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Amaranth LLC v. J.P. Morgan Chase & Co.

November 5, 2009


Cross-appeals from an order of the Supreme Court, New York County (Richard B. Lowe III, J.), entered November 10, 2008, which, to the extent appealed from as limited by the briefs, denied defendant J.P. Morgan Futures, Inc.'s motion to dismiss the first cause of action, and granted defendants' motion to dismiss the second, fourth, and fifth causes of action.

The opinion of the court was delivered by: Catterson, J.

Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431.

This opinion is uncorrected and subject to revision before publication in the Official Reports.

Luiz A. Gonzalez, P.J., Peter Tom, John W. Sweeny, Jr., James M. Catterson, Dianne T. Renwick, JJ.


The instant appeal arises from events that the Wall Street Journal in January 2007 described as "the biggest hedge fund failure ever." To stem billions of dollars in losses in 2006, Amaranth LLC executed trades to transfer its high-risk positions to the parent company of its clearing broker, J.P. Morgan, which received substantial benefits from the transaction. Both parties appeal from portions of an order that, inter alia, dismissed Amaranth's claims for tortious interference and denied J.P. Morgan's motion for dismissal of a claim for breach of contract. We find that the plaintiffs did not plead a valid cause of action for breach of contract, but that their claim for tortious interference should be reinstated.

The plaintiffs are Amaranth LLC (hereinafter referred to as the "Fund"), a hedge fund involved in natural gas derivatives trading, and Amaranth Advisors LLC (hereinafter referred to as "Advisors"), the trading advisor that planned and executed the Fund's investment strategy. The defendants J.P. Morgan Futures, Inc. (hereinafter referred to as "JPMFI"), the Fund's clearing broker, and J.P. Morgan Chase Bank, N.A. (hereinafter referred to as "JPMB") are subsidiaries of defendant J.P. Morgan Chase & Co. (hereinafter referred to as "JPMC").

The following facts are undisputed:

In 2005 and 2006, the Fund made huge gains trading in energy derivatives, reaching a value of $9.2 billion in July 2006. However in late August 2006, the Fund lost hundreds of millions of dollars, and by September 15, 2006, it was in danger of being unable to satisfy its obligations on its open trading positions. As the Fund's clearing broker, JPMFI was, effectively, the guarantor for trades if the Fund defaulted. To shield clearing brokers from ultimate responsibility for their clients' losses, exchange regulations require commodities traders to maintain funds as a deposit for performance on their contracts. These funds are known as margin. A client's account is recalculated at the end of every business day and the resultant gains or losses reflected in the client's account balance. When losses accrue, they are deducted from the client's balance and the client may be required to post additional margin funds. This is known in the industry as a margin call. This process ensures that the account has sufficient funds to satisfy margin requirements and provide adequate protection for clearing brokers against their clients' positions.

The relationship between the Fund and JPMFI is established in the Client Agreement executed by the parties in 2004. The agreement states in relevant part: "[¶ 3](e) All transactions by JPMFI on behalf of [the Fund] shall be subject to the applicable constitution, bylaws, rules, regulations, customs, rulings, and interpretations ("Rules") of the exchange and its clearing organization.... JPMFI shall not be liable to [the Fund] as a result of any action taken by JPMFI or its agents to comply with any such Rule [...] "(f) JPMFI shall not be required to execute any new order for [the Fund] if, in JPMFI's reasonable discretion, the state of [the Fund's] account does not justify such execution; provided, however, that JPMFI shall execute orders that would have the effect of reducing JPMFI's exposure to [the Fund], and such [sic] and provided further that such execution would not violate any exchange or regulatory rule or applicable law."

At the close of business on Friday, September 15, 2006, the Fund's margin requirement was $2.513 billion. At the time, the Fund had $2.518 billion in its futures account at JPMFI, leaving it with just $5 million in unencumbered cash.

To protect themselves from further losses that could threaten the Fund's survival, the plaintiffs sought to transfer the risk associated with the Fund's natural gas portfolio to other banks or funds. On Saturday, September 16, the Fund reached a deal under which Merrill Lynch (hereinafter referred to as "Merrill") would assume about a quarter of the Fund's open natural gas positions. These trades were cleared through JPMFI the next business day, Monday, September 18, without incident.

At the same time, the Fund was in negotiations with Goldman Sachs (hereinafter referred to as "Goldman") to transfer most of their remaining open positions. On Sunday, September 17th, the Fund reached a deal with Goldman under which Goldman would accept a payment of $1.85 billion to assume most of the remaining risk in the Fund's portfolio. Unlike the Merrill deal, Goldman required this payment in advance. The Fund had little unencumbered cash on hand, and the Goldman deal would necessarily require the release of its margin funds to complete the deal.

The proposed trade was discussed in a conference call the next morning, Monday, September 18, among officials from Advisors, Goldman, JPMFI, and the New York Mercantile Exchange (hereinafter referred to as "NYMEX"). Despite the endorsement of the NYMEX officials, JPMFI refused to release the necessary $1.85 billion ...

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