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KWIATKOWSKI v. BEAR STEARNS & CO.

December 29, 2000

HENRYK DE KWIATKOWSKI, PLAINTIFF,
V.
BEAR STEARNS & CO., INC., BEAR STEARNS SECURITIES CORP., AND BEAR STEARNS FOREX INC., DEFENDANTS.



The opinion of the court was delivered by: VICTOR Marrero, United States District Judge.

    DECISION AND ORDER

INTRODUCTION

Plaintiff Henryk de Kwiatkowski ("Kwiatkowski") brought this action against defendants Bear, Stearns & Co., Inc.; Bear, Stearns Securities Corp.; and Bear, Stearns Forex Inc. (collectively, "Bear Stearns") alleging, among other things, breach of fiduciary duty and negligence in connection with Bear Stearns's handling of his brokerage accounts. After trial, the jury rendered a verdict in favor of Kwiatkowski on the negligence claim in an amount of $111.5 million, on which he was entitled as of right to statutory prejudgment interest of approximately $60 million that was then added by the Court. Bear Stearns now moves pursuant to Federal Rules of Civil Procedure 50(b) and 59(a) for judgment as a matter of law and, in the alternative, for a new trial. For the reasons discussed below, the motions are denied.

Kwiatkowski is an exceptionally wealthy individual who, through accounts he maintained at Bear Stearns under his own management and control, in late 1994 purchased a position in foreign currency futures contracts worth approximately $6.5 billion. In this venture, a form of investment some experts consider inherently risky, he lost an estimated $215 million in a space of a few weeks in early 1995. Subsequently, he commenced the case now before the Court against Bear Stearns, one of the nation's largest investment banking firms, to recover his losses. As the action went to trial, Kwiatkowski alleged two legal theories for recovery: breach of fiduciary duty and negligence. The jury found Bear Stearns liable on the negligence claim but not for breach of fiduciary duty.

Bear Stearns contends that the jury's award represents a miscarriage of justice, and that, not only by reason of its size, but by the allegedly new legal duties this determination would place on all securities dealers if the verdict were allowed to stand, the case has generated "shock and attention in the brokerage and legal communities." Memorandum of Law in Support of Defendants' Motion for Judgment as a Matter of Law and, in the Alternative, for a New Trial, dated June 15, 2000 ("Defendants' Memorandum"), at 14.*fn1 In asserting that something here has gone awry, Bear Stearns asks this Court to intervene and set aside the jury's verdict, either by undoing certain previous rulings of this Court, and potentially those of the judge who managed earlier proceedings of the litigation, or by overturning the jury's factual determination.

The sheer magnitude of the jury award and the extraordinary relief Bear Stearns now seeks evince the high stakes at issue here as perceived by the parties and third persons otherwise following the outcome. But if the matter is critical to particular interests before the Court, it is fundamental as well in other respects. At bottom, Bear Stearns's challenge implicates some vital legal principles. Foremost among the underlying issues is the proper balance of labor our legal system prescribes for the respective roles of the judge and the jury not only in this case, but generally. What Bear Stearns urges must rank among the most demanding judgments any court is called upon to render: to recognize and correct not only alleged errors of its own and possibly of other judges, but, of larger scope and implications, to weigh a jury's verdict against the Court's own assessment of the evidence adduced at trial and to determine in effect whether to substitute the judge's own perceptions and judgment of the facts for those of the jurors charged to decide faithfully and impartially the factual issues in dispute.

So framed, one of the highest values here on the line, as gauged by this Court, is not the financial interests the parties may stand to gain or lose, but the integrity of the judicial system itself, as measured by the due respect and protection that must be accorded to the rightful offices of judge and jury in the constitutional enterprise in which they share appointed duties.

In fact, the most prominent question Bear Stearns's motions bring to this Court implicates the concept of legal duty, specifically its application to the relations between the litigants here. But in resolving this issue for these parties, the Court must first construe and settle what duty the Court itself is bound by its office to discharge. For this purpose, this Court fixes a rigorous mark. From its perspective, the most delicate and trying demand placed upon any court on these occasions is to decide when and under what circumstances, even if a jury's award stirred vigorous reaction from any litigant, or engendered adverse public pressures, perceptions or apprehensions, or indeed even were the Court itself to harbor any personal qualms agitating that somehow "this isn't right," the verdict should be allowed to stand. The proper basis for this judgment must rest upon whether the guided path of the law so directs; whether the award is supported by rational grounds; and whether the effect of overriding the jurors' determination would be to intrude upon their proper domain, diminish the acceptable latitude the jury is warranted in order to exercise its role, and upset the constitutional division of authority in the administration of justice.

This is a solemn task. For the sake of the justice system whose values we prize, the exercise of judicial discretion it demands should be justified only in the most compelling circumstances. The Court's duty at hand compels it to rule as the law commands. It can do no more. Insofar as the stakes are high all around, so the burden of persuasion must be exacting. Bear Stearns has not persuaded this Court that the jury's verdict should be disturbed.

FACTS*fn2

Kwiatkowski is a Canadian citizen. During the times relevant to this litigation, he resided in Nassau, Bahamas and maintained his business offices there. A native of Poland, he escaped from the Germans and later from the Russians during World War II, making his way to England. After the war, he began an extraordinarily successful career in the aviation business, first leasing airplanes for an American manufacturer and later establishing his own company to produce and market helicopters. To his aviation industries, Kwiatkowski later added businesses in horse breeding and real estate, purchasing the renowned Calumet Farm and Kennelot Stables in Kentucky.

Kwiatkowski opened securities accounts with Bear Stearns in 1988, when Albert J. Sabini ("Sabini"), who had been his broker at EF Hutton, moved to Bear Stearns. At Bear Stearns, Kwiatkowski's accounts were handled by the firm's "Private Client Services Group", which provided large private investors with services akin to those it offered to governments and institutions, such as access to Bear Stearns's experts and executives. Sabini, who later became a managing director at Bear Stearns, continued as his lead broker and principal contact at the firm. Until March 1995, the two communicated daily about news and market reports that might affect Kwiatkowski's investments and regularly reviewed the status of Kwiatkowski's accounts. Sabini also forwarded relevant market reports and other Bear Stearns documents to Kwiatkowski when requested or as he deemed appropriate.

Until January 1991, Kwiatkowski maintained only securities accounts at Bear Stearns. At that time, he opened a foreign currency futures account there by transferring from Bank Leu in the Bahamas a position consisting of 4,000 Swiss franc contracts traded on the Chicago Mercantile Exchange (the "CME").*fn3 Kwiatkowski believed in the strength of the United States dollar and traded consistently in long-term positions favoring the U.S. dollar against other currencies.

As of the time of the transfer of his foreign currency account, Kwiatkowski had experienced losses amounting to approximately $69 million at Bank Leu. Kwiatkowski testified that he felt compelled to move the position because Bank Leu was too small to service the account and that he recalled Sabini having extolled the capacity of Bear Stearns to provide him the full services and resources he needed for large-scale foreign currency trading. Upon opening the account, Kwiatkowski transferred large holdings of stock and United States Treasury bonds to Bear Stearns to meet the collateral demanded by Bear Stearns.

At the time he opened his Bear Stearns foreign currency trading account, on January 16, 1991, Kwiatkowski signed a Commodity Futures Customer Agreement. In that document, provided in compliance with government regulations and securities industry practices, Kwiatkowski acknowledged that commodity futures trading is highly risky. Further, he declared his net worth to be $100 million, with liquid assets of $80 million, and affirmed that his investments were within his means. On the same day, Bear Stearns also furnished and Kwiatkowski acknowledged receipt of a standard Risk Disclosure Statement, which elaborated the risks associated with commodity futures trading, including the potential for losing more than the funds deposited as collateral for margin accounts, the parties' rights and obligations relating to margin calls, and the difficulties of liquidating a position or limiting loss exposure to any pre-determined amount.

During this initial period of trading foreign currencies at Bear Stearns, Kwiatkowski continued the same pattern of purchasing futures contracts favoring the dollar against other currencies. From September 1992 through January 1993, he increased his futures position to 16,000 contracts on the CME. He testified that prior to doing so, he spoke to Sabini and to Bear Stearns's chief economist, Lawrence Kudlow ("Kudlow"), and that Kudlow indicated that the dollar then represented an investment opportunity because it was undervalued. Kwiatkowski closed the position in January 1993, having made profits of approximately $219 million. Kwiatkowski did not engage again in foreign currency trading at Bear Stearns or elsewhere until the fall of 1994.

Beginning in late October 1994, Kwiatkowski once again entered the foreign currency market, encouraged by his understanding that his continued confidence in the long-term strength of the U.S. dollar was shared by Bear Stearns's experts with whom Sabini put him in contact. Specifically, Kwiatkowski asserted that Bear Stearns's then chief economist, Wayne Angell ("Angell"), was bullish on the dollar. According to Kwiatkowski, relying in part on the advice and opinions of Sabini and other Bear Stearns experts, he began to mount a position on the CME that by late November had grown to 65,000 foreign currency contracts in equal amounts of Swiss francs, German marks, Japanese yen and British pounds, worth approximately $6.5 billion. These contracts represented as much as 30 percent or more of the CME's open interests in some of the currencies. In mid-November, when Kwiatkowski had acquired the bulk of contracts and continued augmenting his position, Sabini discussed with and transmitted to Kwiatkowski a copy of Bear Stearns's Global Futures Marketing Strategies Report prepared by Bear Stearns's analysts indicating that the dollar represented an investment opportunity.

As Kwiatkowski's commitment rose to 65,000 contracts, the Bear Stearns Executive Committee (the "Executive Committees") approved Kwiatkowski's maintaining the account at that level subject to an increased collateral requirement of $300 million. Also in November 1994, the Executive Committee and Bear Stearns's senior managers assumed direct supervision of Kwiatkowski's foreign currency account, removing it from the purview of the firm's general compliance department.

All of Kwiatkowski's futures contracts were due to expire in early December 1994, thus requiring that the positions be closed or rolled over to March contracts. In late November, the circumstances relating to Kwiatkowski's foreign currency trading at Bear Stearns came to the attention of David Schoenthal ("Schoenthal"), head of Bear Stearns Forex Inc., the firm' s foreign exchange entity. Schoenthal believed that Kwiatkowski's position was too large to be traded on the CME. In his view, the visibility of the position in the market and the limited capacity of the CME would prevent Kwiatkowski from liquidating his position if he had to do so in a short period of time. Schoenthal discussed the matter with the Executive Committee and expressed a view that it would be more advantageous for Kwiatkowski to roll his CME contracts into the over-the-counter (the "OTC") market, where he would benefit from less visibility and greater liquidity.*fn4

Following discussions with Sabini and Schoenthal, before the contracts expired in December 1994, Kwiatkowski decided to retain half of his position on the CME, rolling his contracts over into the March expiration, and to move the other half to the OTC market. Kwiatkowski testified that although he did not fully understand how the OTC market worked, he authorized the transaction on the strength of the advice he received from Sabini and Schoenthal, including assurances from Schoenthal that if anything went wrong with his investment on the OTC market, Schoenthal could get him out "on a dime".

In connection with this transaction, Bear Stearns requested early in December 1994 that Kwiatkowski execute a renewed customer agreement. Kwiatkowski declined to sign the long form of Bear Stearns's standard contract, eventually accepting a shorter letter from Bear Stearns's counsel that on January 19, 1995 he acknowledged having received and read. In it, Kwiatkowski reiterated his familiarity with the risks associated with foreign currency transactions and acknowledged that, if he failed to meet margin calls, Bear Stearns was authorized to liquidate his open foreign currency positions and other assets pledged to the firm.

Beginning in early January 1995, the currency markets grew increasingly volatile. On January 9, another large drop in the value of the dollar caused Kwiatkowski's position to lose nearly $100 million. According to Kwiatkowski, he then again weighed whether to close his foreign currency position and had a conversation with Sabini and Angell in order to obtain an explanation for the market's decline. By Kwiatkowski's account, Angell expressed a view that the dollar was undervalued and would rebound; Sabini recalled that Angell's position was either noncommittal or incomprehensible. In either event, Kwiatkowski asserted that following that conversation he felt sufficiently assured to remain with the full position.

By the end of January 1995, however, the currency markets had continued their volatility. At that point, Kwiatkowski had a discussion directly with Schoenthal about the United States government's policy goal of strengthening the value of the yen relative to the dollar. Following that conversation, Kwiatkowski sold half of his yen contracts and shortly later closed the balance after Sabini expressed concern to Kwiatkowski's accountant, Themis Themistocleous ("Themistocleous"), about the size of Kwiatkowski's foreign currency investment in light of market conditions and recommended to Themistocleous that he urge Kwiatkowski to reduce the position.

Through February and into March 1995, the value of the dollar steadily weakened. In fact, prior to this period, Bear Stearns's foreign currency analysts had changed their opinions about the strength of the dollar relative to other currencies. In the firm's monthly Global Futures Marketing Strategies publications for February and March 1995. the experts downgraded their forecast for the dollar to negative. Bear Stearns also issued a report containing one in-house expert's opinion that the German mark and Swiss franc were particularly likely to gain strength against the dollar. Kwiatkowski asserts that despite his large long-term position supporting the dollar, he was never provided these materials or any other information regarding Bear Stearns's revised forecasts and that Sabini did not apprise him of Bear Stearns's changed outlook in this regard. Sabini testified that he had no recollection of having provided the information or discussing the matter with Kwiatkowski.

After other significant losses in Kwiatkowski's trading in mid-February, Kwiatkowski stopped paying his margin calls directly, asking that positions be liquidated instead to pay the resulting debts. At the same time, Bear Stearns was becoming concerned about the sufficiency of Kwiatkowski's collateral to cover margin calls and requested additional security. Kwiatkowski declined to provide such security and reiterated that Bear Stearns should instead liquidate positions as a means of payment of his margin debt. Bear Stearns officials testified that it was their understanding that Kwiatkowski merely expressed a preference to liquidate some positions rather than send more cash to satisfy margin calls.

On Friday, March 3, 1995, the dollar began another precipitous decline against the Swiss franc and German mark, the two currencies in which Kwiatkowski held remaining contracts. Having experienced another large loss that day, Kwiatkowski contended that he expressed interest to Schoenthal in selling his positions. Schoenthal and Sabini, however, informed him that it would be unwise to begin liquidating contracts on a Friday afternoon because traditionally the liquidity of the markets decreases at that time. Instead, they expressed a view that any further liquidations necessary should be postponed until Sunday, March 5, and be resumed when foreign currency trading opened in Australia and New Zealand and later in Asian markets. Kwiatkowski asserts that it was solely on this advice that he decided not to sell off the balance of his position that day.

In fact, the value of the dollar continued to fall over that weekend. Bear Stearns management decided to staff its trading desk on Sunday, March 5, under Schoenthal's supervision. By the opening of the Australia, New Zealand and Asian markets that morning, the dollar's value had already declined, and it continued to do so during the course of the day, not only diminishing the value of Kwiatkowski's position, but eventually requiring liquidation of his pledged equity in order for Bear Stearns to avert the financial exposure of an unsecured debt in Kwiatkowski's margin account.

Schoenthal spoke repeatedly to Kwiatkowski throughout the day, informing him of market conditions in order to obtain Kwiatkowski's authorization either to defer or proceed with additional transactions. In Kwiatkowski's view, Schoenthal advised and managed the liquidation, while Kwiatkowski complied with his requests. Bear Stearns asserted, on the other hand, that although the position had to be liquidated, it sought Kwiatkowski's authorization at every turn before selling them. By early the next morning, March 6, all of Kwiatkowski's remaining foreign currency contracts had been liquidated, followed in the next two days by the equity held in his Security Accounts, leaving a balance still due to Bear Stearns of $2.7 million, which Kwiatkowski paid by March 9, 1995.

Kwiatkowski asserted that he was not informed while Bear Stearns was selling off his entire equities holdings, and that it was only days later that he realized what had occurred and the extent of his losses. Kwiatkowski maintained that the losses he suffered from his foreign currency trading from December 1994 to March 6, 1995 amounted to $215 million, of which $116 million was attributable to the transactions from March 1 through that final weekend of March 5.

In June 1996, Kwiatkowski filed this action against Bear Stearns and Sabini. The original complaint charged numerous violations of federal and New York state securities statutes and common law. On Bear Stearns's motions to dismiss for failure to state a claim and subsequently for summary judgment, Judge Koeltl, the judge to whom this case was assigned initially, ruled in favor of Bear Stearns in regards to all but two of Kwiatkowski's claims: breach of fiduciary duty and negligence.*fn5

During the course of a jury trial held in May 2000, Bear Stearns moved under Federal Rule of Civil procedure 50(b), before and after Kwiatkowski's presentation of evidence, for judgment as a matter of law. The Court denied the motion without prejudice and submitted both claims to the jury. The jury returned a verdict in favor of Bear Stearns and Sabini on the breach of fiduciary duty claims. With regard to the negligence claim, the jury ruled in favor of Kwiatkowski and against the Bear Stearns entities jointly, awarding him $111.5 million, but not against Sabini.*fn6 Upon entry of judgment on June 1, 2000, Bear Stearns renewed its Fed. R. Civ. P. 50 motion and moved for a new trial under Fed. R. Civ. P. 59(a).

RULE 50(b) AND RULE 59(a) STANDARDS

A judgment as a matter of law pursuant to Rule 50 is appropriate where "there is no legally sufficient evidentiary basis for a reasonable jury to find for a party." Merrill Lynch Interfunding, Inc. v. Argenti, 155 F.3d 113, 120 (2d Cir. 1998) Such a determination may not be reached by evaluating the credibility of witnesses or the relative weight of evidence. Rather, in assessing a motion for judgment under Rule 50, the Court must view the evidence in the light most favorable to the nonmovant. See 9 James Wm. Moore, et al., Moore's Federal Practice ¶ 50.64 [1] (3d ed. 2000); see also Caruolo v. John Crane, Inc., 226 F.3d 46, 59 (2d Cir. 2000). To grant a Rule 50 application, there must be "`such a complete absence of evidence supporting the verdict that the jury's findings could only have been the result of sheer surmise and conjecture, or . . . such an overwhelming amount of evidence in favor of the movant that reasonable and fair minded men could not arrive at a verdict against [it].'" Concerned Area Residents for Environment v. Southview Farm, 34 F.3d 114, 117 (2d Cir. 1994) (quoting Song v. Ives Lab., Inc., 957 F.2d 1041, 1046 (2d Cir. 1992)) (citations omitted)

The standard for granting a Rule 59 motion is less stringent. First, the trial judge may weigh the evidence himself and not view it in the light most favorable to the non-movant and, second, the motion may be granted even if substantial evidence may support the jury's verdict. See DLC Mgt. Corp. v. Town of Hyde Park, 163 F.3d 124 (2d Cir. 1998). A Rule 59 motion for a new trial should be granted, however, only when the trial court is convinced that the. verdict reached by a jury is "seriously erroneous" or the verdict is "a miscarriage of justice." Katara v. D.E. Jones Commodities, 835 F.2d 966, 970 (2d Cir. 1987).

In the following discussion, the Court addresses the facts brought out at the trial in the context of its consideration of both motions together. Although the Court is to construe the evidence in the light most favorable to the non-movant for the purposes of a Rule 50 motion, and is to weigh the facts independently in deciding the Rule 59 motion, the Court finds that, as discussed below, under either standard, there is a legally sufficient basis for the jury's verdict. The Court also cannot conclude as a matter of law that the jury's determination is unreasonable or "seriously erroneous." Id.

DISCUSSION

I. LAW OF THE CASE

Bear Stearns correctly points out that application of the law of the case doctrine is discretionary. See In re PCH Assoc., 949 F.2d 585 (2d Cir. 1991); United States v. Birney, 686 F.2d 102 (2d Cir. 1982). The rule is intended to ensure the orderly progression of litigation. It offers a measure of predictability to the conduct of the proceeding through its successive stages by not permitting the reopening of matters already decided. But the doctrine does not mandate that the Court adhere unquestioningly to its prior rulings, or to those of a judge who previously may have handled aspects of the case, if valid grounds exist to support a finding that any prior determination by the Court in the matter may have been erroneous. See DiLaura v. Power Authority of New York, 982 F.2d 73 (2d Cir. 1992); In re "Agent Orange" Prod. Liab. Litig., 733 F.2d 10, 13 (2d Cir. 1984) (pretrial orders and rulings are subject to modification by the district judge at any time prior to final judgment and may be modified to the same extent if the case is reassigned to another judge).

Here, the Court informed the parties at the commencement of the trial that it would, to the extent applicable, consider pertinent rulings of Judge Koeltl as the law of the case and adhere to them in guiding the trial. In connection with the issue most intensely disputed in the instant motions, the Court stated:

With regard to whether the plaintiff's account was discretionary or non-discretionary, the rulings indicate that the plaintiff does not dispute that the accounts were non-discretionary but that the relationship between the parties may have entailed the entrustment of duties even beyond the limitations of a non-discretionary account. That was what Judge Koeltl found most essential here.

Trial Transcript ("Tr.") at 5-6.

As this Court read the denial of Bear Stearns's motion for summary judgment, Judge Koeltl found that, even if Kwiatkowski's accounts were nondiscretionary, on the basis of the business relationship and course of dealings the record demonstrated he had established with Bear Stearns, there was sufficient evidence to raise a triable issue as to whether, in connection with Bear Stearns's handling of Kwiatkowski's investments, Kwiatkowski had entrusted matters and Bear Stearns had provided services that exceeded the bounds ordinarily associated with nondiscretionary accounts. See Tr. at 1212. Accordingly, as regards the negligence claim, the dispositive factual issue was not so much what type of accounts Kwiatkowski maintained, but rather the manner in which Bear Stearns actually dealt with them. Thus, in denying Bear Stearns's motion and sustaining the negligence claim, Judge Koeltl found issues of fact "as to whether the defendants properly handled the plaintiff's accounts, including whether the defendants properly advised the plaintiff with respect to his positions and whether they liquidated his position in an appropriate manner." Kwiatkowski v. Bear. Stearns & Co., Inc., 96 Civ. 4798, 1999 WL 1277245, at *16 (S.D.N.Y. Nov. 29, 1999) ("Kwiatkowski II") (emphasis added).

The operative conduct grounding Judge Koeltl's holding was the appropriateness of Bear Stearns's handling of Kwiatkowski's accounts. In this regard, he specified two examples. By use of the word "including", the judge suggests either that the alleged improper handling of Kwiatkowski's accounts may have been evidenced by the two particular actions mentioned, or that the two examples may not have been exhaustive. Thus, as formulated by Judge Koeltl, the factual question found proper for the jury suggests one generic issue with perhaps at least two components, and not, as Bear Stearns contends, three distinct questions. See Defendants' Memorandum at 16.*fn7 In fact, the pleadings of negligence described in Kwiatkowski's Second Amended Complaint, and the claims placed at issue by the evidence at trial, assert generically a breach of the duty of reasonable care in Bear Stearns's dealings with Kwiatkowski, then specifying the related particular actions alleged to constitute the lack of due care. This reading was acknowledged by Judge Koeltl in his ruling sustaining the complaint. See Kwiatkowski v. Bear, Stearns & Co., Inc., 96 Civ. 4798, 1997 WL 538819, at *6 (S.D.N.Y. Aug. 29, 1997) ("Kwiatkowski I").

The elaboration included Bear Stearns's failing to make daily margin calls after February 14, 1995; failing to safeguard the Security Account he held for his children; waiting for weeks until Kwiatkowski's losses had reached the value of the securities accounts and then rapidly liquidating his positions in a deteriorating market; causing one-half of Kwiatkowski's foreign currency positions to be transferred to the OTC market; and engaging in transactions with Kwiatkowski on the OTC market as an interested party. See Kwiatkowski II, 1999 WL 1277245, at *15-16; Second Amended Compl., ¶¶ 62-66, 80. In either event, Judge Koeltl also made reference to "evidence of a substantial advisory function undertaken by the defendants" (id. at *13) and of a "substantial advisory relationship" in the course of which "the defendants were entrusted with matters and owed the plaintiff duties which exceeded those of simply executing trades in a normal broker-client relationship in a nondiscretionary account". Id. at *11.

Although these findings pertained specifically to Kwiatkowski's breach of fiduciary duty claim, Judge Koeltl's ruling regarding the negligence action makes clear he understood that there was some overlap among the relevant facts encompassed by the two theories of liability, and that to a large extent, they rested. on the same actions and evidence. Consequently, in describing the negligence claim, Judge Koeltl noted that Kwiatkowski alleged that Bear Stearns owed him a duty to use reasonable and ordinary care in its dealings with him, "including the care and competence of a reasonable investment broker or advisor" and that Bear Stearns had breached that duty "by the same actions the plaintiff alleges constituted a breach of the defendants' fiduciary duties." Id. at *15 (emphasis added). Similarly, in contrasting Kwiatkowski's negligence claim to the breach of contract claim the Court had dismissed, Judge Koeltl noted that the negligence action alleged that "the defendants violated duties of care they owed to the plaintiff as his broker and advisor and it is clearly broader than the dismissed claim for breach of contract." Id. at *16

Accordingly, on this record, this Court concluded that the issues Judge Koeltl found were proper factual disputes supporting his denial of Bear Stearns's motion for summary judgment included the matter here in contention. This Court consequently adopted Judge Koeltl's rulings as the law of the case and submitted those issues to the jury. The central question is whether, as one among other aspects of Bear Stearns's dealings with Kwiatkowski and handling of his accounts, and as a component of a duty of reasonable care under the circumstances, Bear Stearns's alleged failure to provide proper information and advice to Kwiatkowski constituted negligent conduct.

II. THE JURY INSTRUCTIONS

As understood by this Court, and apparently by Judge Koeltl as well, Kwiatkowski's negligence claim rested on the theory that in Bear Stearns's overall handling of Kwiatkowski's accounts the firm failed to exercise the degree of skill and care a securities broker would reasonably employ under the circumstances. Even if Kwiatkowski's accounts at Bear Stearns were nondiscretionary, an issue of fact arose as to whether by their business dealings and course of conduct the parties had developed a relationship which entailed entrustment of matters and related performance by Bear Stearns of substantial advisory functions. The instructions the Court gave the jury in this regard reflect this understanding.*fn8

In so charging, the Court summarized the contentions of both parties. It cited the instances and specific ways in which Kwiatkowski alleged Bear Stearns had acted negligently. The Court set forth Kwiatkowski's claim that Bear Stearns owed him a duty to use reasonable and ordinary care in its dealings with him, including the care and competence of a reasonable investment or commodities broker.*fn9 The Court then set forth the countervailing responses Bear Stearns offered.*fn10

The instructions informed the jury that "[a] defendant breaches a duty of care if his conduct is not that of a reasonably prudent person under similar circumstances." Tr. at 2285. In giving context to what the jury could take into account as some evidence of reasonable conduct related to a trade or business, the Court referred the jury to documents and to sharply divergent testimony of expert witnesses admitted in evidence regarding the applicability of certain general industry standards and practices, as well as Bear Stearns's own internal procedures. The Court permitted the jury, in reaching a verdict, to consider whether or not Bear Stearns adhered to these standards in handling Kwiatkowski's accounts.*fn11

The Court concluded by directing that the jury could find Bear Stearns negligent if it found that Kwiatkowski established that "defendants had a duty to perform particular services as brokers for plaintiff and failed, in respect of their dealings with plaintiff, to exercise the degree of care of a reasonably prudent and diligent broker under the same circumstances." Tr. at 2286 (emphasis added).

III. CLAIMS OF ERROR

A. Bear Stearns as Investment Advisor

Bear Stearns argues that the Court erred in its instructions to the jury by referring to Bear Stearns as "brokers and investment advisors", thereby allegedly misleading the jury into believing that Bear Stearns was obligated to provide investment advice to Kwiatkowski. See Defendants' Memorandum at 16. While conceding that the firm does provide investment advisor services to some of its clients, Bear Stearns asserts that Kwiatkowski was not one of them and that "that function had nothing to do with this case." Id. The Court disagrees.

As detailed below, and as Judge Koeltl had previously found as a triable issue, Bear Stearns's advisory function had much to do with this case, in the manner and to the extent, as developed at trial, that it arose out of the parties' relationship, conduct and. course of dealings, if not strictly from contractual obligations. Nonetheless, the context in which the Court's instructions to the jury alluded to Bear Stearns as investment advisors makes unambiguously clear that the characterization was a general reference meant to describe the full range of financial services Bear Stearns provided to its various customers.

Whether or not the firm rendered investment advice to Kwiatkowski in particular was a central factual question in dispute. Moreover, the issue of the extent of any advisory services Bear Stearns actually provided to Kwiatkowski related not only to Kwiatkowski's breach of fiduciary duty claim — the other theory of recovery that went to the jury — but to the negligence claim as well. As both the Second Amended Complaint and Judge Koeltl's rulings sustaining it make clear, Kwiatkowski's allegations of negligence are founded on essentially the same specific conduct as the breach of fiduciary duty claim.

In any event, the Court's charge to the jury stressed both that whether, in general, Bear Stearns provided investment advice at all depended upon the scope of the relationship and accounts established with its customers, and that, with regard to Kwiatkowski in particular, "[a] threshold issue about which the parties here differ, and which you as trier of facts must decide, is precisely which services, from among those they generally offered to their customers, defendants specifically provided to. plaintiff in accordance with the particular relationship that existed between the parties." Tr. at 2269.

The Court then elaborated that the parties' relationship may be defined and evidenced in part by the services Bear Stearns undertook to provide Kwiatkowski, by the duties he entrusted to Bear Stearns pursuant to any agreements or understandings between them, as well as by the parties' conduct and practices. See id. Accordingly, the Court finds no reasonable basis for a determination that its reference to investment advisors in the instructions' factual description of Bear Stearns's business services to some of its customers could be reasonably construed as misleading, or that the mention as so qualified could have influenced the jury in any material way. Rather than prejudging or implying in any way that Bear Stearns had an obligation to offer Kwiatkowski any advice or actually did so, the charge treated the issue as an open factual matter central to the parties' dispute and left it for the jury to decide.

B. Theories of Negligence

Bear Stearns contends that the Court erroneously instructed the jury on Kwiatkowski's "four theories of negligence". This statement is inaccurate because its factual predicate is mistaken. In fact, the instructions articulated only one legal theory of liability for the jury to consider and apply in adjudicating the negligence claim: breach of the duty of reasonable care. Specifically, the jury was charged to decide whether Bear Stearns failed to exercise the degree of care expected of a reasonable or prudent broker acting under the same circumstances. Accordingly, what the Court conveyed to the jury was not four distinct statements of liability or standards of negligence, but one theory, a breach of a single legal duty — the obligation to exercise due care.

The statement of this conceptual basis for recovery was accompanied by the summary Kwiatkowski furnished alleging the particulars of his claim. This support itemized four specific ways and instances by which Kwiatkowski maintained Bear Stearns's conduct did not comport with the duty of reasonable care and therefore constituted negligence. In the same vein, the Court also set forth the assertions Bear Stearns offered to refute Kwiatkowski's allegations, thus squaring for the jury the factual dispute it was charged to resolve within its purview of assessing the credibility and weight of the evidence.

C. Failure to Advise

Bear Stearns devotes the bulk of its challenge to the portions of Kwiatkowski's contentions which charge, as specific instances of negligence, that Bear Stearns failed to provide him certain warnings of risk, investment advice and pertinent analysis. This predominant focus on advice or materials allegedly provided or omitted overlooks altogether that at its theoretical core the basis. of Kwiatkowski's negligence claim — as described in the Second Amended Complaint and by Judge Koeltl in denying Bear Stearns's motion for summary judgment, and as developed by the trial evidence — was not Bear Stearns's failure to provide advice per se. Rather, it comprised actions much more extensive, encompassing the alleged failure to provide information or advice as but an adjunct of Bear Stearns's dealings with Kwiatkowski and its handling of his accounts. It is this larger conduct that gives rise to the firm's duty under all the circumstances to use reasonable and ordinary care in its relationship with Kwiatkowski and that serves as the factual grounds for the jury's determination as to whether Bear Stearns "properly handled the plaintiff's accounts." Kwiatkowski II, 1999 WL 1277245, at *16.

Consequently, as this Court construed Judge Koeltl's rulings that found triable issues of fact, the matter of whether or not Bear Stearns owed Kwiatkowski a duty to warn or offer any information or advice, and whether or not any such duty was properly carried out, did not constitute a free-standing legal theory of liability, but one component of the larger question that incorporated other factual issues in dispute.

Consistent with this understanding, the jury's instructions did not express the alleged particular instances of failure to warn or advise as independent obligations constituting the duty of care. Instead, the Court charged that the duty to use reasonable care. that Kwiatkowski claimed Bear Stearns owed him, "including the care and competence of a reasonable investment or commodities broker," was grounded "in their dealings with him." Tr. at 2283. The referenced "dealings" extended beyond rendering or failing to render advice. The term also encompassed, as Kwiatkowski's Second Amended Complaint charged and Judge Koeltl found as a triable issue, whether Bear Stearns "liquidated [Kwiatkowski's] position in an appropriate manner". Kwiatkowski II, 1999 WL 1277245, at *15.

Moreover, in opening and closing arguments, Kwiatkowski's counsel described Kwiatkowski's theory of recovery and outlined other conduct that did not entail providing advice as such, but that he maintained further demonstrated Bear Stearns's alleged breach of due care in the firm's "dealings" with Kwiatkowski and his accounts. See Tr. at 44-67; 2195-2225. These actions involved initially placing Kwiatkowski's unusually large position in the wrong currency market; lacking sufficient knowledge and professional skill to handle Kwiatkowski's 1994 foreign currency position and failing to seek assistance from Bear Stearns's own foreign currency experts; failing to comply with industry practices and internal guidelines by not performing appropriate risk analysis of Kwiatkowski's materially different investment position as market conditions and the status of his accounts changed; neglecting to supervise and monitor properly the handling of Kwiatkowski's accounts; failing to provide Kwiatkowski with Bear Stearns's. negative forecasts for the dollar after having supplied him with its earlier bullish report; offering what may be characterized as unwarranted, optimistic assurances or encouraging a false sense of security that Kwiatkowski claimed he relied upon in maintaining his large currency futures position longer than may have been prudent; and charging excessive markups and commissions. See id. These issues, as further discussed below, occupied a substantial portion of the trial. They raised vigorously contested factual disputes among the parties and their experts, and constituted fair grounds for resolution of the conflicting evidence by the jury in the exercise of its proper role.

Nonetheless, Bear Stearns not only asserts that it had no legal duty to offer advice but denies having done so in this case, other than perhaps incidentally. The record, however, belies this contention. Judge Koeltl found, and the trial record sustained, that during the course of the parties' business relationship and dealings, and in particular in connection with the crucial events of late 1994 and early 1995 relating to the acquisition and liquidation of Kwiatkowski's foreign currency position, a jury reasonably could have concluded that Bear Stearns actually undertook to provide Kwiatkowski with "substantial advice with respect to the size, placement, and timing of his transactions". Kwiatkowski II, WL 1277245, at *12. This evidence is summarized in Part V, B, infra.

D. Absence of Duty

Bear Stearns's principal challenge asserts that, in the instructions pertaining to the negligence claim, the Court outlined for the jury Kwiatkowski's "four theories" of negligence grounded on Bear Stearns's failure to advise him and "left it for the jury to determine whether defendants had a duty to provide that advice". Defendants' Memorandum at 4 (emphasis in original). According to Bear Stearns, the issue as to whether the firm was obligated to provide any investment advice should have been resolved by the Court before the case was sent to the jury. Consequently, Bear Stearns maintains that if the Court had performed that inquiry properly, Kwiatkowski's negligence claim would never have been submitted to the jury in the first place. On this theory, the Court should have decided as a matter of law that Bear Stearns owed Kwiatkowski no legal duty to render advice of any kind since his accounts were nondiscretionary.

In support of its contention, Bear Stearns argues that there is no authority under any applicable statute, case law, rule or regulation under which a broker could be held to a legal duty to provide investment advice to a customer of a nondiscretionary account, and that none of the agreements Bear Stearns entered into relating to Kwiatkowski's foreign currency trading account contains any terms or conditions requiring Bear Stearns to render investment advice to Kwiatkowski. See id. at 6-10.*fn12

Bear Stearns's reasoning is thus tantamount to a per se defense that in relation to a holder of a nondiscretionary account a broker's limited duties to the customer not only exclude any obligation to offer advice, but may not even embrace a duty of ordinary, reasonable care. See id. (citing Richardson Greenshields Sec., Inc. v. Lau, 693 F. Supp. 1445, 1457 (S.D.N.Y. 1988) (declining "to create [a duty of care] for commodities dealers under these circumstances")). In practice, this proposition would require that the classification of a customer's account would end the inquiry concerning the extent of a broker's duties to the client. The existence of a nondiscretionary account would be categorically dispositive, and there would be no need to examine any further circumstances.

IV. APPLICABLE LEGAL PRINCIPLES

Bear Stearns's hypothesis raises a number of fundamental issues implicating basic aspects of contract, agency and tort law. The Court finds that conceptually Bear Stearns's arguments are not properly premised and reflect a reading of the law that is too limited. Central to a full response to Bear Stearns's theory is a proper understanding of the interplay among the various legal. principles the parties' propositions here invoke, including contract doctrine, the broker/customer relationship and corresponding duties, as well as of the scope of the duty of care applicable in this context. To adequately ...


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