAB sought to neutralize the inadequacy of its pleadings by urging that the Brokers' alleged bid-rigging conspiracy be considered a per se violation of the antitrust laws. More specifically, the LAB suggested that because a horizontal bid-rigging scheme had been alleged, it was entitled to per se treatment and the LAB need not meet the demands of rule-of-reason analysis. As was explained in Granite II, however, because of the novel and complex nature of the market and instruments at issue in this case, the collusion alleged by the LAB did not constitute a per se violation of the Sherman Act. See 17 F. Supp.2d at 297.

In its papers, the LAB has once again attempted to navigate a shortcut around rule-of-reason analysis, pressing that the so-called "quick look" rule of reason should be applied to its antitrust claims. The LAB's entreaties notwithstanding, "quick look" rule-of-reason analysis would not be appropriate in this case. Abbreviated rule-of-reason analysis, as the Supreme Court has recently had occasion to observe, is only appropriate where "the great likelihood of anticompetitive effects can easily be ascertained," and "an observer with even a rudimentary understanding of economics could conclude that the arrangements in question would have an anticompetitive effect on customers and markets." California Dental Assoc. v. FTC, ___ U.S. ___, 119 S.Ct. 1604, 1612-13, 143 L.Ed.2d 935 (1999). It was emphatically the holding of Granite II that the anticompetitive impact of the Brokers' alleged bidding conspiracy was neither obvious nor easily ascertainable, and that therefore the LAB could not maintain its antitrust claims against the Brokers merely by alleging per se violations of the Sherman Act. As California Dental indicates, "quick look" rule-of-reason analysis is inappropriate for similar reasons. See id. The LAB's request that the Court merely engage in yet another form of truncated antitrust analysis is thus meritless.

To withstand a motion to dismiss, a plaintiff making a Sherman Act conspiracy claim must allege a concerted action by two or more persons that unreasonably restrains interstate or foreign trade or commerce. See In re Nasdaq Market-Makers Antitrust Litig., 894 F. Supp. 703, 710 (S.D.N.Y. 1995); Three Crown Ltd. Partnership v. Caxton Corp., 817 F. Supp. 1033, 1047 (S.D.N Y 1993); Broadcast Music, Inc. v. Hearst/ABC Viacom Entertainment Servs., 746 F. Supp. 320, 325 (S.D.N.Y. 1990); accord International Distrib. Ctrs., Inc. v. Walsh Trucking Co., 812 F.2d 786, 793 (2d Cir. 1987). The plaintiff "must do more than merely allege that a conspiracy exists, it must provide some factual basis for that allegation." Fort Wayne Telsat v. Entertainment & Sports Programming Network, 753 F. Supp. 109, 115 (S.D.N.Y. 1990); see Garshman v. Universal Resources Holding Inc., 824 F.2d 223, 230 (3d Cir. 1987); Heart Disease Research Found. v. General Motors Corp., 463 F.2d 98, 100 (2d Cir. 1972). For example, the plaintiff must identify the relevant product market, the co-conspirators, and describe the nature and effects of the alleged conspiracy. See In re Nasdaq, 894 F. Supp. at 710-11; International Television Productions, 622 F. Supp. at 1537. While dismissal prior to giving a plaintiff ample opportunity for discovery should be granted sparingly in antitrust cases, see Hospital Bldg. Co. v. Trustees of Rex Hosp., 425 U.S. 738, 746, 96 S.Ct. 1848, 48 L.Ed.2d 338 (1976),*fn2 "`[i]t is not . . . proper to assume that the [plaintiff] can prove facts that it has not alleged or that the defendants have violated the antitrust laws in ways that have not been alleged.'" George Haug Co. v. Rolls Royce Motor Cars Inc., 148 F.3d 136, 139 (2d Cir. 1998) (quoting Associated Gen. Contractors of California, Inc. v. California State Council of Carpenters, 459 U.S. 519, 526, 103 S.Ct. 897, 74 L.Ed.2d 723 (1983)).

As the Second Circuit has held, establishing an unreasonable restraint of trade under the rule of reason involves three basic steps:

  "[P]laintiff bears the initial burden of showing that
  the challenged action has had an actual adverse
  effect on competition as a whole in the relevant
  market. . . ." Capital Imaging Assocs. P.C. v.
  Mohawk Valley Medical Assocs., 996 F.2d 537, 543 (2d
  Cir.), cert. denied, 510 U.S. 947, 114 S.Ct. 388,
  126 L.Ed.2d 337 (1993). If the plaintiff succeeds,
  the burden shifts to the defendant to establish the
  "pro-competitive `redeeming virtues'" of the action.
  Id. Should the defendant carry this burden, the
  plaintiff must then show that the same
  pro-competitive effect could be achieved through an
  alternate means that is less restrictive of
  competition. Id.; Bhan v. NME Hosps., Inc.,
  929 F.2d 1404, 1413 (9th Cir.), cert. denied,
  502 U.S. 994, 112 S.Ct. 617, 116 L.Ed.2d 639 (1991).

K.M.B. Warehouse Distribs., Inc. v. Walker Mfg. Co., 61 F.3d 123, 127 (2d Cir. 1995). To meet its initial burden a plaintiff bringing suit under the Sherman Act must "show more than just that he was harmed by defendants' conduct." Id. Rather, a plaintiff must show that the alleged restraint of trade had an actual adverse effect on competition as a whole in the relevant market. See id.; see also Jefferson Parish Dist. No. 2 v. Hyde, 466 U.S. 2, 31, 104 S.Ct. 1551, 80 L.Ed.2d 2 (1984) ("Without a showing of actual adverse effect on competition, respondent cannot make out a case under the antitrust laws. . . ."). This is so because the ultimate aim of the Sherman Act is to protect competition, as opposed to competitors. See Brown Shoe Co. v. United States, 370 U.S. 294, 320, 82 S.Ct. 1502, 8 L.Ed.2d 510 (1962). As another Second Circuit decision, Capital Imaging Assocs., P.C. v. Mohawk Valley Med. Assocs., Inc., 996 F.2d 537 (2d Cir. 1993), has explained:

  Under [the rule of reason test] . . . plaintiff bears
  the initial burden of showing that the challenged
  action has had an actual adverse effect on
  competition as a whole in the relevant market; to
  prove it has been harmed as an individual competitor
  will not suffice. Insisting on proof of harm to the
  whole market fulfills the broad purpose of the
  antitrust law that was enacted to ensure competition
  in general, not narrowly focused to protect
  individual competitors.

Id. at 543.

Additionally, it is well-settled that "[a] private plaintiff may not recover damages under § 4 of the Clayton Act merely by showing `injury causally linked to an illegal presence in the market.'" Atlantic Richfield Co. [ARCO] v. USA Petroleum Co., 495 U.S. 328, 334, 110 S.Ct. 1884, 109 L.Ed.2d 333 (1990) (quoting Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477, 489, 97 S.Ct. 690, 50 L.Ed.2d 701 (1977)). Rather, a private plaintiff must demonstrate the existence of "antitrust injury, which is to say injury of the type the antitrust laws were intended to prevent and that flows from that which makes defendants' acts unlawful." Brunswick, 429 U.S. at 489, 97 S.Ct. 690; see George Haug, 148 F.3d at 139 ("The antitrust injury requirement obligates a plaintiff to demonstrate, as a threshold matter, `that the challenged action has had an actual adverse effect on competition as a whole in the relevant market; to prove it has been harmed as an individual competitor will not suffice.'") (quoting Capital Imaging, 996 F.2d at 543); Florida Seed Co. v. Monsanto Co., 105 F.3d 1372, 1375 (11th Cir.) ("In many instances, those displaced by a merger suffer an economic loss. However, this loss is not an antitrust injury because it does not flow from that which makes a merger unlawful. Injuries like that suffered by Florida Seed do not `coincide[] with the public detriment tending to result from the alleged violation.'") (quoting Todorov v. DCH Healthcare Auth., 921 F.2d 1438, 1450 (11th Cir. 1991)), cert. denied, ___ U.S. ___, 118 S.Ct. 296, 139 L.Ed.2d 228 (1997). Even injuries with a causal connection to antitrust violations will not qualify as "antitrust injuries" unless they are "attributable to an anticompetitive aspect of the practice under ...

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