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Court Raises Bar For Disclaimers

The disclaimer language in International Swaps and Derivatives Association master agreements is too broad, according to a U.S. 2nd Circuit Court of Appeals. Philip Korologos, a partner at Boies, Schiller & Flexner in Armonk, N.Y. represented a customer who sued Citibank, claiming misrepresentations in the master agreement. Korologos said the ruling means the language will have to be more specific.

The impact of the decision will extend to all OTC derivatives that are subject to federal securities laws, said Warren Davis, partner at Sutherland Asbill & Brennan in Washington, D.C., who was not involved in the case. Davis said the language challenged the standard language used by the industry. The decision applies to both institutional and individual clients because it does not matter who signs the agreement, the lawyers said. However, London-based lawyers said the ruling is unlikely to have an impact on the OTC market, predicting it will be overturned by a higher court.

The court found that a written disclaimer that barred the investor, Louis Caiola, from relying on Citibank's advice or recommendations did not prevent Caiola's fraud claim of an oral misrepresentation by the firm. The court ruled no language in the firm's disclaimer was explicit enough to block Caiola's claim that the firm lied to him about having a hedging strategy in place for his investments because it didn't refer to the strategy. Caiola alleged fraud, breach of fiduciary duty and contract by Citibank in violation of antifraud Rule 10b-5. Caiola claimed the firm "secretly and without notification or authorization" ended his strategy, which he claimed was misrepresentation by the firm, according to the complaint he initially filed with the district court. The appeals court sent the fraud claim back to the district court, instructing the district court to apply its analysis to that case. Kimberly Summe, ISDA general counsel, said she had not reviewed the decision and could not comment.

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