Claims by three investment funds that they were subject to improper margin calls and liquidations can go to trial, the United States District Court for the Southern District of New York ruled on February 5, 2001. The ruling, in Granite Partners, L.P. v. Donaldson, Lufkin & Jenrette Securities Corp., No. 96 Civ. 7874 (RWS), arises out of the March 1994 liquidation and subsequent bankruptcy of the three funds, Granite Partners, L.P., Granite Corporation, and Quartz Hedge Fund, which invested in collateralized mortgage obligations.

A Litigation Advisory Board created in the Funds' bankruptcy proceedings sued Donaldson, Lufkin & Jenrette Securities Corporation, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Bear, Stearns & Co. Inc., and others, alleging that the defendant broker-dealers made improper margin calls on the Funds and conducted bad-faith and commercially unreasonable liquidations of the Funds' securities. The Funds' claims against Bear Stearns were settled in November 1999 for $39.6 million.

Ruling on the remaining defendants' motions for summary judgment, Judge Robert W. Sweet held that the Funds' margin call claims against DLJ and Merrill Lynch could go to trial. The Court concluded that the "[t]here is a genuine dispute of material fact as to whether DLJ's margin calls violated the implied covenant of good faith." Judge Sweet noted that "[a]lthough there were no margin deficits in the [Funds'] accounts as of [two days before the liquidations], within the next two days, the period around which the rumors as to the Funds' difficulties were circulating, DLJ quickly repriced the securities -- resulting in significant margin deficits." The Court cited the opinion of the Funds' expert, Professor John Y. Campbell of Harvard University, that DLJ had overstated the margin deficit in one account by nearly $4 million and in another by more than $1 million. Judge Sweet held that the Funds could seek damages against DLJ and Merrill Lynch based on the "highest intermediate price of the liquidated securities within a reasonable period after the liquidations."

The Funds are represented by Friedman Kaplan Seiler & Adelman partners Eric Seiler, Robert J. Lack, and Katherine L. Pringle and associate Lee D. Sossen, together with partners Steven E. Greenbaum and Scott M. Berman and associates Anne M. Cunningham and Melissa A. Sarubbi of Berlack, Israels & Liberman LLP.