Hague Convention (Evidence)

• Author: International Law Group

The sister companies of Genira Trade & Finance Inc and Binzer Enterprises Corporation (Genira and Binzer) (plaintiffs) brought an action in the Supreme Court of the state of New York against Refco Capital Markets Limited and Refco Group Limited (Refco or defendant). For eighteen months they had an account with Refco, during which time plaintiffs engaged in high risk "Brady Bonds" and other transactions with Refco. Mr. Ramlal Melwani (RM) had not only introduced plaintiffs to Credit Suisse (First Boston) Ltd. (CSFB) and Standard Bank (London) Ltd.(SBL) (collectively, the Banks) but also to Refco. Plaintiffs alleged that RM had told them that CSFB and later Refco would pay him a small fraction of the spread between the bid and asked price for each transaction according to industry custom and practice.

When Refco began to demand high margins, however, plaintiffs refused to pay and Refco shut down their accounts. In plaintiff's original breach of contract action against Refco in the New York courts, a deposition of RM, a non-party, turned up evidence that Refco had certain commission or profit-sharing deals with RM and with entities controlled by RM's family members (the Melwani Entities). Plaintiffs then abandoned their contract claims and sought leave to plead claims of fraudulent dealings.

Their amended pleadings claimed that the sharing arrangements between Refco and the Melwani Entities were improper. Thus, the payments made to the Melwani Entities were inducements or kickbacks to make it profitable for Melwani Entities to bring customers to Refco and to trade through Refco. With Refco's agreement, and to further boost the amounts that he and his accomplices would receive as revenue sharing, RM allegedly raised the sums plaintiffs paid in buying Brady Bonds and "When Issued Rights" and cut back the amounts plaintiffs received in selling those securities.

Refco opposed the amendments. It argued that they would require more discovery from RM and from the Banks to bring out that the fee arrangements between the Banks and the Melwani Entities were about the same as those between Refco and the Entities and accorded with normal trading standards. This further discovery would have to seek production of additional relevant documents from third-parties that would show the fees claimed and/or earned by Melwani, Investment Services, and/or Dimensions (two Melwani Entities) through entities other than Refco Capital.

The New York court granted...