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LEHMAN BROS. COMMERCIAL v. MINMETALS INTERN.
August 10, 2000
LEHMAN BROTHERS COMMERCIAL CORPORATION AND LEHMAN BROTHERS SPECIAL FINANCING INC., PLAINTIFFS,
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.
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.
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
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
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.
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.
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
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. ¶¶
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
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
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,
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.
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.
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
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
Non-Ferrous has also asserted the following fourteen
counterclaims against Lehman: (1) the transactions at issue were
unauthorized; (2) Lehman breached its fiduciary duties; (3)
Lehman aided, abetted, and induced a breach of fiduciary duty;
(4) Lehman was negligent; (5) Lehman committed fraud; (6) Lehman
committed negligent misrepresentations; (7) Lehman breached the
contracts at issue; (8) the transactions were illegal; (9) the
swap agreement contained additional terms understood by both
parties; (10) Lehman committed willful deception, fraud, and
cheating in violation of § 4b of the Commodity Exchange Act,
7 U.S.C. § 6b; (11) Lehman devised a scheme or artifice to defraud
in violation of § 4o of the Commodity Exchange Act,
7 U.S.C. § 6o; (12) Lehman committed deception, cheating, and fraud in
violation of § 32.9 of the Rules of the Commodity Futures
Trading Commission, 17 C.F.R. § 32.9; (13) Lehman violated §
10(b) of the Securities Exchange Act, 15 U.S.C. § 78j(b), and
Rule 10b-5, 17 C.F.R. § 240.10b-5; and (14) Lehman committed
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
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
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.
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. ...