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Jane Street Capital, LLC v. Merrill Lynch Pierce Fenner & Smith, Inc.

Supreme Court of New York, New York County

June 11, 2013

In the Matter of the Application of JANE STREET CAPITAL, LLC, Petitioner, for an Order, Pursuant to CPLR 3102(C), Compelling
v.
MERRILL LYNCH PIERCE FENNER & SMITH, INC. and Merrill Lynch & Co., Inc., to Provide Limited Disclosure in Aid of Commencing an Action, Respondents. No. 103189/12.

Editorial Note:

This decision has been referenced in a table in the New York Supplement.

Robert W. Forman, Esq., Matthew J. Sava, Esq., New York City, for petitioner.

Merrill Lynch & Co., New York City, for respondent, self-represented.

BARBARA JAFFE, J.

By notice of petition dated July 3, 2012, petitioner seeks an order pursuant to CPLR 3102(c) directing respondents to provide limited pre-action disclosure. Respondents oppose.

Petitioner alleges that respondents formed and sold industry-sector trusts, called HOLDRS, and that the applicable Trust Agreements provided that the trusts would be liquidated 12 months after respondents announced the termination of the Trusts, during which period the owners of HOLDRS certificates could surrender them against delivery of the underlying trust securities. Petitioner purchased and held various HOLDRS securities. On August 11, 2011, respondents amended the Trust Agreement to shorten the liquidation period to four months.

Petitioner contends that in reliance on the amendment, it established various short positions in HOLDRS options. However, on December 16, 2011, after receiving a complaint from an owner of HOLDRS, respondents announced that they had changed the liquidation period back to 12 months, as a result of which petitioner lost millions of dollars on its option positions.

Petitioner alleges that a party opposing it in its option transactions influenced respondents to change the liquidation period back to 12 months, thereby enhancing the value of the long options it held and unjustly enriching itself at petitioner's expense. It thus seeks to ascertain the identity of this person or entity in order to file an action against it for unjust enrichment.

Respondents oppose the petition, arguing that petitioner fails to set forth a meritorious claim for unjust enrichment against the unknown party, as petitioner's claim that it lost money on the HOLDRS options while another party benefitted does not establish that the other party's conduct was inequitable or that it was unjustly enriched, and that petitioner alleges no relationship between it and the unknown party that could have caused it to rely on or be induced the party.

In reply, petitioner maintains that it has a valid unjust enrichment claim as it has alleged that the unknown party unduly coerced or influenced respondents to change the liquidation period in order to profit at petitioner's expense, and that it believes that the unknown party was on the opposite side of an options transaction, thus establishing a sufficient connection between it and the unjustly enriched party.

CPLR 3102(c) authorizes a court to order disclosure prior to the commencement of an action " to aid in bringing an action." A plaintiff may petition the court under this section in order to identify potential defendants ( Holzman v. Manhattan and Bronx Surface Tr. Operating Auth., 271 A.D.2d 346, 347 [2000]; Stump v. 209 E. 56th Street Corp., 212 A.D.2d 410, 410 [1st Dept 1995] ), or to determine the way in which the complaint should be framed ( Liberty Imports v. Bourguet, 146 A.D.2d 535, 536 [1st Dept 1989]. However, preaction discovery is not intended to discern the existence of a cause of action. ( Holzman, 271 A.D.2d at 347). Accordingly, a petitioner must show that " he has a meritorious cause of action and that the information sought is material and necessary to the actionable wrong." ( Id. ). To determine " whether the petitioner has demonstrated a prima facie case, the evidence presented must be considered in a light most favorable to the petitioner" ( Toal v. Staten Island Univ. Hosp., 300 A.D.2d 592, 593 [2d Dept 2002] ), and " the determination of whether a party has demonstrated merit lies in the sound discretion of the trial court" ( Bishop v. Stevenson Commons Assocs., LP, 74 A.D.3d 640, 641 [1st Dept 2010]; In re Peters, 34 A.D.3d 29, 34 [1st Dept 2006], lv denied 8 N.Y.3d 809 [2007] ).

An action to recover on a theory of unjust enrichment is based on the equitable principle that a party may not enrich itself unjustly at another's expense. ( Waldman v. Englishman Sportswear, Ltd., 92 A.D.2d 833, 836 [1st Dept 1983] ). To prevail on an unjust enrichment claim, the plaintiff must show: (1) the other party was enriched, (2) at that party's expense, and that " it is against equity and good conscience to permit [the other party] to retain what is sought to be recovered." ( Mandarin Trading Ltd. v. Wildenstein, 16 N.Y.3d 173, 182 [2011] ). While the party need not show privity with the other party, an unjust enrichment claim may not be maintained if the connection between the parties is too attenuated, and the allegations must indicate " a relationship between the parties that could have caused reliance or inducement." Conclusory allegations that fail to demonstrate that the other party was unjustly enriched at the plaintiff's expense warrant dismissal. ( Id. ).

Here, even assuming that the other party unduly influenced or coerced respondents into changing the length of the liquidation period, and that petitioner and the other party were known to each other and on opposite sides of an options transaction, petitioner has neither alleged how it relied on the other party or on what basis it relied on it, nor has it alleged any facts from which it may be inferred that the relationship between the two parties was such that it could or should have caused petitioner to rely on the other party. Indeed, according to petitioner, to the extent that there was a relationship, it was adversarial.

Moreover, petitioner provides no facts as to how the other party coerced or unduly influenced respondents to change the liquidation period, thereby failing to establish that the other party engaged in any inequitable conduct. Even if the other party had convinced respondents to change the liquidation period for its own financial benefit and to petitioner's detriment, petitioner has not shown that such conduct is inequitable within the context of the financial market and the transactions at issue. ( See e.g. Paramount Film Distributing Corp. v. State, 30 N.Y.2d 415 [1972] [courts will look at whether benefit has been conferred on defendant under mistake of fact or law]; 22A N.Y. Jur 2d, Contracts ยง 528 [2013] [critical inquiry is whether " under the circumstances and as between the two parties to the transaction the enrichment be unjust" ] ).

Rather, it is undisputed that respondents were free to change the liquidation period at any time, as long as it complied with the applicable HOLDRS Trust Agreements. Thus, petitioner's investment in short options constituted a calculated risk or gamble, which it presumably took with knowledge that the liquidation period could be changed thereafter. That the gamble did not pay off does not warrant recoupment of its losses from the other party absent a showing that equity and good conscience require restitution from the other party. ( See Dragon investment Co. II LLC v. Shanahan, 49 A.D.3d 403 [1st Dept 2008] [claim of unjust enrichment does not lie to relieve party of consequences of party's own failure to exercise caution with respect to business transaction]; Clark v. Daby, 300 A.D.2d 732 [3d Dept 2002], lv denied 100 N.Y.2d 503 [2003] [" fact that plaintiffs' calculated risk failed makes their conduct no less voluntary, and there is no evidence or claim that defendant's conduct with regard to this matter was in any way tortious or fraudulent" ] ).

Accordingly, it is hereby

ORDERED and ADJUDGED, that the petition is denied and the proceeding is dismissed.


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