Henryk de Kwiatkowski was getting flustered and not a little bit angry. It was a spring day in early May, the locale a federal courtroom in Manhattan. The 76-year-old self-made millionaire, a polo-playing society figure and owner of the prestigious horse-breeding estate Calumet Farms, had been on the stand for hours, and he was in no way accustomed to the plodding, persistent and personal cross-examination of the Bear Stearns lawyer.
No one seemed to understand-Bear Stearns had lost more than $300 million of his money in the currency markets in just a matter of days-hard-earned money that he had compounded over the years and hoped to leave to his seven children and his grandchildren. And now, at the end of a long day, this impertinent man was suggesting that, yes, he had lost a lot of money, but that his net gain as a Bear Stearns client over the years was $22 million. It was just too much.
“It’s not the money, sir,” he said in his thick Polish accent, his voice trembling. “It’s the principle. [Bear Stearns] praised me like I’m God walking on the water, and … in the meantime these losses mounted day after day until they decided to sell my children’s stock now. You got me in all these high multiples … [you say] you will protect me forever just to get twice the commissions …. And you did it all for peanuts, for a pound of flesh.”
Silence in the courtroom. “Would you allow the attorney to ask the question?” directed Federal District Court Judge Victor Marrero of the witness. But Mr. de Kwiatkowski was in no state to continue. His lawyer asked for a recess and the court adjourned.
The Bear Stearns legal team, led by James Linn of Linn & Neville, was confident. Under Mr. Linn’s relentless questioning, Mr. de Kwiatkowski had appeared to the federal jury just as the defense lawyers desired: A worldly, sophisticated and indeed successful investor who made one huge and ultimately disastrous bet that the U.S. dollar would rise in late 1994 and early 1995. Bear Stearns had warned him of the risks involved; risk-disclosure forms had been signed; he had been cautioned over the extraordinarily large size of his investment. But no matter: Mr. de Kwiatkowski had an immigrant’s belief in the almighty dollar and bet the ranch on it.
And he lost. Now he was suing Bear Stearns for not having sufficiently informed him of the risks he had incurred. “He’s a gambler,” Mr. Linn summed up in his closing argument. “He is a gambler like no one has ever seen. But he is a successful gambler and he can’t stand to lose. Ever.”
So on May 18, when a jury found in Mr. de Kwiatkowski’s favor and ordered Bear Stearns to pay him $112 million (later increased to $164.5 million to account for interest not earned), Mr. Linn’s face was not the only one to go pale in Judge Marrero’s courtroom. Also surely in shock were Bear Stearns president and chief executive James Cayne and chairman Alan (Ace) Greenberg-both of whom had taken the trouble to leave their busy desks to attend closing arguments the previous day.
And while the chief executives of Morgan Stanley Dean Witter, Merrill Lynch and Goldman Sachs were not present that day, it is certain that they, too, took sharp notice. Bear Stearns had been found liable for failure to exercise due care on the part of its client, specifically by failing to inform him of a new analysis of the currency market that suggested the dollar was not going his way.
It was a decision virtually without precedent, according to lawyers familiar with the case, and indeed may be struck down on Bear Stearns’ appeal to the judge. But this much is true: Brokerages, starting with-but by no means limited to-Bear Stearns, are watching to make sure it doesn’t establish one.
Judge Marrero’s ruling on the Bear Stearns motion is expected any day now, according to lawyers on both sides. And those same lawyers are in super-charged spin mode, bringing their own perspective to the thousands of pages of court documents and transcripts that have led to this point.
In some ways, it’s a simple tale: Heads, I win; tails, I call my lawyer. In Mr. de Kwiatkowski’s case, it was: You didn’t tell me what analyst X was saying, so I want my money back. But a broader truth holds: If clients are able to sue and win when they lose money in a market downturn-well, it’s enough to make the securities industry go weak-kneed with fear.
For Bear Stearns, the implications have already been severe: The company took a $96 million charge to its second-quarter earnings in June.
“The industry was very surprised that a suit like this could be resolved in favor of the investor. There certainly will be implications,” said Guy Moskowski, a securities-industry analyst for Salomon Smith Barney.
Said a Bear Stearns spokesman: “We believe this decision should be set aside by the judge. The case is completely unprecedented and, if allowed to stand, represents a major threat of liability to the brokerage industry.”
Mr. de Kwiatkowski seems an unlikely figure to strike fear into the hearts of Wall Street bankers. His story is well known and extraordinary. Born in Poland in 1924, he escaped the invading Nazis in 1939, was imprisoned in Siberia by the Russians, broke free and made his way on foot across Central Asia to Tehran, where he talked his way into the British Embassy. He then became a pilot in the British Royal Air Force, flew combat missions against the Germans, ended up as an aeronautical engineer in Canada (where he still remains a citizen) and went on to make millions as an independent broker of used airliners in the 1970′s and 1980′s.
Most famously, he is said to have earned a $20 million commission from the Shah of Iran for having sold him nine 747′s over a game of backgammon at the royal palace in Tehran.
As Bob Colacello pointed out in a 1992 article in Vanity Fair , some of the de Kwiatkowski saga has been embroidered-he did not fly Spitfire planes in World War II, nor does it seem that the Shah actually cut him a check-but the crux remains true. He lives now within the Lyford Cay compound in the Bahamas and maintains three other homes around the world-among them a pied-à-terre at the exclusive 1 Beekman Place and a palatial spread in Greenwich, Conn. All were decorated by the famed East Coast decorator Sister Parish (he named a horse after her, as he has for each of his children; she a dog after him).
Mr. de Kwiatkowski declined to be interviewed for this article, although his attorneys spoke on his behalf.
His children are established members of the trustafarian Upper East Side set-indeed, his super-socialite daughter Lulu (owner of Lulu DK Fabrics) was recently named an “It” girl by Vanity Fair . His son Conrad Kwiatkowski (who eschews the “de” in business practices-an appellation that Mr. de Kwiatkowski only added later in life) runs his own very-high-end art gallery on Greene Street in the West Village. It’s called the Monastery, and it abounds in all manner of expensive high-concept gadgetry and overpriced African art. Another son, Stephan, puts on his own mixed-media art shows around town and, according to Mr. Colacello’s Vanity Fair article, qualifies for a $15,000-a-month allowance. Mr. de Kwiatkowski and his second wife, Barbara (a former model and Andy Warhol favorite), are very much ensconced-they have the right friends, go to the right parties and belong to the right clubs.
But it wasn’t always that way. In the late 1970′s, Mr. de Kwiatkowski-despite all his millions, his young wife, his grand residences-was looking for something more … like a little entree. Which is what he started to get when he began doing business with Henry Mortimer at E.F. Hutton.
An account of that relationship, and of Mr. de Kwiatkowski’s subsequent investment relationships leading up to the suit, has been culled from the court documents, from interviews with lawyers and acquaintances and from previously published accounts.
At the time, Henry Mortimer, who died in 1992, was coming to the end of his career as a broker. He had previously worked at Clark Dodge, one of the last old-line white-shoe brokerage firms. A Porcellian Club member at Harvard, a member of the Brook and Racquet clubs in New York, his blueblood credentials were superb. They became friends-Mr. de Kwiatkowski would spend time with the Mortimers at their house in South Hampton, and Mortimer’s career thrived as Mr. de Kwiatkowski’s fortune (and hence, Mortimer’s commissions) grew.
In 1987, as E.F. Hutton struggled to survive after the crash, Mortimer-then 70 years old-moved himself and his accounts to Bear Stearns. Working with Mortimer at the time was Albert Sabini, an industrious young broker born in Flushing, N.Y., and educated at Fordham University. While Mortimer traveled the world cultivating his clients, Mr. Sabini was the one picking up the phone and writing the tickets. In so doing, he became acquainted with Mr. de Kwiatkowski at E.F. Hutton and came to know him all the better at Bear Stearns. When Mortimer moved to London, Mr. Sabini-ever striving-stepped in and took over the de Kwiatkowski account.
By 1991, the portfolio was all Mr. Sabini’s. According to the court record, Mr. de Kwiatkowski’s net worth was $100 million at the time (though likely it was a lot more; as a resident of the Bahamas, he pays no U.S. income taxes, and thus the specific extent of his wealth has always been something of a mystery). And his account at Bear Stearns was blue chip all the way-I.B.M., Texaco and U.S. Treasuries. Mr. Sabini knew, too, that his client had a strong appetite for risk, whether it was speculating in foreign currencies or taking a turn at the gaming tables.
But it was mostly with the dollar that his client preferred to make his bets. Dating back to his airplane-trading days in the 70′s, Mr. de Kwiatkowski had a long-standing, somewhat mystical belief in the greenback. “Ever since I was a boy, the dollar has been supreme to me. I saved my life on $2 a day,’” he would say on the stand. Accordingly, he would frequently take speculative positions, going long on the dollar and shorting other currencies such as the yen and the mark.
At the time, Lawrence Kudlow, the chief economist for Bear Stearns, was a dollar enthusiast. Mr. Sabini organized a conference call between his client and Mr. Kudlow in September 1992, and Mr. de Kwiatkowski was impressed. He bought a chunk of futures and sold out three months later, booking a gain of $82 million in the process.
By late 1994, the account had become more active and was a true gold mine for Mr. Sabini-indeed, it made up one-half his total commission run. Every morning he would get to his desk by 6:30 a.m., at which point he would scour the wires for news about the dollar. By now Mr. Sabini was a managing director, thanks in no small part to Mr. de Kwiatkowski.
Since the $82 million trade, his client had stayed away from the futures markets but was following them closely. The account necessitated constant upkeep-Mr. Sabini would make as many as 20 calls a day to Mr. de Kwiatkowski’s Lyford Cay home, giving him updates on how the dollar was trading. Like all of Mr. de Kwiatkowski’s hired help, he called him “Mr. de K.” (For his part, Mr. de Kwiatkowski called him “Sabini” as a matter of course, and “Al” only when he was upset). And Sabini was in awe of Mr. de K-the 10 languages he spoke (from Urdu to Uzbek), his Old World charm. Mr. Sabini was even invited to the wedding of one of Mr. de Kwiatkowski’s daughters in 1991.
In October 1994, Bear Stearns’ chief economist, Wayne Angell-a former governor at the Federal Reserve-started talking up the dollar’s prospects. Mr. Sabini made sure to let Mr. de Kwiatkowski know. His client was intrigued. He still loved the dollar, and now it seemed cheaper than ever; and this was no ordinary dollar bull, but Wayne Angell, a former colleague of Alan Greenspan. “To read through [his report] … the superlatives, I, European, having great faith in the Federal Reserve … I decided this is great,” Mr. de Kwiatkowski would say in court.
So he started nibbling away. But nibbling for Mr. de Kwiatkowski soon grew into a $6.5 billion position comprising a complicated basket of 65,000 futures contracts, all long on the dollar and shorting the yen, the pound, the Swiss franc and the mark. It was an extremely large position for an individual investor, to say nothing of a 76-year-old eccentric with a soft spot for the dollar; indeed, it was a bet more in line with what a bank would make.
By late November 1994, Mr. de Kwiatkowski’s position was complete. Bear Stearns president and chief executive James Cayne was apprised of the contracts first by Mr. Sabini, then by senior executives in the foreign-exchange department. He himself put in a call to Mr. de Kwiatkowski, asking him to up his margin requirement to $250 million. “No problem,” Mr. de Kwiatkowski later testified he told him. “I can send in $500 million if you want.”
In January 1995, however, the markets were roiled by the surprise devaluation of the Mexican peso, and the dollar began to plummet. On one day, Jan. 9, Mr. de Kwiatkowski lost a cool $99 million as investors everywhere sold the dollar down. A month earlier he had been down $100 million, only to recover when the markets bounced back.
But there was no bounce back this time. Mr. Sabini could hear the frustration and fear in his client’s voice, so he set up a conference call between Mr. de Kwiatkowski and Mr. Angell on Jan. 10.
“How can you do that?” complained Mr. de Kwiatkowski to Mr. Angell. “To produce in November such a glowing [report on the dollar], how can you justify that I have lost $200 million since that glorious report?”
In his testimony, Mr. de Kwiatkowski said that Mr. Angell told him he believed the dollar was undervalued and that, if he held on, he would get his investment back.
So Mr. de Kwiatkowski held on, even as the dollar continued to decline. Soon after, in February, a negative note on the dollar’s prospects was put out by Bear Stearns’ commodities-research department. Mr. de Kwiatkowski was not apprised of the downgrade (although he admitted on the stand that much of his mail remained unopened). It was this lack of disclosure on Mr. Sabini’s part that became the thrust of Mr. de Kwiatkowski’s suit against Bear Stearns. If only they had told him, he would have sold, his lawyers contend; conversely, Bear Stearns asserts that it should not be held liable for any random change in opinion by its research staff.
In any event, Mr. de Kwiatkowski was not told. By late February, with the dollar in free fall, Mr. de Kwiatkowski stopped sending in the required funds to meet his margin calls. And while his various assets were being liquidated, his still-large exposure was a risk not only to him but to Bear Stearns, as well.
On Friday, March 3, David Schoenthal, head of the foreign-exchange desk at Bear Stearns, was called in by Mr. Cayne to oversee the final liquidation of the now-hemorrhaging account. Instead of pushing the sale through that day, he opted to wait; conditions might improve over the weekend.
They did not. By Sunday, the Bank of Japan was in the market selling dollars. Demand was negligible. It was a nightmare-traders all over the world seemed to know that there was a big investor selling dollar futures, and they were selling accordingly. Now was the time to close the position, but Mr. Schoenthal needed Mr. de Kwiatkowski’s permission. So he put in put the call in Lyford Cay.
According to a transcript of the telephone call (now part of the court record), Mr. Schoenthal said: “Mr. de K, you maybe have about $10 million in equity left, and I think we just have to liquidate the balance, sir. You don’t have enough money.”
Confused, addled, his net worth eroding before his eyes, Mr. de Kwiatkowski could only respond: “To do what?”
“We have to liquidate the balance of your position, sir. Otherwise you’re going to force a deficit.”
Later on in the call, Mr. de Kwiatkowski asked what the mark was selling for. It was at 1.39, Mr. Schoenthal responded.
For Mr. de Kwiatkowski, it was too much to bear.
” Ai! ai! ai! ” His plaintive cry filled Bear Stearns’ cavernous and empty trading floor.
“I know,” said Mr. Schoenthal.
More cries. ” Ai! ai! ai! “
“All right. Let me just finish the trades,” broke in a harried Mr. Schoenthal.
“Okay, okay, okay,” came the shaken response over the speaker phone.
“Thank you,” Mr. Schoenthal shot back. Then he yelled to his traders: “I got an order to liquidate. I’m doing the best I can. It’s a fucking abortion. I gotta go. It’s an abortion.”
When Mr. de Kwiatkowski awoke the next day, his account at Bear Stearns was fully liquidated-it had taken Mr. Schoenthal until 5 a.m. on Monday to complete all the trades. Gone were Mr. de Kwiatkowski’s FX contracts, gone was all his I.B.M., gone were all his U.S. Treasuries. There was a bill for him, too: he owed Bear Stearns another $2.7 million to cover the balance.
Bear Stearns chairman Ace Greenberg did give him a call, though, Mr. de Kwiatkowski testified. He wanted to commiserate; it was awfully bad luck, and Mr. de Kwiatkowski was such a valued customer of the firm. If he had been involved, they could have avoided this mess. It was a civil exchange; Mr. de Kwiatkowski was, after all, a gentleman. Bear Stearns officials deny that Mr. Greenberg made such statements over the phone.
Little more than a year later, though, Mr. de Kwiatkowski would sue. He had lost more than $300 million, and he would have his satisfaction. But broke he certainly was not. In December 1996, he attempted to open up an account at Morgan Stanley and listed his net worth then at $190 million.
So Wall Street and Mr. de Kwiatkowski await Judge Marrero’s ruling. Feelings remain strong.
“The verdict was a total aberration,” said James Linn, Bear Stearns’ lawyer. “There is no rhyme or reason to it. Even Mr. de Kwiatkowski seemed shocked by the jury’s decision. You could tell by looking at him. If the judge doesn’t turn this aside, the Second Circuit [Court of Appeals] certainly will.”
“Mr. Linn has no basis for that statement,” responds Mr. de Kwiatkowski’s lawyer, Myron Kirschbaum of Kaye, Scholer, Fierman, Hays & Handler. “Mr. de Kwiatkowski was confident going into the trial that he would be vindicated. He was not at all surprised by the jury’s verdict.”