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LEHMAN BROS. COMMERCIAL v. MINMETALS INTERN.

August 10, 2000

LEHMAN BROTHERS COMMERCIAL CORPORATION AND LEHMAN BROTHERS SPECIAL FINANCING INC., PLAINTIFFS,
V.
MINMETALS INTERNATIONAL NONFERROUS METALS TRADING COMPANY AND CHINA NATIONAL METALS AND MINERALS IMPORT AND EXPORT COMPANY, DEFENDANTS. MINMETALS INTERNATIONAL NON-FERROUS METALS TRADING COMPANY, COUNTERCLAIM PLAINTIFF, V. LEHMAN BROTHERS INC., LEHMAN BROTHERS ASIA LIMITED, LEHMAN BROTHERS SECURITIES ASIA LIMITED AND LEHMAN BROTHERS CAPITAL CO. (H.K.) LIMITED, ADDITIONAL COUNTERCLAIM DEFENDANTS.



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

          OPINION and ORDER FILE UNDER SEAL

Before the Court are cross-motions for summary judgment pursuant to Fed.R.Civ.P. 56. Defendants Minmetals International Non-Ferrous Metals Trading Company ("Non-Ferrous") and China National Metals & Minerals Import & Export Corporation ("Minmetals") move for summary judgment dismissing the Amended Complaint in this action, and Non-Ferrous moves to have judgment granted in favor of its Eighth Counterclaim. Plaintiffs Lehman Brothers Commercial Corporation ("LBCC") and Lehman Brothers Special Financing, Inc. ("LBSF") move for the following: (1) summary judgment on Counts One, Two, Four, and Five of the Amended Complaint; and (2) summary judgment on the affirmative defenses asserted by Defendants, except for the affirmative defense claiming failure to mitigate damages. Counterclaim Defendants Lehman Brothers, Inc. ("Lehman"),*fn1 LBCC, LBSF, Lehman Brothers Asia Limited, Lehman Brothers Securities Asia Limited, and Lehman Brothers Capital Co. (H.K.) Limited also move for summary judgment on the counterclaims asserted by Non-Ferrous.

For the reasons that follow in this Opinion and Order, the Defendants' motion is denied. The motions by the Plaintiffs and the Counterclaim Defendants are granted in part and denied in part. The Court reserves decision on aspects of both sides' motions, as discussed in this Opinion and Order.

BACKGROUND

From 1992 to 1994, Lehman subsidiaries were involved in a foreign-exchange ("FX") and swap-trading relationship with Hu Xiangdong ("Hu"), an employee of Non-Ferrous. Non-Ferrous was itself a subsidiary of Minmetals. This case for contract damages, tort damages, and declaratory relief stems from the demise of that relationship.

The Parties

Lehman is a global investment bank that offers a wide range of financial services. Lehman is headquartered in New York and maintains over thirty-five offices worldwide. LBCC is a booking vehicle for Lehman that books transactions in the foreign exchange markets. See Rubinstein Aff. in Supp. of Defendants' Mot. for Summ. J., Ex. 9, at 252, 418-19;*fn2 R1. Ex. 19, at 243, Ex. 3, at 16, 18-19. LBSF is a booking vehicle for Lehman that books interest-rate and other forms of swap transactions. See R1. Ex. 9 at 252, 407-08, Ex. 3 at 16, 18-19. Neither LBCC nor LBSF have any employees, offices, or telephones of their own. They both are Delaware corporations. As evidenced by the facts of this case, both LBCC and LBSF, at least some of the time, serve as principals in transactions with counterparties.*fn3

Minmetals is the parent corporation of the Minmetals Group, an international trading conglomerate that conducts business throughout the world and trades in more than 100 countries and regions. See Pl. Ex. 1. Minmetals is headquartered in Beijing in the People's Republic of China ("China"), is owned by the State, and reports directly to China's Ministry of Foreign Trade and Economic Cooperation. Id. Non-Ferrous is a wholly-owned subsidiary of Minmetals and is located in the same building as Minmetals. See Pl. Exs. 2,15.

The Establishment of a Foreign Exchange Relationship

Non-Ferrous initially opened an account with a Lehman affiliate — Lehman Brothers Commodities Limited ("LBCL") — sometime before the Fall of 1992 for trading on the London Metals Exchange ("LME"). After opening that account, Non-Ferrous sent LBCL communications identifying the Non-Ferrous employees that were authorized to place LME transactions through LBCL on Non-Ferrous' behalf. See R2. Ex. 15, at LM 3271, NF 1703, LM 32. Hu, an employee of Non-Ferrous, was not listed among those with authorization and had no role in opening the LME account.

In the Fall of 1992, Lehman personnel traveled to China as part of an active effort to solicit Chinese FX business. See R1. Ex. 13, at 174-77. During that trip, Lehman employees Timothy Potter, Jeremy Hodges, and May Tse met with Hu. Potter, an LBCC salesperson, went to Beijing to meet with Hu on the recommendation of a long-time customer. See Pl. Ex. 14, at 1354. Potter's customer had indicated that Hu wanted to establish an FX trading relationship with Lehman, and Potter made the trip in hopes of establishing such a relationship. Id. at 1354-55.

During the meeting, Hu presented his business card to Potter. The card read, at top, "China National Metals & Minerals Imp. & Exp. Corp." See Pl. Ex. 15. Directly under that heading, the card read, "International Non-Ferrous Metals Trading Co." Id. The card then identified Hu as "General Manager — Non-Ferrous Metals." Id.

Before that meeting in Beijing, Potter had met with James Bedford, an LBCL salesperson, to discuss LBCL's LME relationship with Non-Ferrous. See Pl. Ex. 14, at 1355. Potter learned from Bedford that Non-Ferrous was an established LME customer in good standing with LBCL. Id. at 1355-57. Although Lehman claims in its papers that Bedford confirmed at that time that Hu was an authorized trader for Non-Ferrous, neither Potter nor Bedford make such a claim. Bedford does not recall when Hu became authorized to trade for Non-Ferrous on the LME, and Potter has not stated that Bedford told him anything about Hu. See R2. Ex. 10 at 246-49; Pl. Ex. 14, at 135556.

At the Fall 1992 meeting, Potter reviewed Bedford's file on the Minmetals companies and noticed a Letter of Undertaking signed by both Minmetals and Non-Ferrous. The Letter of Undertaking indicated that the LME account was opened to allow Non-Ferrous to trade on the LME, and that Minmetals acted as Guarantor for any liabilities incurred by Non-Ferrous. See Pl. Ex. 17, at LM 000502. The Letter of Undertaking stated that LBCL was to place at Non-Ferrous' disposal "facilities in respect of [Non-Ferrous'] operations on all or any of the world's commodity, bullion, metal, securities, foreign exchange, index, financial instruments and options markets and future markets of any sort." Id.

After Hu's Beijing meeting with the Lehman personnel, Hu agreed to begin FX trading with LBCC on Non-Ferrous' behalf. This FX relationship in no way involved the LME account. Hu maintains that he agreed to commence FX trading because Lehman had been calling him regularly with market and trading advice and to recommend FX transactions to him. Hu claims that in making his decision to begin FX trading, he relied on Lehman's representations that it would make specific recommendations to him and would execute his transactions at a favorable price. See Hu Aff. § 18. Hu maintains that he did not understand that LBCC was to be a principal in these transactions; instead, he believed that LBCC was his agent and advisor, and that Potter and he were "a team." Id. ¶ 29.

The opening of Non-Ferrous' FX trading account with LBCC did not proceed smoothly. On November 26, 1992, Hu executed a Commodity Terms and Conditions Agreement and Supplement. See Pl. Ex. 19. Hu executed the agreement in China and faxed a copy to Potter in London. Although the fax cover sheet was written on Minmetals letterhead, it was clearly sent by Non-Ferrous, even though it was faxed after normal business hours from the offices of a company unrelated to either Minmetals or Non-Ferrous. See id.; R2. Ex. 23, at 728-31.

The FX account was opened in Minmetals' name: "China National Metals and Minerals Imp Exp Corp." See Pl. Ex. 19. Potter claims that he used Minmetals' name in the agreement because Hu had instructed him to do so. See R2. Ex. 23, at 727-29. Hu, on the other hand, claims that he had intended to open the account in Non-Ferrous' name. See Hu Aff. 126. Hu states that Potter told him that he would fill out the account title for him, and Hu assumed that Potter would use Non-Ferrous' name. Hu says he signed the agreement without realizing that Potter had used Minmetals' name on that agreement. Id. §§ 26-27.

Hu claims that within two weeks after signing the agreement and after the initial FX transaction was placed,*fn4 he realized that Potter had used Minmetals' name rather than Non-Ferrous' name. Hu says that when he told Potter of the mistake, Potter assured him that he would quickly correct it. Id. ¶ 27. Potter states that Hu directed him to transfer the account from Minmetals to Non-Ferrous. See Pl. Ex. 21.

In any event, on December 8, 1992, Hu executed an identical Commodity Terms and Conditions Agreement and Supplement in Non-Ferrous' name. See Pl. Ex. 22. Hu executed the agreement in China and faxed it on Non-Ferrous letterhead from Non-Ferrous' office to Potter in London. The agreement designated New York law as its governing law and provided for Non-Ferrous' payment of collateral — known as margin — under certain circumstances. The agreement stated that Lehman would have the right to liquidate its transactions with Non-Ferrous in the event that Non-Ferrous did not meet its margin obligations. See Pl. Ex. 24. It required that Non-Ferrous pay any deficiencies remaining after such a liquidation. Id.

At the same time that Hu executed the second agreement, he also signed a purported guarantee from Minmetals (the "Guarantee"). See Pl. Ex. 22, at LM 00029. The Guarantee was drafted by Lehman and then signed by Hu as "General Manager." See R1. Ex. 3, at 24; Pl. Ex. 22, at LM 00029. Hu claims that he signed the Guarantee because Lehman required this form for him to trade. He states that he did not have the authority to do so because he never worked for Minmetals. See Hu Aff. ¶ 28. Hu claims that he asked Potter how he could guarantee his own trading, to which Potter replied, "[D]on't worry about it, it is just a form needed for the files." Id.

After Hu executed the Commodity Terms and Conditions Agreement, neither anyone in Lehman's Credit Department nor any of Lehman's FX salespeople sought any evidence that Hu had the authority to open an FX account on Non-Ferrous' behalf. See, e.g., R1. Ex. 9, at 72-73; R2. Ex. 33, at 74, Ex. 23, at 367-68, 424. Nor did anyone at Lehman inquire about or obtain any governmental license or authorization for FX trading from Hu, even though its credit personnel and salespeople apparently understood that some form of governmental authorization was needed. See R1. Ex. 9, at 61, Ex. 10, at 102-03, Ex. 5, at 105, Ex. 12, at 76. Lehman's Credit Department disclaimed responsibility for making such an inquiry, and its Commodity Administration Department did the same. See R1. Ex. 9, at 22021, Ex. 18, at 162-63, Ex. 19, at 98-99, Ex. 20, at 120-21.

Despite this lack of due diligence, Lehman's Credit Department allowed Non-Ferrous to hold positions of up to $50 million. See R2. Ex. 39. Lehman increased this limit to $100 million within a few weeks' time, and eventually increased it to $1 billion. See R2. Ex. 40-42, 17. Lehman's Credit Department approved these increases without ever examining a financial statement or communicating with anyone at Non-Ferrous about Hu's trading. See R2. Ex. 33, at 44, 99-100, 138-39, 529-30. Lehman's Credit Department's decisions to do FX business with Non-Ferrous and increase Non-Ferrous' position limits were made on a "business-decision" basis, which meant that Lehman was prepared to do business with Non-Ferrous even without the financial information that was needed for an informed credit determination. See R2. Ex. 33, at 44-45, Ex. 44, at 57-59.

The Progression of Non-Ferrous' FX Trading

Hu was promoted to the position of General Manager of Non-Ferrous' Futures Department in February 1993. According to LBCL, that was the first date that Hu began trading for Non-Ferrous' LME account. See R2. Ex. 20. Consistent with its practice, Non-Ferrous sent LBCL a letter dated February 2, 1993 authorizing Hu to trade for Non-Ferrous' LME account. See R2. Ex. 19. The letter was signed by a vice-president of Non-Ferrous, Guo Xianqian. Id

Throughout 1993, Hu entered into many FX transactions with LBCC. During this time, Hu engaged in FX options, forwards, and spot transactions.*fn5 Hu claims that he branched out into forward and spot trading at Lehman's urging and suggestion of more lucrative profits. See Hu Aff. ¶ 62. These transactions proceeded smoothly. Throughout 1993, whenever Non-Ferrous' FX trading generated a margin call, the required funds were provided promptly. See Pl. Ex. 25. By February 1994, Non-Ferrous had earned over $30 million from its FX trading with Lehman.

Hu claims that he transferred the $42 million into Non-Ferrous' FX account after arranging a favorable interest-rate deal with May Tse at Lehman. See Hu Aff. ¶ 59. After Lehman agreed to pay the favorable interest rate, Hu informed Cao that he had arranged such a deal, but he led Cao to believe that the money would be deposited in the LME account. Id. ¶¶ 59-60; Cao Aff. ¶¶ 21-24. Based on these representations by Hu, Cao authorized the transfers of $42 million and had Hu prepare the paperwork. See Hu Aff. ¶ 60; Cao Aff. ¶¶ 22-23. Cao claims that he signed off on the transfers because as far as he knew, Non-Ferrous had only one account with Lehman — the LME account. See Cao Aff. ¶¶ 23-24.

Hu realized that by having this money transferred into the FX account at Lehman, he could increase his trading volume and still be protected against margin calls. See Hu Aff. ¶ 63. After the transfer, Lehman increased Hu's trading limit to $1 billion. See R2. Ex. 17. Hu's FX trading volume grew in response to this increase.

From 1993 to early 1994, Hu's trades earned profits. On two occasions between November 1993 and January 1994, Hu directed Lehman to transfer some of his profits to third parties. In November 1993, Hu asked Potter to transfer $5.1 million from the Non-Ferrous account to an account in Brooklyn under the name Sinormet. On November 18, 1993, Lehman transferred the money to Sinormet's Citibank account. See R2. Ex. 84; Hu Aff. ¶¶ 69-70. Sinormet was an entity that Hu claims he created in private. Hu Aff. ¶¶ 68-69. Hu states that he had no authority to order this transfer, that it was done without the knowledge of anyone at Non-Ferrous, and that nobody at Lehman questioned him or investigated why he ordered a transfer to a third party. Id. ¶¶ 69-70.

In January 1994, Hu directed Lehman to transfer $10.2 million from the FX account to the account of Senior Market Ltd. On January 31, 1994, Lehman transferred the money to Senior Market's account. See R2. Ex. 85; Hu Aff. ¶ 71. Senior Market was a company controlled by the same client of Potter who first introduced Hu to Potter in 1992. See Hu Aff. ¶ 71. Again, Hu claims he had no authority to order such a transfer, that the transfer was done without the knowledge of anyone at Non-Ferrous, and that Lehman simply transferred the money without inquiring into why the money was being transferred to a third party. Id. ¶ 72.

Hu maintains that throughout his FX trading with LBCC he relied upon the advice and recommendations of Potter and his FX colleagues, along with that of Lehman economists. Id. ¶ 30. He claims that he trusted and followed that advice because he believed in the integrity of Potter and Lehman. Id. He claims that Lehman promised to give him fair pricing and offer him better prices than other small investors. Id. ¶¶ 32-33. Hu maintains that he had no access to the FX market except through Lehman, and thus relied on Lehnan to keep him apprised of how his transactions were faring. Id. ¶ 36. All in all, Hu believed, based on what Lehman told him, that Lehman was his "trusted broker, doing its best to maximize [Hu's] Profits." Id. ¶ 33.

Non-Ferrous' Swap Transactions

During the time that the State Reserve Bank money was transferred to Non-Ferrous' FX account at Lehman, Hu opened yet a third account (the "Swap Account"). Hu entered into two interest-rate swap transactions with LBSF.*fn6 Lehman claims that Hu proposed the idea of an interestrate swap in an effort to boost the FX account's rate of return. See Pl. Ex. 34. Hu claims that once the money was transferred, Lehman employees approached him about entering into all sorts of derivative transactions. See Hu Aff. ¶¶ 76-77. Lehman allegedly urged Hu not to keep the money in the FX account, saying, "only old ladies put their money in cash accounts." Id. ¶ 76.

George Koo was the LBSF salesman who primarily handled Hu's swap trading. Hu maintains that Koo pitched interestrate swaps as safe investments that were guaranteed to return a good yield. Id. ¶ 78. In November 1993, Hu entered into an interest-rate swap transaction with LBSF. Hu documented the swap by executing a confirmation in China. See Pl. Ex. 38. The confirmation stated that New York law governed the transaction, and contained a clause that permitted either party to terminate the swap if its exposure exceeded $5 million at any given time and margin was not posted to meet that exposure. Id.

The November swap was a two-year bet on the movement of German interest rates. See R2. Ex. 57, at 8. The notional amount of the swap, the amount upon which the swap payoff is based, was listed on the swap confirmation as $50 million. But, because of a leverage factor in the swap's formula, the actual notional amount was $500 million. See Pl. Ex. 38. Hu claims that he did not know about the leverage, and that Lehman never explained to him that the swap transaction was leveraged. See Hu Aff. ¶ 79.

After Hu entered into the first swap, Lehman told Hu that it needed a letter from his boss authorizing him to engage in swap transactions. To that end, Lehman allegedly drafted an authorization letter for Cao to sign, and sent it to Hu. Id. ¶ 80. Hu, knowing that Cao could not read English, told Cao that his signature was needed to effectuate the higher rate of interest that Hu had told Cao that Non-Ferrous would earn. Id. Cao signed the letter, thinking that it would help return a higher interest rate on Non-Ferrous' LME account. See Cao Aff. ¶ 25. Cao claims that nobody from Lehman contacted him about this authorization letter. Id ¶ 27.

Hu claims that after he entered into the first swap transaction, Lehman continued to propose swap transactions to him. See Hu Aff. ¶ 87. In February 1994, Hu eventually entered into another interest-rate swap with LBSF. This transaction was a one-year bet involving the movement of interest rates in Japan. This transaction was also leveraged, this time with a leverage factor of fifteen. See Pl. Ex. 39. Therefore, the notional amount was $450 million, not the $30 million listed on the confirmation. Again, Hu claimed that he had no knowledge of the leverage, and that Lehman never explained it to him. See Hu Aff. ¶ 83.

Shortly after entering into the second interest-rate swap, Hu became concerned about the swap's value. When Lehman advised him of a temporary market movement in his favor that would enable Hu to get out of the swap, Hu agreed to terminate the transaction. See Pl. Ex. 40; Hu Aff. ¶ 88. Lehman paid Hu a termination fee of $50,000.

Lehman's establishment of Non-Ferrous' swap-trading account was characterized, like its handling of the FX account, by certain irregularities. According to Lehman policy, Lehman commonly documented swaps it booked by entering into an International Swap Dealers Association ("ISDA") Master Agreement with the party to whom it sold the swap. See R2. Ex. 36, at LM 16024. After entering into the first swap with Hu, Lehman asked him to execute an ISDA Master Agreement.

Although Lehman prepared a draft of the agreement, Hu never executed it. See R2. Ex. 38, at LM 924-60, Ex. 101, at ML 210; Hu Aff. ¶ 86. As a result, Hu never provided Lehman with certain documents that the ISDA Master Agreement required from Non-Ferrous. These documents included copies of Non-Ferrous' business license and articles of association, as well as the "[a]pproval of each transaction by the State Administration of Exchange Control." See R2. Ex. 38, at LM 946. Under the ISDA Master Agreement, therefore, Lehman was supposed to obtain proof of such approval on or before entering into the swap transaction. Id.

Lehman's Credit Department approved the swap transactions with Non-Ferrous without ever investigating Non-Ferrous. George Koo admitted that the Credit Department's approval resulted from the pressure he himself placed on the credit officer, combined with the strength of the Non-Ferrous name. See R2. Ex. 51.

Potter remained in close contact with Hu during Hu's association with Lehman's swap personnel and attempted to protect him from risky transactions involving swaps. For example, in May 1994, Lehman's swap personnel approached Hu about restructuring his Deutsche Bull Swap. Potter, upon hearing of this, became worried that the deal was too risky for Hu because he felt that Non-Ferrous "[was not] so sophisticated." See R2. Ex. 120, at 199. Potter believed that the transaction was "absolutely ridiculous," and therefore decided to advise Hu against it. See R2. Ex. 119, at 376. Potter was confident that he could persuade Hu not to enter into the restructuring because of his "very strong relationship" with Hu. See R2. Ex. 120, at 199. He subsequently advised Hu not to enter into the restructuring because of the risk, and Hu followed his advice. See R2. Ex. 122, at 212-13, Ex. 123, at 403-04.

The swap restructuring incident is not the only example of Potter's strong relationship with Hu. As Sheng Yan, an LBSF salesperson, commented to Potter after his initial meeting with Hu, "I'm pretty impressed, actually. I mean, obviously you are very good friends." See R2. Ex. 28, at 99. Potter acknowledged the strength of his relationship with Hu, and stated that he had "quite a strong relationship on the currency side" with Hu. Id. In a report to his boss, Potter noted that Hu "trades cash FX and options, on our ideas." See R2. Ex. 25, at 14767.

Hu maintains that his FX and swap trading accounts with Lehman were not authorized by Non-Ferrous, and that throughout his trading with Lehman, he was the only person that Lehman dealt with at Non-Ferrous. See Hu Aff. ¶¶ 2223, 40-50. Hu claims that nobody at Lehman ever demanded any proof of his authority to trade FX with Lehman on Non-Ferrous' behalf. Id. ¶ 40.

Lehman disputes Hu's claim that he lacked authorization from Non-Ferrous. However, Lehman has not shown that anyone from its credit or operations departments communicated with anyone at Non-Ferrous other than Hu concerning the FX or swap trading. Andrew Fately, Lehman's head of FX options trading, cannot recall the name of anyone at Non-Ferrous other than Hu. See R2. Ex. 92, at 138-39. Potter admits that he never spoke with anyone at Non-Ferrous other than Hu until the end of July 1994. See R2. Ex. 23, at 367-68, 484. Potter also admits that nobody in Lehman's FX department ever met with Cao before August 1994. See R2. Ex. 94, at 00012. Neither Yang Shen nor George Koo, the two swap salespeople that dealt with Non-Ferrous, ever met or communicated with Cao during the period of Hu's trading. See R2. Ex. 95, at 94, Ex. 13, at 495.

The Margin-Call Crisis

In 1994, the United States Federal Reserve Board (the "Fed") began a series of interest-rate hikes that dramatically raised interest rates in the United States. The Fed's actions caused the dollar's value to fall and, as a result, market participants who had anticipated a strong dollar incurred substantial losses in their transactions. The Fed's actions caused losses in Non-Ferrous' FX and swap positions. By June 1994, Non-Ferrous' collateral in the FX account (the money that was transferred initially by the State Reserve Bank) was used up, and Lehman issued a series of margin calls to Non-Ferrous. These margin calls eventually totaled over $46 million. See R2. Ex. 127.

On June 23, 1994, Hu agreed to a payment schedule under which the margin calls would be met by a series of installment payments. See Pl. Ex. 44. Lehman received one payment of $5.1 million on June 24, 1994, see Pl. Ex. 45, but Hu subsequently failed to keep up with the rest of the installment plan. During this time, no one at Lehman attempted to contact anyone at Non-Ferrous other than Hu. See R2. Ex. 31, at LM 18235-37.

In late July 1994, Lehman contacted Cao because it was no longer able to reach Hu. Lehman states that after it contacted Cao, Cao sent Lehman a letter taking the position that Hu's activities in FX and swap trading were unauthorized. See Pl. Ex. 47.

According to Hu, Hu realized by mid-July that his hopes for a market recovery were futile, and thus confessed all of his unauthorized trading to Cao. See Hu Aff. ¶¶ 113-14. Cao claims that this confession was the first he heard of Hu's FX and swap trading, or of the existence of these accounts. See Cao Aff. ¶ 29. Cao states that the confession prompted him to write his letter to Lehman, and that Lehman did not call him until after that letter was sent. Id. ¶¶ 32-34.

Liquidation of the Thai NCDs

During the period Hu traded with Lehman, he also purchased negotiable certificates of deposit ("NCDs") issued by two Thai banks and underwritten by Lehman. Hu claims that he was never advised of the risks associated with these NCDs, and that he did not understand the nature of these investments. See Hu Aff. ¶ 90. He states that Lehman never informed him that it was the underwriter of the NCDs; nor did it inform him of the deteriorating value of these investments. Id. ¶¶ 93-94. Lehman eventually sent its personnel to China in June 1994 to explain these investments to Hu. Id. ¶¶ 95-96; R2. Ex. 110.

Hu states that after he confessed his unauthorized trading to Cao in July 1994, Cao ordered him to liquidate the NCDs. Hu claims that soon afterwards, he prepared a letter for Cao to sign directing the immediate liquidation of the NCDs and the transfer of those proceeds to Non-Ferrous' LME account. See Hu Aff. ¶¶ 115-16. This occurred before Lehman liquidated the FX and swap transactions.

The Current Litigation

In its Amended Complaint, Lehman asserts the following five claims against the Defendants: (1) Non-Ferrous breached its FX contract with LBCC; (2) Non-Ferrous breached its swap contract with LBSF; (3) Minmetals breached its guarantee of Non-Ferrous' FX transactions; (4) Minmetals is liable for the FX transactions of its alter ego, Non-Ferrous; and (5) Minmetals is liable for the swap transactions of its alter ego, Non-Ferrous.

The Defendants have asserted the following eighteen affirmative defenses against Lehman's claims: (1) Lehman failed to state a claim upon which relief can be granted; (2) the transactions at issue were not authorized; (3) Lehman was negligent and breached its fiduciary duties; (4) Lehman inequitably failed to advise Non-Ferrous of the risks of the transactions at issue; (5) Lehman committed fraud and misrepresentations; (6) the transactions at issue were illegal; (7) Lehman's claims are barred by the doctrine of unclean hands; (8) Lehman provided information that was incorrect and misleading; (9) Lehman breached the contracts at issue; (10) the contracts at issue lack consideration; (11) Lehman's claims are barred by the doctrines of mutual or unilateral mistake; (12) the transactions were in violation of the Commodity Exchange Act, 7 U.S.C. § 1 et seq.; (13) Lehman's claims are barred by the doctrines of estoppel and equitable estoppel; (14) Lehman's claims are barred by the doctrine of laches; (15) Lehman's claims are barred by the doctrine of waiver; (16) Lehman failed to mitigate its damages; (17) this Court lacks personal jurisdiction over the Defendants; and (18) in essence, Lehman acted unfairly and deceitfully.*fn7

After years of contentious discovery and pre-trial practice, the parties cross-moved for summary judgment as stated in the introductory paragraph of this Opinion and Order. For the reasons that follow, the Defendants' motion for summary judgment is denied with respect to Counts One, Two, Four, and Five of Lehman's Amended Complaint. The Court reserves decision with respect to Count Three in accordance with the rulings in this Opinion and Order.

Lehman's motion for summary judgment is granted in part and denied in part. Summary judgment is granted with respect to the following affirmative defenses: the Fourth, the Seventh, the Ninth, the Tenth, the Thirteenth, the Fourteenth, the Fifteenth, the Seventeenth, and the Twentieth. Summary judgment is also granted with respect to Non-Ferrous' Seventh and Twelfth Counterclaims. The Court reserves decision with respect to Non-Ferrous' Fifth and Thirteenth Counterclaims in accordance with the rulings in this Opinion and Order. Summary judgment is denied with respect to all other affirmative defenses and counterclaims.

DISCUSSION

I. Summary Judgment Standards

This Court may grant summary judgment only if the moving party is entitled to judgment as a matter of law because there is no genuine dispute as to any material fact. See, e.g., Silver v. City Univ. of New York, 947 F.2d 1021, 1022 (2d Cir. 1991); Montana v. First Fed. Sav. & Loan Ass'n, 869 F.2d 100, 103 (2d Cir. 1989); Knight v. U.S. Fire Ins. Co., 804 F.2d 9, 11 (2d Cir. 1986); Falls Riverway Realty, Inc. v. Niagara Falls, 754 F.2d 49, 54 (2d Cir. 1985). The role of the Court on such a motion "is not to resolve disputed issues of fact but to assess whether there are any factual issues to be tried, while resolving ambiguities and drawing reasonable inferences against the moving party." Knight, 804 F.2d at 11; see also First Fed. Sav. & Loan Ass'n, 869 F.2d at 103 (stating that to resolve a summary judgment motion properly, a court must conclude that there are no genuine issues of material fact, and that all inferences must be drawn in favor of the non-moving party); Ramseur v. Chase Manhattan Bank, 865 F.2d 460, 465 (2d Cir. 1989) (same).

The movant bears the initial burden of informing the Court of the basis for its motion and identifying those portions of the "pleadings, depositions, answers to interrogatories, and admissions to file, together with affidavits, if any," that show the absence of a genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). If the movant meets this initial burden, the party opposing the motion must then demonstrate that there exists a genuine dispute as to the material facts. Id.; see also Silver, 947 F.2d at 1022; Greater Buffalo Press, Inc. v. Federal Reserve Bank, 866 F.2d 38, 42 (2d Cir. 1989).

The opposing party may not solely rely on its pleadings, on conclusory factual allegations, or on conjecture as to the facts that discovery might disclose. See, e.g., Gray v. Darien, 927 F.2d 69, 74 (2d Cir. 1991). Rather, the opposing party must present specific evidence supporting its contention that there is a genuine material issue of fact. See, e.g., Celotex Corp., 477 U.S. at 324, 106 S.Ct. 2548; Twin Lab. Inc. v. Weider Health & Fitness, 900 F.2d 566, 568 (2d Cir. 1990); First Fed. Sav. & Loan Ass'n, 869 F.2d at 103; Knight, 804 F.2d at 12; L & L Started Pullets, Inc. v. Gourdine, 762 F.2d 1, 3-4 (2d Cir. 1985).

To show such a "genuine dispute," the opposing party must come forward with enough evidence to allow a reasonable jury to return a verdict in its favor. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986); Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586-87, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986); Cinema North Corp. v. Plaza at Latham Assocs., 867 F.2d 135, 138 (2d Cir. 1989). If "the party opposing summary judgment propounds a reasonable conflicting interpretation of a material disputed fact," then summary judgment must be denied. Schering Corp. v. Home Ins. Co., 712 F.2d 4, 9-10 (2d Cir. 1983) (citing New York State Energy Research & Dev. Auth. v. Nuclear Fuel Servs., Inc., 666 F.2d 787, 790 (2d Cir. 1981)). The Court will analyze the parties' cross-motions in accordance with these principles.

II. The Defendants' Motion

The Defendants move for summary judgment dismissing Lehman's Amended Complaint in this case. Non-Ferrous also moves for summary judgment on its Eighth Counterclaim, which alleges that the transactions at issue were illegal. The Court will treat the Defendants' motion under the following headings: (A) Choice of Law; (B) Illegality and Enforceability; (C) IMF Agreement; and (D) the Guarantee Claim.

A. Choice of Law

Federal courts sitting in diversity in New York must apply New York's choice-of-law rules when determining the law that governs a contract. See Dornberger v. Metropolitan Life Ins. Co., 961 F. Supp. 506, 530 (S.D.N.Y. 1997). Although New York has traditionally followed common-law principles in its approach to contractual choice-of-law clauses, it now requires, by statute, that courts enforce the parties' selection of New York law in commercial contracts of $250,000 or more. See N.Y. Gen. ...


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