Bear Stearns Wins Appeal of Huge Verdict
Thu Sep 19, 6:59 PM ET
By Gail Appleson
NEW YORK (Reuters) - In a victory for Bear Stearns & Co. , a U.S. appeals court on Thursday overturned a $164.5 million verdict won by an investor who claimed the Wall Street firm failed to warn him about the speculative risks of trading in currency futures.
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The U.S. Second Circuit Court of Appeals both threw out the verdict and dismissed the suit brought by multimillionaire investor Henryk de Kwiatkowski, who blamed his $300 million in foreign currency losses on his commodities broker's alleged bad advice and negligence.
The award was believed to be the largest ever won by a solo-investor against a brokerage at the time and was one of the 10th largest U.S. verdicts awarded by a jury in the year 2000.
A key issue in the case was that Kwiatkowski held a "nondiscretionary" account at the firm, meaning his broker could not make a trade without his permission. Because of this, Bear Stearns argued that it had no ongoing duty to provide him with information and advice.
The appeals court agreed stating that a nondiscretionary customer by definition keeps control of the account and has full responsibility for trading decisions.
"In the ordinary nondiscretionary account, the broker's failure to offer information and advice between transactions cannot constitute negligence," the three-member panel wrote.
The appeals court said that "in sum ... the claimed negligence is not in the advice that Bear gave, but in advice that Bear did not give."
The appeals court pointed out in its opinion that Kwiatkowski had been an experienced currency trader before he opened his Bear Stearns futures account. As an entrepreneur and founder of Kwiatkowski Aircraft, which leases and sells aircraft internationally, the court said he developed a background in trading to hedge the risks associated with his company's foreign currency transactions.
It said Kwiatkowski made and lost hundreds of millions of dollars betting on the U.S dollar by trading in currency futures.
"Kwiatkowski traded on a governmental scale," the court said, adding that, at one point, his positions accounted for 30 percent of the total open interest in certain currencies on the Chicago Mercantile Exchange.
"Liability cannot rest on Bear's failure to give ongoing market advice that it had no duty to give, on Bear's failure to issue warning that it had no duty to give (concerning risks about which Kwiatkowski surely knew more than anyone), or on Bear's failure to foretell the short-term gyration of the dollar," the court said.
Elizabeth Ventura, a Bear Stearns spokeswoman, said the firm was extremely pleased with the ruling.
"We feel vindicated by the court's 3-0 decision in our favor," she said.
The investor had blamed Bear Stearns for the huge sums he lost during a five month period in 1994-1995.
In June 1996, Kwiatkowski sued Bear Stearns and related entities that had executed his trade orders, alleging negligence and breach of fiduciary duty. At trial he alleged that the firm failed to warn him adequately of risks, failed to keep him apprised of certain market forecasts and gave him negligent advice concerning the timing of his trades.
In May 2000, a Manhattan federal jury found Bear Stearns negligent and awarded Kwiatkowski $111.5 million in damages. In December of 2000 the trial judge added $53 million to the jury's award for prejudgement interest dating back to March 6, 1995.
Bear Stearns was forced to take a charge of $96 million in its 2000 second quarter for increased litigation reserves following the verdict. |
