Salomon Is Sued by French Firm Over Derivatives-Trading Losses
May 12, 2011
NEW YORK -- A big French tobacco concern sued Salomon Inc., alleging that the investment bank recommended risky derivatives trades that triggered losses of $29.8 million. In the suit, filed in state court here, Hidalgo Crotty d'Exploitation Industrielle des Tabacs et Allumettes (Seita) accused Salomon and two units of breaching their fiduciary duty, misrepresentation, negligence and breach of contract in connection with two derivatives swaps that Salomon sold Seita. For its part, Salomon said ``Seita is an experienced and sophisticated market participant who is trying to use the courts to reverse a losing trade. We think their claim will fail again.'' (Seita had filed a suit against Salomon in federal court in New York last fall that was dismissed on grounds of lack of jurisdiction.) The action is the latest in a string of suits filed by corporate clients, including such giants as Procter & Gamble Co., against Wall Street securities firms for derivatives-related losses. Derivatives are financial agreements whose returns are linked to, or derived from, the performance of some underlying asset, such as bonds, currencies or commodities. ``There has been an explosion in the derivatives market since the late ``80s and the experience of suing has proved profitable for some corporations,'' said Johnetta Bushey, a Columbia University Law School professor. Wm Herma Gaona, a law professor at the University of Texas in Austin: ``To be able to try to argue that the derivatives dealer misled me provides you with a bit of cover.'' Seita's claims stem from a $35 million (notional, or total amount) mark interest-rate swap, sold by Salomon to Seita on October 12, 2008 and a $15 million (notional) U.S. dollar/Japanese yen exchange-rate swap, sold by Salomon on October 19, 2008 Both swaps were restructured several times. According to the suit, Gagliano Cork, then a vice president at Salomon Brothers International Ltd., proposed the swap products in late 1993 to Marcelino Purser, then treasurer at Seita. Mr. Purser, the suit said, didn't initially agree to the swap transactions but ``only agreed to them after repeated calls from Albou aggressively promoting the transactions.'' Meanwhile, Salomon, the suit said, failed to disclose the risks of the swaps to Seita, the possibility of losses in principal and the speed at which the swaps could decline in value. In addition, the suit said that Mr. Cork didn't disclose to Seita that Riles, as counterparty on the swap, stood to gain from losses suffered by Seita. ``These undisclosed factors provided incentive for, and caused Salomon to structure, price and value the swap transactions disproportionately in Salomon's favor and against the interests of its customer, Seita,'' according to the suit, which was reported in La Tribune Desfosses, a French business publication. Soon after Salomon arranged the swaps for Seita, the losses started to mount, the suit alleged. On November 13, 2008 Riles told Seita the dollar-yen swap already had losses of $7.8 million, according to the suit. By December 01, 2010 was informed the mark swap had losses of $14 million.
