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Appaloosa Investment L.P.I. v. J.P. Morgan Securities

April 24, 2008

APPALOOSA INVESTMENT L.P.I; PALOMINO FUND LTD.; RELIANCE STANDARD LIFE INSURANCE COMPANY; MUTUAL SHARES FUND; MUTUAL BEACON FUND; MUTUAL QUALIFIED FUND; MUTUAL DISCOVERY FUND; MUTUAL EUROPEAN FUND; MUTUAL SHARES SECURITY FUND; MUTUAL DISCOVERY SECURITIES FUND; FRANKLIN NATURAL RESOURCES FUND; FRANKLIN NATURAL RESOURCES SECURITIES FUND; AND FRANKLIN GOLD AND PRECIOUS METALS, PLAINTIFFS-RESPONDENTS,
v.
J.P. MORGAN SECURITIES, INC.; BMO NESBITT BURNS CORP.; BMO NESBITT BURNS SECURITIES INC., A/K/A BMO NESBITT BURNS, INC.; HARRIS NESBITT INC.; BANK OF MONTREAL, SNC-LAVALIN GROUP, INC.; SNC-LAVALIN/KILBORN ENGINEERING PACIFIC, LTD.; P.T. KILBORN PAKAR REKAYASA AND BARRICK GOLD CORPORATION, DEFENDANTS.
BMO NESBITT BURNS, INC., BANK OF MONTREAL, BMO CAPITAL MARKETS CORP., AND J.P. MORGAN SECURITIES, INC., DEFENDANTS/THIRD PARTY PLAINTIFFS-APPELLANTS,
v.
APPALOOSA MANAGEMENT, LP, FRANKLIN RESOURCES, INC., FRANKLIN ADVISORS, INC. AND FRANKLIN MUTUAL ADVISORS, LLC, THIRD PARTY DEFENDANTS-RESPONDENTS.



On appeal from the Superior Court of New Jersey, Law Division, Morris County, Docket No. L-3059-05.

Per curiam.

NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION

Argued telephonically April 3, 2008

Before Judges C.S. Fisher and C.L. Miniman.

Plaintiffs are a group of mutual and hedge funds (the funds) that, by way of this action, seek damages based upon losses they claim to have sustained from investing in Bre-X Minerals Ltd. (Bre-X), a Canadian gold exploration company. Defendants are financial institutions that provided services for the now-bankrupt Bre-X; in the complaint filed by their attorneys, Gibbs & Bruns, LLP, the funds allege that "red flags" that went up should have made defendants understand that Bre-X was a fraud.

Defendants filed a third-party complaint against the managers and investment advisers (advisers) of the funds. Gibbs & Bruns thereafter appeared as counsel for the advisers. In this appeal, we review the trial judge's order that denied defendants' motion to disqualify Gibbs & Bruns as counsel because of its dual representation of both the funds and the advisers.

I.

This action has its genesis in Bre-X's report in 1994 that it discovered a rich gold deposit in Busang, Indonesia. With increasing estimates of the gold find, the share prices of BreX, and its affiliate, Bresea Resources, Ltd. (Bresea), rose on the stock exchanges here and in Canada. In March 1997, however, the market apparently realized that Bre-X's drilling results had been falsified, causing the share prices of both Bre-X and Bresea to plummet and generating losses for the funds.

The funds' complaint, which was filed on October 31, 2005, asserted common law claims and sought damages from defendants for the losses sustained as a result of the funds' purchases of Bre-X and Bresea stock. Defendants unsuccessfully moved for a dismissal of the complaint.*fn1 Once their motion to dismiss was denied, defendants filed a third-party complaint against the advisers.

In their third-party action, defendants alleged that the advisers were sophisticated financial firms that promised, for substantial fees, their robust and diligent examination of their investments -- that the advisers promised, among other things, to examine "original country, industry and company research," make "company visits and inspections," utilize "other publicly available information," and conduct "management interviews." Defendants alleged, apparently without dispute, that the decisions to purchase Bre-X and Bresea stock were made by the advisers with full and sole discretionary authority to make these purchases. Defendants also asserted that the advisers failed to live up to their promises of exercising due diligence and thereby breached their fiduciary duties; these assertions are disputed.

Once the third-party complaint was filed and served, Gibbs & Bruns appeared for the advisers. Defendants argued that this created "a clear conflict for Gibbs & Bruns because, in the same action, Gibbs & Bruns is asserting on behalf of one set of clients the very allegations against which they are defending another set of clients." That is, defendants claim that the theory that the funds are pursuing against them -- that there were certain "red flags" about the Bre-X gold find that "would have put any sophisticated person on notice that Bre-X was a fraud" -- is essentially the same theory that is being pressed by defendants against the advisers. In short, defendants contend that Gibbs & Bruns will be both advocating and resisting the same theory, for different clients, in the same case.

Defendants unsuccessfully moved in the trial court to disqualify Gibbs & Bruns. After we denied defendants' motion for leave to appeal, defendants moved in the Supreme Court for leave to appeal. The Court granted this motion and summarily remanded the matter to us to consider the appeal on its merits. 193 N.J. 218 (2007).

II.

Because the "appearance of impropriety" no longer provides a basis for the disqualification of counsel from litigation when a conflict of interest is asserted, In re Supreme Court Advisory Comm. on Prof'l Ethics Opinion No. 697, 188 N.J. 549, 552 (2006), we are required to consider whether there is any substance in defendants' contention that the interests of the advisers are "directly adverse" to the interests of the funds, R.P.C. 1.7(a)(1), or whether there is "a significant risk" that Gibbs & Brun's representation of one of these groups of clients "will be materially limited by [its] responsibilities" to the other, R.P.C. 1.7(a)(2). The trial judge found, and we agree, that in the ...


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