Pennsylvania Public School Employees’ Retirement System v. Morgan Stanley, No. 13-2095 (2d Cir. 2014)
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This case arose out of the collapse of SIV, managed by Cheyne and structured by Morgan Stanley. PSERS and Commerzbank appealed from the final order of judgment denying class certification, dismissal of Commerzbank's claim for lack of standing; and dismissal of PSERS's claim because its presence as a party would destroy complete diversity, the sole basis of subject matter jurisdiction. The court affirmed the denial of class certification and dismissal of PSERS; held that it was not a permissible exercise of discretion for the district court to limit Commerzbank's ability to establish its standing; certified to the New York Court of Appeals the question of whether a reasonable trier of fact could find that Commerzbank had acquired from a third party that had purchased securities a fraud claim against Morgan Stanley; and certified the question whether, if Commerzbank has standing, a reasonable trier of fact could hold Morgan Stanley liable for fraud based on the present record.
The court issued a subsequent related opinion or order on February 23, 2016.
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13-2095-cv (L) Pennsylvania Public School Employees’ Retirement System v. Morgan Stanley & Co. Inc. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT August Term, 2013 (Argued: June 20, 2014 Decided: October 31,2014) Docket Nos. 13-2095-cv(L), 13-2283-cv(XAP), 13-2286-cv(XAP), 13-2287-cv(XAP) - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - COMMONWEALTH OF PENNSYLVANIA PUBLIC SCHOOL EMPLOYEES’ RETIREMENT SYSTEM, together and on behalf of all others similarly situated, COMMERZBANK AG, together and on behalf of all others similarly situated, Plaintiffs-Appellants-Cross-Appellees, ABU DHABI COMMERCIAL BANK, individually and on behalf of all others similarly situated, KING COUNTY, WASHINGTON, together and on behalf of all others similarly situated, SEI INVESTMENTS COMPANY, together and on behalf of all others similarly situated, THE BANK OF N.T. BUTTERFIELD & SON LIMITED, SFT COLLECTIVE INVESTMENT FUND, DEUTSCHE POSTBANK AG, GLOBAL INVESTMENT SERVICES LIMITED, GULF INTERNATIONAL BANK B.S.C., NATIONAL AGRICULTURAL COOPERATIVE FEDERATION, together and on behalf of all others similarly situated, STATE BOARD OF ADMINISTRATION OF FLORIDA, together and on behalf of all others similarly situated, BANK SINOPAC, together and on behalf of all others similarly situated, BANK HAPOALIM B.M., together and on behalf of all others similarly situated, KBL EUROPEAN PRIVATE BANKERS S.A., Plaintiffs, v. MORGAN STANLEY & CO., INCORPORATED, MORGAN STANLEY & CO. INTERNATIONAL LIMITED, MOODY’S INVESTOR SERVICE, INC., MOODY’S INVESTOR SERVICE, LTD., THE MCGRAW-HILL COMPANIES, INC., STANDARD & POOR’S RATING SERVICES, Defendants-Appellees-Cross-Appellants, 1 1 2 3 4 5 6 7 8 9 10 11 CHEYNE CAPITAL MANAGEMENT LIMITED, CHEYNE CAPITAL MANAGEMENT (UK) LLP, CHEYNE CAPITAL INTERNATIONAL LIMITED, THE BANK OF NEW YORK MELLON, formerly known as The Bank of New York, QSR MANAGEMENT LIMITED, 12 Court for the Southern District of New York (Shira A. Scheindlin, 13 Judge) denying class certification, dismissing appellant 14 Commerzbank’s fraud claims for lack of standing, and dismissing 15 appellant Commonwealth of Pennsylvania Public School Employees’ 16 Retirement System’s claims for lack of diversity jurisdiction. 17 We affirm the denial of class certification and the dismissal of 18 PSERS’s claim, and we certify questions dispositive of 19 Commerzbank’s appeal to the New York Court of Appeals. 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 Defendants. - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - B e f o r e: WINTER, LEVAL, and LYNCH, Circuit Judges. Appeal from a judgment entered in the United States District LUKE O. BROOKS (Joseph D. Daley & Daniel S. Drosman, San Diego, CA) Robbins Geller Rudman & Dowd LLP, San Francisco, CA, for PlaintiffsAppellants-Cross-Appellees. JAMES P. ROUHANDEH (Antonio J. Perez-Marques, Paul S. Mishkin, Jessica L. Turner, on the joint brief) Davis Polk & Wardwell LLP, New York, NY, for Defendants-AppelleesCross-Appellants Morgan Stanley & Co. Inc. and Morgan Stanley & Co. Int’l Ltd. Dean Ringel, Jason M. Hall, Roxana Labatt, Cahill Gordon & Reindel LLP, New York, NY, on 2 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 the joint brief, for Defendants-AppelleesCross-Appellants Standard & Poor’s Ratings Services and The McGraw-Hill Companies, Inc. Joshua M. Rubins, James J. Coster, Mario Aieta, James I. Doty, Satterlee Stephens Burke & Burke LLP, New York, NY; Mark A. Perry, Gibson, Dunn & Crutcher LLP, Washington, DC, on the joint brief, for Defendants-Appellees-CrossAppellants Moody’s Investors Service, Inc. and Moody’s Investors Service Ltd. WINTER, Circuit Judge: The Commonwealth of Pennsylvania Public School Employees’ 23 Retirement System (“PSERS”) and Commerzbank AG (“Commerzbank”) 24 appeal from Judge Scheindlin’s order of final judgment. 25 R. Civ. P. 54(b). 26 orders that, as relevant to this appeal: 27 certification under Fed. R. Civ. P. 23 based on appellants’ 28 failure to establish numerosity and predominance of common 29 issues; (ii) dismissed Commerzbank’s claim for lack of standing; 30 and (iii) dismissed PSERS’s claim because its presence as a party 31 would destroy complete diversity, the sole basis of subject 32 matter jurisdiction. 33 and dismissal of PSERS. 34 permissible exercise of discretion for the district court to 35 limit Commerzbank’s ability to establish its standing. See Fed. That judgment encompassed several previous (i) denied class We affirm the denial of class certification However, we hold that it was not a 3 We 1 certify to the New York Court of Appeals the question of whether 2 a reasonable trier of fact could find that Commerzbank had 3 acquired from a third party that had purchased securities a fraud 4 claim against Morgan Stanley & Co. (“Morgan Stanley”). 5 certify the question whether, if Commerzbank has standing, a 6 reasonable trier of fact could hold Morgan Stanley liable for 7 fraud based on the present record. 8 9 10 We also BACKGROUND a) The Cheyne SIV We view all disputed facts and inferences fairly drawn from 11 those facts in the light most favorable to appellants. Salamon 12 v. Our Lady of Victory Hosp., 514 F.3d 217, 226 (2d Cir. 2008). 13 The present dispute arose out of the collapse of the Cheyne 14 SIV, a structured investment vehicle (“SIV”) that was managed by 15 Cheyne Capital (“Cheyne”) (a defendant but not a party to this 16 appeal) and structured by appellee Morgan Stanley. 17 was launched in 2005 and issued several classes of notes 18 amounting to several billion dollars, before its demise in 2007. 19 The notes had different maturities, return rates, and risk 20 profiles. 21 be purchased only by sophisticated institutional investors. 22 Three specific notes are at issue: 23 notes, senior medium term notes, and mezzanine capital notes. 24 All of them were given high ratings (the senior notes received Cheyne SIV Because of the complexity of the SIV, the notes could 4 senior commercial paper 1 higher ratings) by the ratings agencies named as defendants: 2 Standard & Poor’s Ratings Services and the McGraw-Hill Companies, 3 Inc. (“S&P”); and Moody’s Investors Service, Inc. and its 4 subsidiary Moody’s Investors Service Ltd.. 5 Morgan Stanley included those ratings in selling documents 6 distributed to potential investors. According to appellants, the 7 ratings were unreliable because they were based on outdated 8 models and data. 9 of this unreliability. The ratings agencies are alleged to have known It is also alleged that the use of 10 unreliable models was caused by Morgan Stanley’s demand for high 11 ratings. 12 whole received a triple-A rating despite being loaded with very 13 risky assets, including a significant profile of subprime 14 residential mortgage-backed securities. 15 housing market collapsed in the summer of 2007. 16 collapsed with it and declared bankruptcy in the fall of 2007. 17 b) 18 Thus, according to the complaint, the Cheyne SIV as a As is well known, the The SIV Procedural History Following Cheyne’s collapse, this lawsuit was filed as a 19 putative class action by Abu Dhabi Commercial Bank (“ADCB”) on 20 August 25, 2008. 21 New York law and based federal subject matter jurisdiction on 22 diversity of citizenship under 28 U.S.C. § 1332(a). 23 additional plaintiffs later joined. 24 class certification on the common law fraud claims seeking to ADCB’s complaint alleged common law fraud under 5 Two They eventually moved for 1 represent a class of all investors in the Cheyne SIV who 2 purchased notes during a class period from October 2004 to 3 October 2007. 4 that plaintiffs failed to establish numerosity and the 5 predominance of common issues. 6 Plaintiffs’ counsel were then allowed to contact other investors, 7 which led to the addition of twelve new plaintiffs, including 8 Commerzbank and PSERS. 9 The district court denied that motion, holding Interlocutory review was denied. In January 2012, appellants filed the complaint operative 10 for purposes of this appeal. 11 dismiss and for summary judgment on the fraud-related claims 12 shortly thereafter. 13 appellees raised, inter alia, the issues before us on appeal: 14 whether Commerzbank had acquired from the original purchaser of 15 some of the notes the purchaser’s fraud claim against Morgan 16 Stanley, and whether Morgan Stanley had made actionable 17 misrepresentations. 18 Appellees responded with motions to In their motion for summary judgment, In responding to the motion for summary judgment, all 19 fifteen plaintiffs, including appellants, were limited by the 20 district court to a single three-page “reliance declaration” 21 necessary to establish the reliance of each plaintiff on the 22 alleged misstatements as required to support a valid fraud claim 23 under New York law. 24 declaration stated that Commerzbank had acquired Dresdner Bank AG With regard to Commerzbank’s claim, that 6 1 (“Dresdner”) through a merger in 2009, and that Dresdner had 2 earlier purchased Cheyne SIV notes from Allianz Dresdner Daily 3 Asset Fund (“DAF”), the original purchaser, at par –- face value 4 -- after which DAF was “wound down.” 5 stated that, under German law, “all of Dresdner’s assets, 6 liabilities, rights and obligations passed automatically by 7 operation of law to Commerzbank.” 8 9 The declaration further On August 17, 2012, the district court granted appellees’ motion for summary judgment in part. As relevant to this appeal, 10 the court held that Commerzbank had failed to establish standing 11 to sue under New York law. 12 of a note to have standing to sue entities involved in the 13 issuance of the note for torts committed in the issuance, the 14 prior holder of a note must assign its tort claims at the time of 15 transfer, and that a simple transfer of the note did not assign 16 those claims. 17 in the reliance declaration had not shown that Dresdner acquired 18 DAF’s tort claims through the transfer and merger. 19 claims were, therefore, dismissed. 20 appellees’ argument that DAF had not reasonably relied on the 21 Cheyne SIV credit ratings. It held that, for a subsequent holder The court determined that Commerzbank’s statement Commerzbank’s The court did not reach 22 The district court also dismissed claims against Morgan 23 Stanley for fraud on the grounds that the only misstatements 24 alleged were made by the ratings agencies themselves and that 7 1 these were not attributable to Morgan Stanley. 2 court reasoned, Morgan Stanley could not be held liable for fraud 3 based on third-party misstatements under New York law. 4 Therefore, the Commerzbank moved for reconsideration of the dismissal of 5 its fraud claims. Attached to the motion was a new declaration 6 (“Williams declaration”) that explained the transfer of rights 7 from DAF to Dresdner to Commerzbank. 8 also filed a Fed. R. Civ. P. 17(a)(3) “ratification” of its claim 9 and another declaration (“Shlissel declaration”). Ten days later, Commerzbank These 10 documents were a far more thorough explanation of how DAF was 11 unable, and could not have intended, to retain any interest in 12 the notes, including a right to sue. 13 consider the two documents because they were untimely and denied 14 reconsideration. 15 The court refused to In November 2012, appellees discovered that PSERS had 16 previously represented that it was an arm of the state of 17 Pennsylvania –- now conceded –- and not a citizen of that or any 18 state, as required by 28 U.S.C. § 1332(a). 19 Appellees accordingly moved to dismiss either PSERS’s claims, or 20 the entire action, because PSERS’s presence as a plaintiff 21 destroyed complete diversity. 22 U.S.C. § 1367 did not permit supplemental jurisdiction over a 23 non-diverse party’s claims where jurisdiction was based on 24 diversity, even where that party was permissively joined, as See infra n.1. The district court held that 28 8 1 PSERS was, under Fed. R. Civ. P. 20. 2 dismissed PSERS from the action to preserve its subject matter 3 jurisdiction. 4 The court therefore All plaintiffs other than appellants agreed to settle 5 following mediation. 6 and the court entered a Fed. R. Civ. P. 54(b) final judgment 7 incorporating its previous dismissals of PSERS and Commerzbank. 8 This appeal followed. 9 10 11 The action was dismissed with prejudice, DISCUSSION a) Dismissal of PSERS as a Non-Diverse Plaintiff There being no disputed facts, PSERS’s dismissal for lack of 12 subject matter jurisdiction is reviewed de novo. 13 F.3d at 226. 14 Salamon, 514 Subject matter jurisdiction is based on 28 U.S.C. § 1332,1 15 which requires “complete diversity,” i.e. all plaintiffs must be 16 citizens of states diverse from those of all defendants. 17 Mobil Corp. v. Allapattah Servs., Inc., 545 U.S. 546, 553 (2005). 18 The party asserting jurisdiction bears the burden of proof. 19 DiTolla v. Doral Dental IPA of N.Y., 469 F.3d 271, 275 (2d Cir. 20 2006). 1 Exxon “The district courts shall have original jurisdiction of all civil matters where the matter in controversy exceeds the sum or value of $75,000, exclusive of interest and costs, and is between . . . citizens of different states . . . .” 28 U.S.C. § 1332(a)(1). 9 1 As an arm of the state of Pennsylvania, PSERS concedes that 2 it is not a citizen of any state. Therefore, it cannot be 3 “diverse” for purposes of Section 1332. 4 Alameda, 411 U.S. 693, 717 (1973) (the “arm or alter ego” of a 5 state is not a citizen for diversity purposes (quoting State Hwy. 6 Comm’n of Wyo. v. Utah Constr. Co., 278 U.S. 194, 199 (1929))). 7 PSERS nonetheless claims that the district court had 8 supplemental jurisdiction under 28 U.S.C. § 1367, which permits 9 the exercise of diversity jurisdiction over related claims, Moor v. Cnty. of 10 “includ[ing] claims that involve the joinder or intervention of 11 additional parties,” subject to relevant statutory exceptions. 12 28 U.S.C. § 1367(a). 13 party is consistent with Section 1367(b), an exception preventing 14 the exercise of supplemental jurisdiction over joined parties in 15 diversity cases when their inclusion “would be inconsistent with 16 the jurisdictional requirements of section 1332.” 17 The issue is whether PSERS’s inclusion as a In Exxon, the Supreme Court considered the question of 18 whether the Section 1367(b) exception prevented supplemental 19 jurisdiction over plaintiffs who failed to meet the Section 1332 20 amount-in-controversy requirement, and held that it did not. 21 U.S. at 559-60. 22 a “contamination theory” governing the interaction of Sections 23 1332 and 1367. 24 while “original jurisdiction” may not literally be required over 545 In its discussion, the Supreme Court articulated In explaining the theory, the Court noted that, 10 1 each individual plaintiff, the view that the inclusion of a non- 2 diverse party “somehow contaminates every other claim in the 3 complaint, depriving the court of original jurisdiction . . . can 4 make some sense in the special context of the complete diversity 5 requirement . . . [because it] eliminates the justification for 6 providing a federal forum.” 7 Id. at 560, 562. We elaborated on the contamination theory in Merrill Lynch & 8 Co. v. Allegheny Energy, Inc., 500 F.3d 171, 179 (2d Cir. 2007). 9 Our discussion there stated: 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 Exxon makes clear that its expansive interpretation of § 1367 does not extend to additional parties whose presence defeats diversity. The reason for the different treatment of these two § 1332 requirements is found in their differing purposes. The purpose of the amount-in-controversy requirement, on one hand, is fulfilled by a single claim of sufficient importance to warrant a federal forum and is not negated by additional, smaller claims. A failure of diversity, on the other hand, contaminates the action, so to speak, and takes away any justification for providing a federal forum. It follows that a defect of the latter sort eliminates every claim in the action, including any jurisdictionally proper action that might otherwise have anchored original jurisdiction, and removes the civil action from the purview of § 1367 altogether. Further, it is clear that a diversitydestroying party joined after the action is underway may catalyze loss of jurisdiction. Id. (all internal citations and quotations omitted). 35 discussion thus adopts the line hinted at in Exxon, namely, that 36 while the amount-in-controversy requirement is somewhat 11 This 1 malleable, complete diversity of all parties is an absolute, 2 bright-line prerequisite to federal subject matter jurisdiction. 3 We follow this rationale and hold that PSERS’s dismissal was 4 proper, because inclusion of its claim destroyed complete 5 diversity and would have otherwise “catalyze[d] loss of [federal] 6 jurisdiction.” Id. 7 PSERS attempts to distinguish Merrill Lynch by noting that 8 it, PSERS, was permissively joined as a plaintiff under Fed. R. 9 Civ. P. 20, while Merrill Lynch involved compulsory joinder of a 10 defendant under Rule 19. 11 Exxon’s discussion as dicta. 12 for a distinction between parties permissibly and compulsorily 13 joined is not without some appeal. 14 facts, the contamination theory is less obviously applicable 15 because PSERS is not “non-diverse” but is simply not a citizen. 16 And, because it is the arm of a non-forum state, there is an 17 arguable need for a federal forum. 18 It further seeks to explain away We concede that PSERS’s argument Moreover, on these particular Nonetheless, the discussions of complete diversity in Exxon 19 and Merrill Lynch follow a long line of cases holding that the 20 jurisdictional requirements of diversity should track easily 21 adjudicated bright lines following Section 1332(a)(3)’s language 22 of “between citizens of different states.” 23 particular cases for a federal forum is not subject to bright 24 lines at all and is in tension with the statutory language, which 12 Weighing the need in 1 omits consideration of such a need. 2 federal subject matter jurisdiction under Section 1332(a)(3) 3 requires complete diversity of all parties, regardless of how 4 they joined the action. 5 sensible and workable, this rule tracks the statutory language, 6 follows Merrill Lynch, and accords with a decision of the D.C. 7 Circuit, see In re Lorazepam & Clorazepate Antitrust Litig., 631 8 F.3d 537, 541 (D.C. Cir. 2011) (holding that the D.C. Circuit’s 9 absolute, complete diversity requirement remained intact after 10 13 We note that in addition to being Exxon).2 11 12 We, therefore, hold that We thus affirm the dismissal of PSERS’s claim. b) Denial of Class Certification District courts’ denials of motions for class certification 14 are reviewed for abuse of discretion. 15 Freight Div. Pension Fund v. Bombardier, Inc., 546 F.3d 196, 201 16 (2d Cir. 2008). 17 the Fed. R. Civ. P. 23 requirements by a preponderance of the 18 evidence. 19 Teamsters Local 445 The party seeking certification must establish Id. at 202. Under Rule 23, a movant seeking certification of a class 20 must establish: (i) numerosity, (ii) commonality, (iii) 21 typicality, and (iv) adequacy. Fed. R. Civ. P. 23(a)(1)-(4); id. 2 PSERS makes an alternative argument that diversity jurisdiction exists under the Class Action Fairness Act, 28 U.S.C. § 1332(d)(2)(A). This argument was not raised in the district court and, as was conceded at oral argument, has no merit unless we reverse the denial of class certification. Because we affirm that denial, we need not address the argument. 13 1 at 201-02. 2 determined that appellants had failed to demonstrate either 3 numerosity or the predominance of common issues. 4 23(b). 5 The district court’s analysis of the Rule 23 factors Fed. R. Civ. P. It did not abuse its discretion in doing so. Numerosity is presumed for classes larger than forty 6 members. Consol. Rail Corp. v. Town of Hyde Park, 47 F.3d 473, 7 483 (2d Cir. 1995). 8 existence of over 100 potential class members based on the number 9 of investors who purchased the various SIV notes. Appellants submitted evidence of the However, the 10 numerosity inquiry is not strictly mathematical but must take 11 into account the context of the particular case, in particular 12 whether a class is superior to joinder based on other relevant 13 factors including: 14 dispersion, (iii) the financial resources of class members, (iv) 15 their ability to sue separately, and (v) requests for injunctive 16 relief that would involve future class members. 17 Celani, 987 F.2d 931, 936 (2d Cir. 1993). 18 (i) judicial economy, (ii) geographic Robidoux v. The district court concluded that the Robidoux factors 19 “weigh heavily in favor of concluding that joinder is not 20 impracticable.” 21 identifiable, and composed of sophisticated SIV investors, all of 22 whom had millions of dollars at stake and were able to pursue 23 their own claims. Specifically, the class was limited and 14 1 Appellants contend that this determination was error because 2 the court failed to resolve a dispute over the class’s size, and 3 because the class was simply too large not to be certified on 4 that basis. 5 relatively diverse geographically, the district court was within 6 its discretion to conclude that the size, sophistication, and 7 individual stakes of the parties counseled in favor of joinder. 8 See id. at 936 (“Determination of practicability [of joinder] 9 depends on all the circumstances surrounding a case, not on mere Although the purported class was large and 10 numbers.”); accord Deen v. New Sch. Univ., No. 05 Civ. 7174 11 (KMW), 2008 WL 331366, at *3 (S.D.N.Y. Feb. 4, 2008) (denying 12 certification to a putative class of 110 where plaintiffs 13 “provide[d] no evidence that joinder . . . would be difficult to 14 accomplish, or . . . would be somehow less efficient than class 15 certification”); Ansari v. N.Y. Univ., 179 F.R.D. 112, 115-16 16 (S.D.N.Y. 1998) (denying certification despite geographic 17 dispersion where the identity of the potential plaintiffs was 18 known and the potential class members likely had the financial 19 resources to individually bring suit). 20 the different classes of notes, and their differences in maturity 21 dates, rates of return, and risk-profile, the efficiencies 22 available through class certification are less than the number of 23 potential class members would make them appear. 15 We would add that, given 1 Appellants’ argument regarding commonality is based on a 2 relatively recently created “fraud-created-the-market” theory, 3 i.e., that but for the defendant’s fraud, no market for the notes 4 would have existed at all. 5 theory and determined that the putative class members would face 6 differing individual issues of reliance, loss causation, and 7 damages. 8 S. Ct. 1184, 1193 (2013) (absence of fraud-on-the-market theory 9 “would ordinarily preclude certification of a class action The district court rejected this See Amgen Inc. v. Conn. Ret. Plans & Trust Funds, 133 10 seeking money damages because individual reliance issues would 11 overwhelm questions common to the class”). 12 The fraud-created-the-market theory is a matter of first 13 impression for us but has been rejected or questioned by four 14 other circuits. 15 City of Alameda, 730 F.3d 1111, 1121 n.4 (9th Cir. 2013); Malack 16 v. BDO Seidman LLP, 617 F.3d 743, 756 (3d Cir. 2010); Ockerman v. 17 May Zima & Co., 27 F.3d 1151, 1160 (6th Cir. 1994); Eckstein v. 18 Balcor Film Investors, 8 F.3d 1121, 1130-31 (7th Cir. 1993). 19 Whatever may be the merits of this putative doctrine in See Nuveen Mun. High Income Opportunity Fund v. 20 other contexts, we see no reason to give it weight here. The 21 complaint raises only New York common law fraud claims. While 22 the theory is used to argue that none of the notes would have 23 been sold but for the fraud, that argument establishes only “but- 24 for” causation; it does not establish reliance. 16 It is quite 1 possible that some buyers of the notes might have known the 2 underlying facts, believed in the models, and held the same rosy 3 view of the residential housing market as did many government and 4 private financial officers. 5 theory to eliminate the need to prove reliance, a traditional 6 element of common law fraud. 7 York courts that such a radical doctrinal shift is in the offing. 8 9 Appellants thus seek to use the No hint has been offered by New Even in the case of the fraud-on-the-market theory,3 recognized for purposes of federal securities fraud, we 10 “repeatedly have refused to apply [it] to state common law 11 cases.” 12 63, 73 (2d Cir. 2000). 13 significant differences in the investment decision processes of 14 the various putative class members, a variance compounded by the 15 differences between the three types of notes offered by Cheyne. 16 As the district court noted, some investors were permitted only 17 to invest in top-rated instruments, while others were permitted Secs. Investor Prot. Corp. v. BDO Seidman, LLP, 222 F.3d Moreover, the record here is replete with 3 We note that although the fraud-created-the-market doctrine uses a name similar to the accepted fraud-on-the-market doctrine, the two have little to do with each other. “Fraud-on-the-market” is based on the efficient market hypothesis, which postulates that an efficient market incorporates fraudulent statements into a price viewed by investors as based on available accurate information. See In re Initial Pub. Offerings Secs. Litig., 471 F.3d 24, 42 (2d Cir. 2006) (rejecting application of the fraud-on-the-market theory to establish classwide reliance because a “primary market for newly issued securities is not efficient or developed under any definition of these terms,” so the normal linkage between price and available information is not applicable) (internal quotation marks and alterations omitted). “Fraudcreated-the-market” asserts that, absent the fraud, the securities in question were unmarketable. 17 1 to invest in lower or unrated securities. 2 context of a newly issued instrument, the district court did not 3 err in concluding that class-wide reliance was not established as 4 a common issue.4 5 c) 6 Particularly in the Commerzbank’s Right to Sue Under New York Law Commerzbank argues that the district court erred in its view 7 of the requirements for assignment under New York law and in 8 refusing to consider the additional documentation meant to meet 9 the standard it applied. We agree that the district court erred 10 in refusing to consider the additional evidence. However, we 11 certify the questions of: 12 that Commerzbank’s evidence of a transfer of the right to sue 13 meets the requirements of New York law; and (ii) whether, if it 14 does, a trier of fact could find Morgan Stanley liable for fraud 15 on the record established in the summary judgment proceeding. (i) whether a trier of fact could find 16 1) Abuse of Discretion 17 We review the district court’s refusal to consider 18 Commerzbank’s evidence of a transfer of DAF’s fraud claim for 19 abuse of discretion. 20 228 (2d Cir. 2005). Universal Church v. Geltzer, 463 F.3d 218, 4 Although the district court did not reach the issues of adequacy or typicality, we note that the same elements of the case that undercut plaintiffs’ commonality and numerosity arguments –- the size of the individual claims, the sophistication of the parties, and, most importantly, the variances in each putative class member’s investment strategy and decisionmaking process and in the notes themselves, cut against class certification on those elements as well. 18 1 The district court required all fifteen plaintiffs involved 2 at the time of the dismissal to demonstrate each plaintiff’s 3 evidence of reliance on the allegedly false ratings in a three- 4 page document, thereby rejecting their request to provide more 5 documentation. 6 of a transfer of rights, or standing, might arise from, much less 7 be dependent on, that declaration. 8 There was no indication that the separate issue After the district court used Commerzbank’s small portion of 9 the three-page statement to raise this issue and to dismiss 10 Commerzbank’s claim, the district court denied the motion to 11 reconsider without considering the additional evidence proffered. 12 The district court determined that the level and type of detail 13 provided by Commerzbank in the three-page reliance declaration 14 (of all plaintiffs) was a “tactical decision[]” by which 15 Commerzbank was bound. 16 question indicates, the standing issue is sufficiently 17 complicated that a single paragraph, or perhaps even the entire 18 three pages, was unlikely to suffice to provide the detail needed 19 for an informed decision. 20 thus the result of being put in an impossible position by the 21 district court. 22 for explication originally, called for more explication when it 23 decided to raise the transfer of right to sue issue, or have However, as our certification of this Commerzbank’s “tactical decision” was The court should either have allowed more room 19 1 considered the new evidence proffered in the motion for 2 reconsideration and ratification.5 3 We do not preclude district court efforts to force counsel 4 to make their points efficiently, but where it appears that 5 limits on pages are arbitrarily preventing adequate elaboration 6 of a party’s position, some flexibility must be shown by district 7 courts. 8 district court not to have shown such flexibility in this matter. 9 We now turn to this evidence proffered in the motion for 10 It was not a permissible exercise of discretion for the reconsideration. 11 2) Evidence of a Right to Sue Under New York Law 12 Generally speaking, under New York law, only the original 13 purchaser of a note has standing to sue for fraud, because only 14 it could have relied upon the fraudulent statements. 15 Fraternity Fund Ltd. v. Beacon Hill Asset Mgmt., LLC, 479 F. 16 Supp. 2d 349, 373 (S.D.N.Y. 2007). 17 may be assigned in New York, however, subject to limitations 18 inapplicable here. 19 Md. Nat’l Bank, 57 F.3d 146, 151 (2d Cir. 1995). See The right to sue for fraud See Banque Arabe et Int’l D’Investissement v. 5 Federal courts The district court denied Commerzbank’s Fed. R. Civ. P. 17(a)(3) motion to ratify its claim by a successor entity to DAF. That motion was made in the alternative to its motion to reconsider, and we decline to reach it in light of our certification of the ultimate issue of standing. We note, however, that the rule permits ratification of a claim within a “reasonable time” after a standing objection is raised, the breadth of which is left to the district court to determine. See Stichting Ter Behartiging v. Schreiber, 407 F.3d 34, 43-44 (2d Cir. 2005). Commerzbank’s motion was made on September 10, 2012, after summary judgment and even after the filing of the motion to reconsider, when the matter was raised as early as defendants’ answers in March 2011 and again in its motion for summary judgment on January 23, 2012. 20 1 have found that an assignment is defined in New York as “a 2 transfer or setting over of property, or of some right or 3 interest therein, from one person to another, and, unless in some 4 way qualified, it is properly the transfer of one whole interest 5 in an estate or chattel or other thing.” 6 LLC v. Saks, Inc., 486 F. Supp. 2d 229, 236 (S.D.N.Y. 2007) 7 (internal quotation marks omitted). 8 whether Commerzbank has offered sufficient evidence to allow a 9 trier of fact to find that DAF assigned its entire interest in Int’l Design Concepts, The question in this case is 10 the notes to Dresdner, including, therefore, its right to sue for 11 fraud. 12 The original reliance declaration stated only that Dresdner 13 bought the notes “at par” from DAF and that DAF was wound down 14 ten months later. 15 alone are sufficient to permit an inference of transfer because, 16 as discussed supra, it was not a permissible exercise of 17 discretion not to consider the additional evidence submitted. 18 The Williams and Shlissel declarations –- from the New York 19 counsel of Commerzbank and CEO of the successor entity to DAF, 20 respectively -- are significantly more thorough with respect to 21 the issue of transfer. 22 detail the circumstances surrounding DAF’s sale to related entity 23 Dresdner, including the fact that DAF suffered no loss on the 24 sale because Dresdner bought the already-downgraded securities at We need not decide whether these statements Among other things, they describe in more 21 1 par, that neither DAF nor the company that administered its trust 2 retained any claims or causes of action, and that all parties 3 believed any claims would be automatically transferred under 4 German law. 5 The question, therefore, is whether, based on the 6 declarations and documentary evidence presented by Commerzbank, a 7 reasonable trier of fact could find that DAF validly assigned its 8 right to sue for common law fraud to Dresdner in connection with 9 its sale of Cheyne SIV notes. 10 3) 11 We believe that resolution of this dispositive question 12 would require us to pass upon a question open under New York 13 caselaw, and that the question should be resolved by the New York 14 Court of Appeals upon a certificate from this court. 15 N.Y.C.R.R. § 500.27; 2d Cir. R. 0.27.2. 16 Certification See 22 We are not aware of any “controlling precedent of the Court 17 of Appeals.” 22 N.Y.C.R.R. § 500.27(a). On the one hand, New 18 York law is clear that specific incantations of “assignment” are 19 unnecessary to perfect a transfer. 20 N.Y.2d 83, 88 (1994). 21 general trend in New York toward adopting principles of free 22 assignability of claims, including those of fraud. 23 57 F.3d at 153 (citing N.Y. Gen. Oblig. Law §§ 13–105 & 13–107 24 (McKinney 1978); ACLI Int'l Commodity Servs., Inc. v. Banque See Leon v. Martinez, 84 Moreover, we have elsewhere noted a 22 Banque Arabe, 1 Populaire Suisse, 609 F. Supp. 434, 441–42 (S.D.N.Y. 1984)). 2 However, there is also a strain of New York law that treats tort 3 and contractual claims in a particular instrument separately. 4 See Fox v. Hirschfeld, 157 A.D. 364, 142 N.Y.S. 261, 262-63 (1st 5 Dep’t 1913) (assignment of all rights “in and to the within 6 contract” did not include assignment of the right to sue for 7 fraud). 8 9 We believe these jurisprudential trends present an as-yet unresolved issue when applied to this case. Specifically, it is 10 unclear whether the intent of parties to transfer a whole 11 interest, combined with the absence of limiting language, 12 suffices to transfer an assignor’s tort claims, or whether an 13 additional, more specific statement of an intent to transfer tort 14 claims is required. 15 of Appeals. 16 We certify that issue to the New York Court The parties also disagree, of course, regarding Morgan 17 Stanley’s liability for the allegedly fraudulent ratings. 18 need to resolve that dispute depends on the antecedent issue of 19 Commerzbank’s standing. 20 Court of Appeals allows Commerzbank’s claim to proceed, we 21 further ask it to resolve, and certify to it, the question of 22 Morgan Stanley’s potential liability on the present record. 23 24 The However, in the event that the New York The district court held that, as a matter of New York law, the allegedly fraudulent ratings could be attributed only to the 23 1 ratings agencies themselves. Cf. Eurycleia Partners, LP v. 2 Seward & Kissel, LLP, 849 N.Y.S.2d 510, 512 (1st Dep’t 2007) 3 (lawyers and auditors not responsible for fraudulent 4 representations originally made by hedge fund). 5 Stanley did not issue the ratings, the district court held that 6 it could not be directly liable and that there was no claim of 7 aiding-and-abetting liability. 8 Stanley is nonetheless liable because it exerted pressure on the 9 ratings agencies to obtain the fraudulently high ratings, even Because Morgan Appellants argue that Morgan 10 participating in a “scheme” to do so. Indeed, the district court 11 noted that appellants had presented some evidence that Morgan 12 Stanley had “manipulated the Cheyne SIV modeling process to 13 create the ratings it desired,” and had otherwise influenced the 14 process beyond simply hiring the agencies. 15 under some New York decisions to impose liability on “parties who 16 make, authorize or cause a [fraudulent] representation to be 17 made.” 18 651360/2012, 2013 N.Y.Misc. LEXIS 3056, at *34 (N.Y. Sup. Ct. 19 July 8, 2013) (Morgan Stanley could be held liable for false 20 ratings it influenced with false statements and disseminated). 21 Other New York decisions, however, which were discussed 22 extensively by the district court, Abu Dhabi Commercial Bank v. 23 Morgan Stanley & Co., 888 F. Supp. 2d 431, 448-54 (S.D.N.Y. 24 2012), seem to foreclose suits against third parties based on the This would suffice See Metro. Life Ins. Co. v. Morgan Stanley, No. 24 1 misrepresentations of another, even where that party was alleged 2 to have known about the misstatement; see Mateo v. Senterfitt, 3 918 N.Y.S.2d 438, 440 (1st Dep’t 2011); Eurycleia, 849 N.Y.S.2d 4 at 512. 5 Therefore, we certify to the New York Court of Appeals a 6 second question to be resolved if that court holds that 7 Commerzbank may bring a fraud claim against Morgan Stanley. 8 question is whether, on the record established during the summary 9 judgment proceedings, a reasonable trier of fact could find 10 Morgan Stanley liable for fraud under New York law. 11 12 That CONCLUSION For the foregoing reasons, we affirm the district court in 13 part, holding that: 14 status as a party destroyed complete diversity under 28 U.S.C. § 15 1332 was correct; and (ii) the district court’s denial of class 16 certification under Fed. R. Civ. P. 23 was within its discretion. 17 (i) PSERS’s dismissal on grounds that its However, we find that the district court erred in refusing 18 to consider Commerzbank’s proffered evidence with regard to a 19 transfer of the fraud claim it seeks to bring. 20 conclude that the question of standing turns on an unresolved 21 issue of state law, and thus certification to the New York Court 22 of Appeals pursuant to Second Circuit Local Rule § 0.27.2 and New 23 York Court of Appeals Rule § 500.27, is appropriate. 24 certify a second question: We further We also whether, if Commerzbank can pursue 25 1 its fraud claim, a reasonable trier of fact could find Morgan 2 Stanley liable based on the evidence adduced during the summary 3 judgment proceedings. 4 render a final decision once either certification is denied or we 5 have the benefit of the Court of Appeals’s view of the correct 6 legal standard and its application to this case. 7 ordered to bear equally any costs that may be required by the 8 Court of Appeals as part of certification. This panel will retain jurisdiction to The parties are 9 10 CERTIFICATE 11 Commonwealth of Pennsylvania Public School Employees’ Retirement 12 System v. Morgan Stanley & Co. Inc. 13 13-2095-cv(L), 13-2283-cv(XAP), 13-2286-cv(XAP), 13-2287-cv(XAP) 14 The following questions are hereby certified to the New York 15 Court of Appeals pursuant to Second Circuit Local Rule § 0.27 and 16 New York Court of Appeals Rule § 500.27, as ordered by the Second 17 Circuit: 18 Based on the declarations and documentary evidence presented 19 by Commerzbank, could a reasonable trier of fact find that DAF 20 validly assigned its right to sue for common law fraud to 21 Dresdner in connection with its sale of Cheyne SIV notes? 22 based on the record established in the summary judgment 23 26 If so, 1 proceedings in the district court, could a reasonable trier of 2 fact find Morgan Stanley liable for fraud under New York law? 3 4 The Court of Appeals may, of course, reformulate these issues or resolve other matters it deems relevant. 5 6 27
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