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advance. On October 19, 1987, the Dow Jones industrial average
fell 22.6 percent (hereinafter, this fall is referred to as the
Crash), which was the worst decline since World War I and greater
from a numerical standpoint than the 12.82 percent drop on
October 28, 1929. Some stocks dropped 50 percent on that day,
and petitioner and Kenilworth's 3 percent trigger for repurchase
of the LPO's was hit 15 times, resulting in extraordinary losses
to them. Kenilworth lost at least $23.6 million on the day of
the Crash, mainly with respect to its LPO's.
Before the Crash, petitioner and Kenilworth had entered into
cross-collateral and guarantee agreements with Bear Stearns and
Prudential Bache under which: (1) Every LPO owned by petitioner
was collateralized by an LPO owned by Kenilworth, and vice versa,
and (2) petitioner was liable for any charges incurred by
Kenilworth on its purchase of an LPO, and vice versa. Mr. Roven
approved all of these agreements. Petitioner and Kenilworth were
both financially healthy and profitable when they signed these
agreements, and they entered into these agreements with a proper
and valid business purpose, both providing consideration for the
agreements and receiving value therefrom. Petitioner's primary
business purpose was to increase its profits and net worth, and
petitioner realized this purpose until the Crash. The Crash
caused the leverage which had allowed petitioner and Kenilworth
to grow extraordinarily during 1986 and 1987 to backfire and
generate extraordinary losses to the two entities.
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