The PPM also confirmed that there was an opportunity for the Investor
to ask questions of ACM, and receive responses, as part of her
Potential and actual investors were given the opportunity to obtain
information about the Funds and how they were run. The Investors were
free to examine ACM's offices and its computer models, or to interview
its personnel, including Askin. They were invited to observe the computer
modeling on ACM's screens and were provided with printouts generated by
the Amalgamator. They were provided with the Performance Letters and had
access to lists of the Funds' holdings. The Price Waterhouse statements
also set forth each security owned by the Funds, broken down by type.
These statements were given to prospective as well as current investors.
Mack testified that an investor request "to see something or speak to
someone" was never denied. ACM also provided responses to due diligence
questions by those Investors who inquired. One such Investor,
Commonwealth/Providian, concluded that ACM had "sophisticated and
comprehensive computer capabilities."
The Price Waterhouse statements broke the Funds' securities into broad
categories, such as "interest only tranches," "principal only tranches,"
"other tranches," and "residual interests." These categories corresponded
with categories used in ACM materials, in which ACM represented that
interest-only CMOs and residuals were bearish, thus balancing (or
hedging) the bullish principal-only tranches. In the annual audited
statements, the reported market value of the bullish categories roughly
approximated the reported market value of the bearish ones. Some of the
tranches reported as "interest only" in the audited financials were in
fact inverse IOs, which are not bearish. The Price Waterhouse statements
did list the individual securities themselves, so that an Investor could
have obtained a prospectus for that security. In addition, some Investors
requested, and received, "Current Holdings Reports" which identified
securities in more detail, e.g., as "Interest Only Inverse Floater" or
"Super P/O." DLJ obtained statements containing this level of detail in
order to perform its portfolio analyses for ACM.
Investors testified that they read the Performance Letters and Price
Waterhouse statements as reflecting that ACM's market-neutral,
low-volatility approach was working. Each of the Investors has stated in
a sworn declaration that he would not have invested, or retained his
investment, if he had known of Askin's practice of obtaining revised
marks from the brokers.
DLJ's Comerford testified that the Funds' reported returns in 1992
would have led her to conclude that the portfolios were neutral.
However, an expert for Kidder, David Ross ("Ross"), opined that one
cannot draw conclusions about duration or market sensitivity from the
reported returns. Ross compared the Funds' reported returns to the
performance of benchmarks and concluded that the Funds' returns were more
volatile than Treasuries and were correlated with interest rate
movements. Matthew Richardson Demonstration copy of activePDF Toolkit
(http://www.activepdf.com) ("Richardson"), an expert for the Investors,
performed a similar comparison and concluded that the Funds did not
achieve market neutrality. Richardson's use of regression analysis has
been criticized by a DLJ expert, Raj Mehra ("Mehra"), as inadequate for
making the measurements required to reach his conclusion. Wiener analyzed
the securities listed in the statements provided to DLJ for purposes of
the DLJ portfolio analyses. Wiener analyzed the effective duration and
effective convexity of each bond within the portfolios and concluded that
the Funds were never market-neutral.
Some Investors made their investments before Askin's arrival and,
thus, did not have contact with Askin, ACM, or the ACM marketing
materials before making their investments: Employee Retirement Income
Plan of Minnesota Mining and Manufacturing Company ("3M"), The
David I. Chemerow 1992 Trust (the "Chemerow Trust"), Robert Johnston
("Robert Johnston"), and Richard Johnston ("Richard Johnston") as
Trustee for the Demeter Trust (the "Demeter Trust").*fn15 These
Investors contend that assurances made by Askin upon his arrival,
or other ACM representations, induced them to maintain their
investments. These Investors did receive the PPMs.
Some Investors made their initial investment before Askin's arrival,
but made other investments during Askin's tenure: Lionel Sterling
("Sterling") and Antaeus Enterprises, Inc. ("Antaeus").
Investor Roma Malkani ("Malkani") invested after Askin's arrival but
did not have contact with Askin or anyone else at ACM before investing.
A number of Investors did not know and did not ask how the Funds'
portfolios were valued at the time they made their investments: L.H. Rich
Companies ("L.H. Rich"), Primavera Familienstiftung ("Primavera"),
International Asset Management Limited ("IAM"), ABF Capital Management
("ABF"), CoriFrance, Hedged Investment Partners ("HIP"), Global Hedge
Fund ("Global"), Malkani, 3M, Diversified Income Strategies, Excelsior
Investment Fund and Excelsior Qualified L.P. (collectively,
"Excelsior"), Oblingter, W Finance Arbitrage ("W France"), the Regency
Fund, Montpellier Resources Limited, Robert Johnston, Sofa Partners, the
Demeter Trust, Gilla (B.V.I.) Limited ("Gilla"), and Nemrod Leverage
Holdings Limited ("Nemrod").
Although all the Investors claim to have reviewed and relied upon the
Price Waterhouse statements, fewer than half of the sixty Investors were
able to produce copies of those statements, and only thirteen testified
to having seen the "100%" broker marks language, with only seven having
seen the language before making their investments.
Some Investors perceived, based on the PPMs or other information
provided by Askin, that Askin had some discretion in reporting the value
of the Funds' securities: Glenwood Balancing Fund, L.P. Glenwood Trust
Company as Custodian for Walker Art Center, Glenwood Trust Co. Group
Trust II, Glenwood Partners, L.P., Samta, Inc. ("Samta"), Bambou, Inc.
("Bambou"), Loukoum, Inc. ("Loukoum"), FIDR Investors 1996 Trust, HNM
First Investors 1996 Trust, HNM Second Investors 1996 Trust, SDI, Inc.,
Commonwealth Life Insurance Company, Providian Life & Health Insurance
Company ("Commonwealth/Providian"), Neutral Strategies, L.P., Pine
Equities, L.P., and the Chemerow Trust.
Some Investors knew that Askin talked to the brokers about revising
marks: Sterling, Commonwealth/Providian, Oakwood Associates, Rosewood
Associates, and the Chemerow Trust.
A number of Investors had little understanding of ACM's computer
modeling capabilities and never asked for a demonstration or
documentation: Levitt Family Trust, Spirit Debt Limited, Spirit Neutral
Limited, 3M, Neutral Strategies, L.P., Zimmerman Family Trust I,
Zimmerman Income Partners, IAM, Bambou, Loukoum, Samta, Hubert Looser,
L.H. Rich, Primavera, ABF, CoriFrance, HIP, Conservation Securities
Limited Partnership, Trans-Resources, Inc., Excelsior, Gilla, Nemrod,
Robert Johnston, William Monaghan, Oblingter, and W Finance.
One Investor, William Cook ("Cook"), took note of Askin's comments that
he asked the brokers to reconsider their marks. Cook tested the accuracy
of the valuations by comparing the reported marks and subsequent sale
prices of the bonds. Cook, an investment strategist for
a large insurance company, was specifically familiar with CMOs. Cook
believed that, while Askin sought revisions, he ultimately accepted
the broker's price if he was unable to convince them of their error.
Facts Relevant to the Statute of Limitations
On March 10, 1994, Askin reported a two percent loss to the Investors
for all three Funds. On March 25, 1994, ACM restated the February 1994
loss, acknowledging that the correct figure was approximately twenty
On March 24, 1995, Primavera filed a putative class action complaint in
the United States District Court for the Northern District of
California. This suit asserted federal claims Demonstration copy of
activePDF Toolkit (http://www.activepdf.com) and was brought "on behalf
of a class consisting of all persons and entities who purchased, directly
or beneficially, securities issued by any of the Granite Funds . . . from
January 26, 1993 through the date the Granite Funds went bankrupt."
In April 1995, the Funds' Chapter 11 trustee filed a preliminary report
with the bankruptcy court regarding his investigation of the Funds'
demise. This report indicated the possible involvement of the Brokers in
Askin's fraudulent scheme.
On September 20, 1995, the Primavera complaint was amended to add the
Brokers as defendants, and on October 18, 1995, the Primavera Action was
transferred to the Southern District of New York. On March 1998, class
certification in the Primavera Action and the later-filed Montpellier
Action was denied.
Providian Life & Health Insurance Company ("Providian") is an insurance
company with its principal place of business in Pennsylvania. Providian
is a plaintiff in ABF Action, filed on March 27, 1996.
Sterling is a Connecticut resident. Sterling is a plaintiff in the
Johnston Action, filed on June 9, 1997.
The Demeter Trust maintains its principal place of business in
Connecticut. The Demeter Trust is a plaintiff in the Johnston Action,
filed on June 9, 1997.
Cook is a Connecticut resident. Cook is a plaintiff in the AIG Action,
filed on October 21, 1998.
Arbor Place, L.P. ("Arbor"), maintains its principal place of business
in Massachusetts. Arbor is a plaintiff in the Montpellier Action,
pursuant to the amended complaint filed on June 2, 1997.
Global Hedge Fund ("Global") is domiciled in Jersey, Channel Islands.
Global is a plaintiff in the Montpellier Action, pursuant to the amended
complaint filed on June 2, 1997.
Malkani is a Maryland resident. Malkani is a plaintiff in the
Montpellier Action, pursuant to the amended complaint filed on June 2,
The Funds Action
The Repurchase Transactions
DLJ and each of the Funds executed a standard industry agreement
referred to as the PSA ("Public Securities Association") Agreement (the
"PSA Agreement") with respect to their repo transactions.*fn16 Merrill
and Quartz executed the PSA Agreement, but Merrill and Granite Partners
and Granite Corp., respectively, did not.
The PSA Agreement provides with respect to the Funds' obligation as to
margin maintenance, and the brokers' right to demand additional
If at any time the aggregate Market Value of all
Purchased Securities subject to all Transactions in which
a particular party hereto is acting as Buyer [the broker]
is less than the aggregate Buyer's Margin Amount for all
(a "Margin Deficit"), then Buyer may by notice to
Seller [the Fund] require Seller in such Transactions,
at Seller's option, to transfer to Buyer cash or
additional Securities reasonably acceptable to
Buyer ("Additional Purchased Securities") so that the
cash and aggregate Market Value of the Purchased
Securities, including any such Additional Purchased
Securities, will thereupon equal or exceed such aggregate
Buyer's Margin Amount (decreased by the amount of any
Margin Deficit as of such date arising from any
Transactions in which such Buyer is acting as Seller.
PSA Agreement ¶ 4(a).
The "Buyer's Margin Amount," i.e., the amount of collateral which the
Fund was required to maintain in a repo account so as not to have a
margin deficit, is "the amount obtained by application of a percentage .
. . agreed to by Buyer and Seller prior to entering into the
transaction, to the Repurchase Price for such Transaction." PSA Agreement
The PSA Agreement provides that the Fund may obtain the return of
collateral that is in excess of the required margin amount:
If at any time the aggregate Market Value of all
Purchased Securities subject to all Transactions in which
a particular party hereto is acting as Seller [the Fund]
exceeds the aggregate Seller's Margin Amount for all such
Transactions at such time (a "Margin Excess"), then
Seller may by notice to Buyer [the broker] require Buyer
in such Transactions, at Buyer's option, to transfer cash
or Purchased Securities to Seller, so that the aggregate
Market Value of the Purchased Securities, after deduction
of any such cash or any Purchased Securities so
transferred, will thereupon not exceed such aggregate
Seller's Margin Amount .
PSA Agreement § 4(b).