Primavera Familienstifung v. Askin

Page 450

130 F.Supp.2d 450

PRIMAVERA FAMILIENSTIFUNG, Plaintiffs, v. David J. ASKIN, et al., Defendants.

ABF Capital Management, et al., Plaintiffs, v. Askin Capital Management, L.P., et al., Defendants.

Granite Partners, L.P., et al., Plaintiffs, v. Donaldson, Lufkin & Jenrette Securities Corporation, et al., Defendants.

Montpellier Resources Limited, et al., Plaintiffs, v. Askin Capital Management, L.P., et al., Defendants.

Richard Johnston, as Trustee for The Demeter Trust, et al., Plaintiffs, v. Askin Capital Management, L.P., et al., Defendants.

Bambou Inc., et al., Plaintiffs, v. David J. Askin, et al., Defendants.

AIG Managed Market Neutral Fund, et al., Plaintiffs, v. Askin Capital Management, L.P., et al., Defendants.

No. 95 Civ. 8905(RWS).

No. 96 Civ. 2978(RWS).

No. 96 Civ. 7874(RWS).

No. 97 Civ. 1856(RWS).

No. 97 Civ. 4335(RWS).

No. 98 Civ. 6178.

No. 98 Civ. 7494(RWS).

United States District Court, S.D. New York.

February 5, 2001.

As Amended March 1, 2001.

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Swidler Berlin Shereff Friedman, New York, NY, By: David S. Hoffner, for Askin Capital Management, L.P. and David J. Askin, of counsel.

Friedman Kaplan & Seiler, New York, NY, By: Eric Seiler, Robert J. Lack, Katherine L. Pringle, Lee D. Sossen, Berlack, Israels & Liberman, New York, NY, By: Steven E. Greenbaum, Scott M. Berman, Anne M. Cunningham, Melissa A. Sarubbi, for Granite Partners, of counsel.

Bragar Wexler Eagle & Morgenstern, New York, NY, By: Peter D. Morgenstern, Paul D. Wexler, Lawrence P. Eagel, Lisa K. Eastwood, for Montpellier Resources Limited, of counsel.

Morgan, Lewis & Bockius, New York, NY, By: Catherine A. Ludden, for Donaldson, Lufkin & Jenrette Securities Corp., of counsel.

Cleary, Gottlieb, Steen & Hamilton, New York, NY, By: Thomas J. Moloney, Mitchell A. Lowenthal, Carmine D. Boccuzzi, Allyson W. Haynes, Kesari Ruza, for Kidder, Peabody & Co., Incorporated, of counsel.

Brown & Wood, New York, NY, By: A. Robert Pietrzak, Andrew W. Stern, Madeleine J. Dowling, Jonathan J. Brennan, Kimberly A. Johns, for Merrill Lynch, Pierce, Fenner & Smith Inc., of counsel.

Gold Bennett Cera & Sidener, San Francisco, CA, By: Solomon B. Cera, Bernstein Litowitz Berger & Grossmann, New York, NY, By: Jeffrey A. Klafter, for Primavera Familienstiftung, Bambou, Inc., Loukoum Inc., Samta Investment Inc., and Hubert Looser, of counsel.

OPINION

SWEET, District Judge.

The defendants in seven related securities fraud actions have moved for summary judgment as to various claims. The plaintiffs have opposed these motions, and certain plaintiffs have made cross-motions for summary judgment.

Specifically, Kidder, Peabody & Co. ("Kidder") and Donaldson, Lufkin & Jenrette Securities Corp. ("DLJ"), the broker defendants (collectively, the "Brokers") in the six actions entitled ABF Capital Mgmt. v. Askin Capital Mgmt., No. 96 Civ. 2978 (the "ABF Action"), Johnston v. Askin Capital Mgmt., 97 Civ. 4335 (the "Johnston Action"), Primavera Familienstiftung v. Askin, No. 95 Civ. 8905 (the "Primavera Action"), Montpellier Resources Ltd. v. Askin Capital Mgmt., No. 97 Civ. 1856 (the "Montpellier Action"), Bambou Inc. v. Askin, No. 98 Civ. 6178 (the "Bambou Action"), and AIG Managed Market Neutral Fund v. Askin Capital Mgmt., No. 98 Civ. 7497 (the "AIG Action") (collectively, the "Investor Actions"),¹ have moved for summary judgment against all plaintiffs (the "Investors") on Count II of the complaint, which is the sole count remaining against them and which alleges aiding and abetting fraud. Kidder has also moved separately against certain Investors on statute of limitations grounds, and against those Investors who invested in the Quartz Hedge Fund ("Quartz") on grounds specific to those Investors (the "Quartz Investors"). Defendants Askin Capital Management, L.P. ("ACM") and David J. Askin ("Askin") (collectively, the "ACM Defendants") have joined in the motions by DLJ and Kidder to the extent applicable.²

In addition, defendants Merrill Lynch, Pierce, Fenner & Smith Inc. ("Merrill") and DLJ (collectively, the "Brokers")³ have moved for summary judgment in the seventh related action, entitled Granite Partners, L.P. v. Bear Stearns & Co., Inc., No. 96 Civ. 7874 (the "Funds Action"), against Granite Partners, L.P. ("Granite Partners), Granite Corporation ("Granite Corp."), and Quartz (collectively, the "Funds"), suing by and through the Litigation Advisory Board (the "LAB"). DLJ has moved for summary judgment on Count I of the Second Amended Complaint, which count alleges breach of contract by DLJ for wrongful margin calls. Merrill has moved for summary judgment on the three counts remaining against it, namely, Count I, alleging breach of contract for improper margin calls, Count II, alleging breach of contract for bad faith liquidations, and Count VIII, alleging commercially unreasonable liquidations in violation of Article 9 of the Uniform Commercial Code (the "U.C.C."). Merrill has also moved to strike the expert reports submitted by the Funds in connection with the motions for summary judgment. The Funds have cross-moved against Merrill on Counts I, II and VIII. In addition, the Funds have cross-moved against DLJ on Count X of the Second Amended Complaint, which count objects to DLJ's deficiency claim against the Funds in the related bankruptcy proceeding, and Count IX, which count alleges that DLJ failed to turn over certain principal and interest payments owed to the Funds.

Finally, the ABF Plaintiffs have moved for an order removing the "confidential designation" from documents produced by DLJ and Kidder, and from the deposition testimony of present or former employees of those firms, in the Investor Actions.

For the reasons set forth below, the motions will be denied in part and granted in part.

The Parties and Prior Proceedings

The parties in the instant actions are set forth in the prior opinions of this Court, familiarity with which is assumed. See Granite Partners, L.P. v. Bear, Stearns &amp Co., 17 F.Supp.2d 275 (S.D.N.Y.1998) ("Granite I"); Granite Partners, L.P. v. Bear, Stearns & Co., 58 F.Supp.2d 228 (S.D.N.Y.1999); ABF Capital Mgmt. v. Askin Capital Mgmt., L.P., 957 F.Supp. 1308 (S.D.N.Y.1997) ("ABF I").

Previous proceedings are also set forth in the prior opinions of this Court. Extensive discovery has been had in these actions, involving the exchange of tens of thousands of pages of documents and the deposition of dozens of witnesses. Proceedings relevant to the instant motions are set forth below.

The summary judgment motions in the Investor Actions were filed on or about May 12, 2000, and submissions were received through September 1, 2000, at which time the matter was deemed fully submitted. The summary judgment motions in the Funds Action were filed on or about June 6, 2000, and submissions were received through July 28, 2000, at which time the matter was deemed fully submitted. Kidder's motion in the Funds Action to strike the Funds' expert reports was filed on July 12, 2000, and was heard and deemed fully submitted on September 20, 2000. The ABF Plaintiffs' motion in the Investor Actions to strike the "confidential" designation from discovery materials was filed by letter of September 20, 2000, and was heard and deemed fully submitted on October 11, 2000.

The Facts

The following facts are drawn from the parties' Rule 56.1 Statements and other submissions and, as required, are construed in the light most favorable to the non-movant, as applicable. They do not constitute findings of fact by the Court.

Overview of the Transactions and the Funds' Collapse

The Funds were "hedge funds" which made leveraged investments in the mortgage-backed securities market, including collateralized mortgage obligations ("CMOs"). CMOs are bonds created from and collateralized by mortgage-backed securities formed from pools of residential mortgages or securities backed by such mortgages. CMOs are not listed or traded on a public exchange.

The Granite Partners and Granite Corp. Funds (collectively, the "Granite Funds") were established in 1990. Between the time of their creation and September 1991, the investment advisor for these Funds was New Amsterdam, run by Tony Estep ("Estep"). In September 1991, Askin joined the Funds as their president and investment advisor, and in September 1993, ACM was created as the Funds' investment advisor. The Quartz Fund was established in January 1994 with ACM as its investment advisor.

The Investors, who include both individuals and institutional investors, were shareholders and/or limited partners in the Funds. The earliest purchase of an interest in the Funds occurred in or about September 1990, and the latest occurred in March 1994. A number of the Investors acquired additional interests in the Funds after their initial investment.

Askin and ACM purchased CMOs for the Funds from various brokers,⁴ including Merrill, DLJ, Bear Stearns, and Kidder. The brokers created the CMOS.⁵

CMOs are created from and divided into various classes, or "tranches," each of which is entitled to a different portion of the principal and/or interest payments made by the underlying mortgage obligors. The tranches differ from one another with respect to their sensitivity to interest rate changes and the certainty with which their reaction to such changes can be predicted.

The mortgage-backed securities market is complex and relatively illiquid. Although mortgage-backed securities, including CMOs, count among their benefits relatively high yields, these securities also carry with them certain risks. The two primary risks associated with these instruments are interest rate risk and prepayment risk. The interest rate risk is the risk that the price of the security will decrease in response to interest rate increases. The prepayment risk...