Searching over 5,500,000 cases.


searching
Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.

SWS FIN. FUND v. SALOMON BROS.

April 3, 1992

SWS FINANCIAL FUND A, an Illinois Limited Partnership; SWS FINANCIAL FUND B, an Illinois limited partnership; APOLLO I, an Illinois limited partnership; APOLLO II, an Illinois limited partnership; SWS FINANCIAL SERVICES, INC., an Illinois corporation; STENHOUSE, WEINER, SHERMAN, LTD. an Illinois corporation; and HICKEY FINANCIAL SERVICES, LTD., a Delaware corporation, Plaintiffs,
v.
SALOMON BROTHERS INC., a Delaware corporation, Defendant.



The opinion of the court was delivered by: BRIAN BARNETT DUFF

 Plaintiffs (an interconnected set of limited partnerships and corporations, frequently referred to herein collectively as "Hickey") have filed an eight-count complaint against Defendant Salomon Brothers. The complaint charges that Salomon Brothers (1) violated Rule 10b-5, (2) violated the Commodity Exchange Act, 7 U.S.C. § 25, (3) violated RICO, (4) committed common law fraud, (5) breached a fiduciary duty, (6) violated certain regulations promulgated by the Treasury Department pursuant to 31 U.S.C. §§ 3101 et seq., (7) violated the Sherman Act by wilfully acquiring monopoly power in certain secondary markets for Treasury Notes, and (8) violated the Sherman Act by attempting to acquire monopoly power in certain secondary markets for Treasury Notes.

 Salomon Brothers was among the roughly forty firms and financial institutions recognized by the Federal Reserve System as "primary dealers" in government securities. At Treasury auctions, Salomon Brothers bid for and purchased United States Treasury notes and bonds for its own account and for its customers' accounts. According to the complaint, beginning as early as December, 1990, Salomon systematically and deliberately violated Treasury Department regulations regarding Treasury auctions. Treasury regulations limited the maximum bid by any one dealer at any one price to 35% of the amount of the auction. The regulations also limited the maximum acquisition by any one dealer to 35% of the securities available at the auction.

 Salomon routinely submitted bids on its own behalf and also on behalf of a number of public and private institutional investors and others for the purchase of government securities. Hickey alleges that Salomon used to submit unauthorized bids in the names of other entities and through a complicated series of secret transactions, Salomon came to control the securities purchased through the unauthorized bids. That practice allegedly permitted Salomon to control extraordinarily high proportions of the auctioned government securities and enabled Salomon to "squeeze" the secondary markets by reselling the securities at artificially inflated prices.

 The plaintiffs are limited partnerships that trade financial futures contracts and government securities, the general partners of those partnerships, the trading manager for those partnerships and an introducing broker for the partnerships. Plaintiffs claim that they have purchased approximately $ 20 billion of government securities each year from Salomon Brothers. They contend in their complaint that Salomon's efforts to manipulate the market for government securities injured them in a variety of ways. Plaintiffs were allegedly forced to make higher bids for Treasury securities submitted through Salomon and also were forced to pay artificially inflated prices to cover their short positions in futures transactions.

 Salomon Brothers has moved to disqualify Hickey's attorneys, the law firm of Schiff, Hardin and Waite ("Schiff" or "Schiff Hardin"), on the grounds that Schiff's continued representation of Hickey in this lawsuit would violate either Rule 1.7 (governing conflicts of interest with respect to current clients) or Rule 1.9 of the Rules of Professional Conduct (governing conflicts of interest with respect to former clients). Although the court concludes that Schiff in all likelihood did violate Rule 1.7, disqualification is not the proper remedy. Therefore, defendant's motion to disqualify is denied.

 Background1

 On November 20, 1991, Hickey, represented by Schiff, Hardin and Waite, filed this suit against Salomon Brothers. Prompting this suit was a press release dated August 9, 1991, in which Salomon admitted to irregularities and rule violations in connection with its submitting bids at certain Treasury auctions. Sometime not long thereafter, plaintiffs sought Schiff's advice and took steps to present their claim to Salomon. Schiff has provided a substantial amount of legal services to various of the plaintiff entities since 1982. Affidavit of Michael Meyer PP3-4.

 Salomon Brothers' relationship with Schiff traces to October, 1989 when Marcy Engel, Vice-President and Counsel of Salomon Brothers, met Kenneth Rosenzweig, a Schiff partner, at a professional conference. Engel Affidavit P3; Rosenzweig Affidavit P3. Engel was impressed by Rosenzweig's work experience as a lawyer with the Commodity Futures Trading Commission (CFTC) and his knowledge of commodities law. Rosenzweig had worked for the CFTC for eight years prior to joining Schiff in 1987.

 In May, 1990, Salomon authorized Engel to retain Mr. Rosenzweig to assist in putting together a compliance manual for Salomon's commodity futures trading operations. Rosenzweig worked on the project throughout 1990 and on November 20, 1990, he sent Salomon the final draft of Schiff's part of the compliance manual. During the course of the project, Rosenzweig met with a number of Salomon personnel and learned about the futures accounts of Salomon and Salomon's subsidiary, Plaza Clearing Corporation, and about the organization of Salomon's customer and proprietary futures business. Affidavit of Terry Randall, Vice-President and Futures Compliance Manager of Salomon, P4. According to Mr. Randall, Rosenzweig was also educated in detail about Salomon's management of customer order flow and its reaction to, or management decisions about, trading errors. Id.

 
I have enclosed what I hope will be the final version (subject, as always, to legal and regulatory developments).

 The November 20, 1990 letter, addressed to Terry Randall, concluded with Rosenzweig's stating that "I have enjoyed working with you and Marcy [Engel] on this project. . . ."

 Salomon states that as far as it was concerned the compliance manual project was never fully completed and is still ongoing. Randall Affidavit P8; Engel Affidavit P5. In either July or August, 1991, Randall requested that Mr. Rosenzweig provide Salomon with a computer diskette including all the material that Rosenzweig had prepared for the futures compliance manual. Randall Affidavit P8; Rosenzweig Affidavit P7. Rosenzweig sent the diskette to Mr. Randall along with a letter dated August 30, 1991, in which he stated, "Best of luck in (finally) completing this project!"

 Apart from the compliance manual, Schiff undertook a number of other discrete research projects for Salomon, answering commodity law questions when they cropped up. For example, on May 17, 1990, Ms. Engel asked for advice relating to the use of U.S. Treasury securities in meeting the margin obligations for futures contracts. In particular, she asked whether it was permissible for a customer that has received securities from Salomon in a repurchase transaction to post those securities to satisfy the margin requirement. Rosenzweig Affidavit P9; Engel Affidavit P6. Mr. Rosenzweig provided an answer in a telephone call to Ms. Engel on May 22, 1990.

 It is not clear from the record what the other projects were, exactly when they were performed or what went into them. Ms. Engel refers to Schiff's having worked on "not fewer than six matters involving various compliance and regulatory issues." Engel Affidaviat P6. Schiff apparently researched a variety of discrete legal questions mostly relating to commodity futures trading. These projects are referenced in various bills sent by Schiff to Salomon in 1990 and 1991. A review of the bills makes plain that none of these projects required extensive work on Schiff's part. With the exception of one research project concerning the legality of tape-recording customer telephone orders, Mr. Rosenzweig avers that the assignments Schiff did for Salomon related solely to the permissibility of various practices under the commodity laws. Rosenzweig Affidavit P11.

 Schiff most recently worked on a Salomon project on June 24-25, 1991. On June 24, Ms. Engel called Mr. Rosenzweig. During her telephone call, Engel posed a number of questions about the use of customer-owned Treasury securities in meeting futures contract margin requirements. Engel Affidavit P6; Rosenzweig Affidavit P10. Rosenzweig answered those questions in a letter to Engel dated June 25, 1991. The legal fees billed by Schiff to Salomon amounted to a grand total of 39,149.46 representing 214 hours of service extending over a thirteen month period (May, 1990 to June, 1991).

 Since June 25, Schiff has not performed any legal work for Salomon. Nonetheless there has been a fair amount of contact between the two. In addition to the diskette request discussed above, Salomon personnel and Rosenzweig have corresponded on a number of matters. Tellingly, on August 13, 1991, Mr. Rosenzweig telephoned John Shinkle, then-General Counsel of Salomon, in order to receive his consent allowing Schiff to represent a commodity trading advisor in negotiations with Salomon. Rosenzweig Affidavit P10. After Rosenzweig assured Shinkle that the matter was wholly unrelated to the work Schiff had done for Salomon in the past, Rosenzweig obtained Salomon's consent. Id. Rosenzweig states in his affidavit that "in making that request, I was proceeding in the mistaken belief that Salomon's consent was required even though my last assignment from Salomon had been completed nearly two months earlier." Id.

 Rosenzweig has also sent two billings since June 25. The first of the two billings, sent on July 22, 1991, was accompanied by a letter from Mr. Rosenzweig to Ms. Engel in which he wrote:

 
I appreciate the opportunity to provide legal services to you, as do others within our firm who participate in these matters. Please do not hesitate to contact me if you have any questions regarding the enclosed.

 On September 13, 1991, Rosenzweig again sent Ms. Engel copies of previously submitted, unpaid bills for services rendered by Schiff in May and June, 1991. Rosenzweig's accompanying letter of September 13 lacked the hint of availability that was part of his July 22 letter.

 The last batch of correspondence between Rosenzweig and Salomon concerned a proposed rule change by the CFTC. During the course of a conference on commodities law held on October 16-18, 1991, Rosenzweig spoke with Engel and Randall about a proposed new rule submitted to the CFTC by the Chicago Mercantile Exchange. That rule was actively opposed by another client of Schiff's and Rosenzweig had prepared a comment letter on behalf of that other client. Mr. Rosenzweig attempted to enlist Salomon's support for the comment letter both at the conference and in two follow-up letters.

 Rosenzweig enclosed with the first of the two letters, dated October 22, 1991, the comment letter sent to the CFTC on behalf of the other client, a copy of the proposed rule, and a description of what Schiff considered to be some of the practical effects of the rule. At the end of the letter, he wrote, "Please feel free to call me if you would like to discuss this further."

 On December 17, 1991, Mr. Rosenzweig again encouraged Ms. Engel to send comments to the CFTC on behalf of Salomon Brothers. He again included the comment letter that Schiff had drafted for another client and again closed his letter stating, "Please feel free to call me if ...


Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.