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
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
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 address the
various elements of the legal questions presented by the motions before
the Court, an overview of these relationship/duties issues is essential.
A. Bases for the Broker's Duties
The relationship and associated duties corresponding to the type of
broker/customer account are matters generally determined by the terms of
the parties' agreements. See Northeast General Corp. v. Wellington
Advertising, Inc., 624 N.E.2d 129, 130 (N.Y. 1993) ("Courts look to the
parties' agreements to discover, not generate, the nexus of relationship
and the particular contractual expression establishing the parties'
interdependency."); see also Mobil Oil Corp. v. Joshi, 609 N.Y.S.2d 214,
215 (N.Y. App. Div. 1st Dep't 1994). Consequently, issues pertaining to
the existence and scope of the relationship and duties are usually
settled by reference to principles of contract law. See Northeast
General, 624 N.E.2d at 131-32. As regards a nondiscretionary account, the
customer retains management and control over investment transactions,
determining what purchases and sales to make. See Leib v. Merrill Lynch.
Pierce, Fenner & Smith, Inc., 461 F. Supp. 951, 952 (E.D. Mich. 1978),
aff'd, 647 F.2d 165 (6th Cir. 1981) (table). For the. purposes of
assessing the broker's role and ascribing attendant legal duties, each
transaction is considered separately. Id. In this regard, the broker's
basic duties, as recognized by the courts, may be classified broadly in
One set of obligations requires conduct that demands and promotes
diligence and skill. These duties obligate the broker to study a security
sufficiently before recommending it (see Hanly v. S.E.C., 415 F.2d 589,
596 (2d Cir. 1969); C.F.T.C. v. J.S. Love and Assocs. Options Ltd.,
422 F. Supp. 652, 660 (S.D.N.Y. 1976)); to become
familiar with an issuer's financial soundness and performance potential
and inform the customer of all material information so acquired (see
Hanly, 415 F.2d 596); and to execute the customer's requested
purchase and sales orders promptly and faithfully, in this regard
informing the customer of known risks associated with the particular
investment and transmitting records of all transactions. See
Richardson v. Shaw, 209 U.S. 365 (1908) (applying New York
law); Hanly, 415 F.2d at 595-96.
Another class of duties requires the integrity and good faith of the
broker in handling the customer's account. To this end, the broker is
obligated to refrain from self-dealing and to disclose any conflicting or
personal interest the broker may have in the transaction (see Chasins v.
Smith Barney & Co., 438 F.2d 1167, 1172 (2d Cir. 1971)); not to withhold
or misrepresent material information relevant to the investment; and not
to engage in. transactions without giving the client prior notice and
obtaining authorization. See Independent Order of Foresters v. Donald,
Lufkin & Jenrette, Inc., 157 F.3d 933, 940-41 (2d Cir. 1998); Leib, 461
F. Supp. at 952 and cases cited therein; see also Bissell v. Merrill
Lynch & Co., Inc., 937 F. Supp. 237, 247 (S.D.N.Y. 1996).
The manner and degree in which the broker may properly fulfill these
responsibilities in any given case may vary, depending to some extent
upon the business sophistication of the client and the nature of the
relationship between the parties. In the ordinary situation, the broker's
professional obligation to the customer with respect to any particular
investment ends upon the completion of the authorized transaction. See
Leib, 461 F. Supp. at 953; see also Caravan Mobile Homes Sales, Inc. v.
Lehman Bros. Kahn Loeb, Inc., 769 F.2d 561, 567 (9th Cir. 1985); Robinson
v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 337 F. Supp. 107, 111
(N.D. Ala. 1971), aff'd, 453 F.2d 417 (5th Cir. 1972).
1. The Broker as Agent
Under Bear Stearns's theory, solely by virtue of Kwiatkowski's
nondiscretionary accounts, the firm's business relationship with
Kwiatkowski was merely that of a broker, and its corresponding duties to
him therefore were confined to those described by the parties'
contractual obligations and any applicable principles from the law of
agency. Viewed in its narrowest terms, the broker's role ordinarily is
mechanical and ministerial: to fulfill the limited. transactional
requirements of the client's securities purchase or sale orders.*fn13
One court expressed the strict confines of the duties:
A broker's office, without special circumstances . .
. is simply to buy and sell. The office commences when
the order is placed and ends when the transaction is
complete. The risk of the venture is upon the customer
who profits if it succeeds and loses if it fails . .
. . The affair entrusted to a broker who is to buy or
sell through an exchange is to execute the order, not
to discuss its wisdom.
Robinson, 337 F. Supp. at 111.