Arco Capital Corporation Ltd. v. Deutshe Bank AG, No. 1:2012cv07270 - Document 22 (S.D.N.Y. 2013)
Court Description: OPINION re: 12 MOTION to Dismiss filed by Deutshe Bank AG. Based on the conclusions set forth above, Defendant's motion to dismiss Plaintiff's federal securities law claim is granted with leave to replead within 20 days. Supplemental jurisdiction over Plaintiff's state law cause of action is declined, without prejudice. (Signed by Judge Robert W. Sweet on 6/6/2013) (cd)
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UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK ------ ----- -------------- ------ -- --x ARCO CAPITAL CORPORATIONS LTD., Plaintiff, 12 Civ. 7270 OPINION -againstDEUTSCHE BANK AG, Defendant. ----- ---x A P PEA RAN C E S: Attorneys for Plaintiffs MILLER & WRUBEL P.C. 570 Lexington Avenue New York, NY 10022 By: John G. Moon, Esq. re L. Huene, Esq. Attorneys Defendants JONES DAY 222 East 41st Street New York, NY 10017 By: Jayant W. Tarnbe, Esq. Kelly A. Carrero, Esq. USDCSI'NY DOCUMLj.JT : Sweet, D. J. , Defendant Deutsche Bank AG ("Deutsche Bank" or the "Defendant") has moved pursuant to Rules 9(b) and 12(b) (6) of the Fede Rules of Civil Procedure to dismiss the complaint aintiff Arco Capital Corporation Ltd. (the "Complaint") of ("Arco" or "Plaintiff") . Upon the conclusions set forth below, the motion of Deutsche Bank to dismiss the cause of action for securities fraud is granted with leave to lead within 20 days, and supplemental jurisdiction over Arco's state law claim is lined. I. Prior Proceedings On September 27, 2012, Arco led the Complaint setting forth two causes of action against Deutsche Bank for (I) securities fraud in violation of Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act") and (2) contract. 1 for breach of On December 3,2012, invoking Rules 12(b) (6) and 9(b) 1 Procedure, Deutsche Bank moved to of the Federal Rules of C dismiss t Complaint. The instant motion was heard and marked lly submitted on January 16, 2013. II. Background The llowing factual background is drawn from the Complaint and from documents referenced in or integral to the Complaint as submitted by the parties. The allegations of Complaint are accepted as true for the purposes of this motion, see Chambers v. Time Warner, Inc., 282 F.3d 147, 152 (2d Cir. 2002) , do not constitute findings of fact by the Court. This action a entional or rec ses out of Deutsche Bank's allegedly ss misconduct in connection 2006 collateralized loan obligation (~CLO") "Transaction"), known as CRAFT EM CLO 200 or the "Issuer") . (CompI. g[ Deutsche Bank is a th a June transaction (the 1 (t "CRAFT EM CLO" 1). nancial institution organized and existing under the laws of Germany with its principal place of 2 the United States ln New York, New York. business Id. 'II 15) . Arco is an exempted limited company organized and existing under the laws of the Cayman Islands and external managed by a company with its princ 1 place of bus ss in ( Id . '3[ 14). Guaynabo, Puerto Rico. The Transaction In June 2006, Deutsche Bank of opportunity to acquire debt securities portfolio ( "Re Port originated emerging mar red investors the (the "Notes") tied to a ion) of Deuts s investments and derivative transactions (the "Reference Obligations") . transactions were ef Bank- (Id. '3[ 2). The cted through CRAFT EM CLO, a Cayman Islands company created by Deutsche Bank. Id. <J[<J[ 2-4, 30, 77). As a "synthetic" CLO, the Craft EM CLO did not go out and purchase outright whole loans or other rect exposures to the emerging market companies or derivatives counterparties; instead, it gained exposure synthetically through credit swap transactions (the "CDS Agreements"), which the Issuer 3 fault (Id. entered into with Deutsche Bank. ~~ 2-3, 31-43; Exs. 14-17 [Swap Confirmations]). In exchange for the interest payments on the Notes, investors agreed to risk the principal due on the Notes based on Reference Portfolio. t If a Reference Obligation a way covered by the CDS Agreements faulted in (a "Credit Event"), Deutsche Bank received a payment (a "Credit Event Payment"), which directly reduced the principal due on t (Id. <JI Notes at maturity. 3). The Notes were issued in tranches with different levels of seniority: Class E, Class F and Class G Notes, with Class G as the most junior. (Id. <JI 4). The Class E-1, F-1, and G-1 Notes were issued in June 2006 (the "First Offering"), and the Class E-2, F-2, and G-2 Notes were issued (the "Second Of ring"). (Id. <JI<JI January 2007 1, 5, 31, 34, 77, 81). All classes of Notes were scheduled to mature on July 15, 2012. <JI (Id. 10). According to Arco, Deutsche Bank caused the Issuer to enter into an Indenture, dat with HSBC Bank USA, N.A. June 21, 2006 (the "Indenture") ("HSBC"), located 4 New York, as Trustee. t Id. ~ 5). Deutsche Bank controlled Arco alleges transactions from its offices in New York, that all funds went to and from HSBC the Notes by del New York, and that investors purchased Id. ) . ing funds to HSBC. In June 2006, during the First Offering, Gramercy Emerging Markets Fund ("Gramercy"), a company associated with Arco, purchased Class F and Class G Notes on Arco's behalf. (Id. ~~ 81 82). During the Second Offe ng in January 2007, Gramercy purchased new Notes on behalf of Arco. Id. ~ 83). Gramercy, as the alleged agent for Arco, purchased Class G-1 Notes with an original notional amount Notes $15 million, Class G-2 th an original notional amount of $15 million, Notes with an ass F-1 ginal notional amount for $8.75 million, and Class F-2 Notes th an original notional amount for $17.5 million. In total, Gramercy purchased a total of $56.25 Id. ) . million of the Class G and Offering and Second Offering. ass G Notes during the First (Id.). In May 2007, Gramercy transferred the Notes to Arco in a pass-through transaction, which Arco reimbursed Gramercy at par for the amounts Gramercy had advanced to purchase the Notes. 5 (Id. ~ 84). the purchase of the Notes, Gramercy In connection w executed a separate note subscription agreement (the "Note Subscription Agreement") with the Issuer. (Id. ~ 61). The Note Subscription Agreement became an irrevocable agreement between Gramercy and the CLO, stating that: This subscription by the Purchaser is irrevocable; provided, however, that the execution and delivery by the Purchaser of t s Subscription Agreement will not constitute an agreement between the Company and the Purchaser until this Subscription Agreement is accepted on behalf of the Company and, if not so accepted (as described below), this subscription and the obligations of the Purchaser reunder will terminate. (Exs. 8-11 at § 1 (b) [Note Subscription Agreements]) . On or before the closing date of each issuance, each Note Subscription Agreement was agreed to and accepted in t Cayman Islands by a director of the CLO employed by the CLO's "Administrator," Maples & Calder, a Cayman Islands law firm. (Exs. 8-11 at Signature Pages [Note Subscription Agreements]; Ex. 12 at § 2.4 [Administrat Directors and ficers]). Agreement]; Ex. 13 [Registers of The Administration Agreement required them to "perform all services and take all actions in connection with [the transaction] in or from within the Cayman Islands." 6 (Ex. 12 at § 2.9 [Administration Agreement]). Deutsche Bank was not a party to any of the Note Subscription Agreements, but was expressly identified as a third party beneficiary. § (Exs. 8-11 at ption Agreements]). 17 (Note Subs In Section 4 of each Note Subscription Agreement, Gramercy made several representations and warranties, including that: ¢ It "received the Indenture and the other Transaction Documents and has not reli on any information . other information that is contained in, and the terms and provisions of, the Indenture and the ot r Transaction Documents or is otherwise available." ¢ It "has made its own investment decis s based upon its review of the Indenture and the other Transaction Documents, its own judgment upon any advice from such advisers as it has deemed necessary . " Notes had been sold ¢ It acknowledged that pursuant to Regulation S ("Reg S") of t Securities Act of 1933 ( "1933 Act"), an exemption from the stration requirements of Section 5 of the 1933 Act for offshore securities offerings. (Exs. 8-11 at The CDS § 4 (e) - (i) [Note Subscription Agreements] . ) s 7 CDS Agreements applied to the Reference Portfol which started at $500 size. llion ~ (Compl. 1). In January 2007, the Swap Confirmations were amended and the Re rence Portfolio's size doubled to $1 billion (the "Opsize") (rd. ~ 10). At that t finit , the of "Re Payment Obligation" was expanded to include "Specif Obl rence ions," which in turn was defined to include certain derivative transactions and "a senior secured or unsecured note the Re pursuant to an indenture or rence Entity is ~ equivalent instrument." (rd. Exs. 14-15 at 77; [2006 Swap Confirmations], with Exs. 16-17 at §§ § 1 1 and 3 [2007 Amended Swap Confirmations]). Bank Deuts Re ~~ rence sole scret to select the igations to add to the Reference Portfolio. 7, 36, 178(d)). Each Reference Obl meet the following quali (Compl. ion was required to cations (the "Eligibility Criteria"), on the date it was first included in the Reference Portfolio, and on the date of any replenishment increased the notional amount of the Reference Obligation (the "Relevant Daten): the underlyi the company (the "Reference Entity") would satisfy rati n (1) or better); thresholds (e.g., Moody's Equivalent Rating of (2) the Reference Obligation could meet 8 origination requirements (e.g., an eligible asset type and originated by Deutsche Bank "in accordance with its standard credi t policies and guidelines"); (3) there was no known event that with notice or lapse of time would become a Credit Event in relation to the Reference Obligation; (4) the Reference id and enforceable in accordance with Obligation was legally s terms and applicable provisions of law; and (5) the Reference Obligation was held by or for the benefit of a Deutsche Bank entity. (CompI. 37, 44 56; Exs. 14-17 at <J1<J1 <J1 1, C [Swap Confirmations]). Under the rst Eligibility Criter , a Reference Entity had to meet certain minimum credit rating t including holding a Moody's sholds, iva lent Rating of "B3" or better. (Exs. 14-17 at C [Swap Confirmations]). For any unrat Reference Entity, Deutsche Bank would ascribe an internal rating to that Reference Entity. (CompI. <J1<J1 21, 47 -4 8). The rating agencies provided "mapping tables" to determine t corresponding Moody's or Standa & Poor's ("S&P") rating to Deutsche Bank's internal ratings, which would be used to determine the "Moody's Equivalent Rating" and "S&P Equivalent Rating," as defined in the CDS Agreements. <J1<J1 22, 49, ld. 60, 97; Exs. 14-17 at E [Swap Confirmations]). 9 As "Calculation Agent" under the Swap Confirmations, Deutsche Bank was required to engage an independent accountant, Ernst & Young LLP ("E&Y"), to deliver an irrevocable notice to the Issuer containing a certification, as a condition precedent to Deutsche Bank's entitlement to any claimed Credit Event Payment. Con Id. ~~ rmationsJ). 41-42, 89-96; Exs. 14-17 at ~ 4 [Swap The certification was to include: (a) that the defaulted Reference Obligation satisfied the Eligibil Criteria and Replenishment Conditions; (b) ve y fication that the related Credit Event occurred; and (c) verification that the computation of the relevant "Loss Determination Amount" an "E&Y Certification"). Confirmations]). (Exs. 14-17 at ~ (each, 4 [Swap The E&Y Certifications were drafted by E&Y in accordance with "agreed upon procedures" and provided that they were "in accordance with attestation standards established by the American Institute of Certified Public Accountants [("AICPA") l." (CompI. at Ex. B). III. Arco's Allegations and Claims Arco brings a securities fraud 10(b) and Rule 10b-5(a) and (c) aim under Section for "scheme liability" arising 10 out of the same operative facts as the contract claim and seeks to recoup the sses it allegedly suffered. Arco's al gations are predicated on seventeen Reference Obligations that Deutsche Bank designated after the Second Offering in January 2007 and that later suf red Credit Events. First, as a basis (Id. 'lr'lr 11, SO). its fraud and contract claim, Arco contends that the assets that suffered Credit Events were ineligible under the Eligibility Criteria. 69, 17S(c)). As discuss (Id. 'lr'lr 106-62, 16S above, upon default of each Reference Obligation, as provided for under t CDS Agreements, the Issuer was required to make a Credit Event Payment to Deutsche Bank. (Id. 'lr'lr 3 4, 69-70). Each Credit Event Payment correspondingly reduced the amount of funds available to repay the principal balance due on the Notes at maturity. (Id. 'lr 6). According to Arco, at the time of the Upsize, Deutsche Bank faced more stringent regulatory capital requirements and had poorly-written and toxic investments on its books, particularly its rivative investments. Id. 'lr'lr 76). Arco alleges that Deutsche Bank knew that such investments did not meet the Eligibility Criteria, and secretly intended to use t itself of such assets and shift the losses to Arco. Upsize to Id. Deutsche Bank allegedly took advantage of the Upsize to dump 11 ineligible lending transactions into the Re rence Port io, and used its control over the Transaction to disguise its misconduct and frustrate the protections that exi Noteholders. Id. <Jl ed for 10). its fraud and contract claim, Second, as a basis Arco takes issue with the E&Y Certifications. Id. <.IT<.IT 89-96). The Complaint alleges that all of the E&Y Certifications obtained by Arco have patent fi encies and fail to satis the condition precedent that E&Y, as an independent accountant, certify that the default Reference Obligation complied with the Eligibility Criteria and Replenishment Conditions. Id. <Jl<Jl 94-95) . Third, as a basis for its fraud and contract claim, Arco contends that Deutsche Bank falsely reported Moody's Equivalent Ratings based on its use of an outdated Moody's mapping table. (Id. <.IT<Jl 97-105, 171, 178 (b)). The Complaint refers to a Moody's issued April 6, 2009 press release, which stated that "[b]ecause this mapping was performed prior to 1st April 2007, an additional stress was applied to capture potential deviations from the established mapping." Arco (rd. <.IT 98). leges that the employees managing the Transaction knew, 12 or were reckless in not knowing, that Moody's had updated the mapping table in or around April 2007, and intentionally or recklessly continued to use the old Moody's mapping tab order to in lsely report higher Moody's Equivalent able to Ratings for the Reference Obligations in the Reference Portfolio. (Id. ~~ 103-104). Fourth, as a basis for its fraud and contract claims, Arco contends Deutsche Bank took Credit Event Payments it should not have. Id. ~~ 172, l78(e)). instructed HSBC to rna Bank knew it was not ent Credit Event Payments. Deutsche Bank allegedly Credit Event Payments to which Deutsche led, amounting to over $86 million in (Id. ~~ 106-162). As a result of Deutsche Bank's alleged misconduct, Arco contends that it incurred damages in excess of $37 million. IV. The Applicable Standards Standa In considering a motion to dismiss pursuant to Rule 12(b) (6), the Court construes the complaint liberally, accepting all factual allegations as true and drawing all reasonable inferences in the plaintiff's favor. 13 Mills v. ----------------~~~~~ Corp., 12 F.3d 1170, 1174 (2d Cir. 1993). The issue "is not whether a plaintiff will ultimately prevail but whether the imant is entit to of evidence to support the claims." Villager Pond, Inc. v. Town of Darien, 56 F.3d 375, 378 (2d 1995) (quoting Scheuer v. Rhodes, r. 416 U.S. 232, 235-36, 94 S. Ct. 1683, 40 L. Ed. 2d 90 (1974)). ssal, "a complaint must contain To survive di sufficient factual matter, accepted as true, to 'state a claim to relief that is plausible on its face.'" Ashcroft v. I 556 U.S. 662, 129 S. Ct. 1937, 1949, 173 L. Ed. 2d 868 (2009) (quoting =B~e~l~l~. .~~~~~~~_v.~.~T~w~o_m~b~l~, 550 U.S. 544, 570, 127 S. Ct. 1955, 167 L. Ed. 2d 929 (2007)). Plaintiffs must allege ficient facts to "nudge [ ] their claims across the line from conceivable to plaus e." Twombl plausibility standard is not a rement,' but it asks 550 U.S. at 570. "The n to a 'probability r more than a sheer possibility that a defendant has acted unlawfully." Cohen v. Stevanovich, 772 F. Supp. 2d 416, 423 (S.D.N.Y. 2010). Though the court must accept the factual allegations of a complaint as true, it is "not bound to accept as true a 1 allegation." I --"- 1 conclusion couched as a factual 556 U.S. at 678. at 555). 14 (quoting Twombl 550 U.S. Standard Rule 10b-S and the Rule 9 b Section 10(b) imposes civil liability on any person who uses "any manipulative or deceptive device or contrivance" "in connection with the purchase or sale" of any security. U.S.C. § 78j (b). Rule 10b-S makes it unlaw lS r "any person 1 . . to engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any rson, in connection with the purchase or sale of any security." 17 C.F.R. § 240.10b-S. To state a claim under Section 10(b) and Rule 10b-S , a plaintiff must plead that defendants "'(1) made misstatements or omissions of material facti (2) with scienter; wi th the purchase or sale of securities; (4) plaintiffs relied; and (S) that plaintif J proximate cause of their injury.'" (3) in connection upon which reliance was the Lentell v. Me _ _ _ _.... ~~ _ _ _ _ _ _ _ _ _ _ _ _ _ _ __ L_ _ _ __ _ Co., Inc., 396 F.3d 161, 172 (2d Cir. 200S) Sec. Liti. 163 F.3d 102, 106 (2d Cir. 1998)). Such claims are subject to the heightened pleading requirements of Rule 9(b) of the Federal Rules of Civil Procedure and Private Securities Litigation Reform Act of 1995 ("PSLRA"), lS lS U.S.C. § 78u-4(b). Rule 9(b) requires that the plaintiff "state with particularity the circumstances constituting the fraud." R. Civ. P. 9(b). must: Fed. To satisfy this requirement, the complaint "(1) specify the statements that the plaintiff contends were fraudulent, (2) speaker, identify (3) state where and when the statements were made, and (4) explain why the statements were fraudulent." (2d Cir. 2004) Romach v. Chang, 355 F.3d 164, 170 marks and citation omi (internal quotat ) . While "intent, knowledge, and other conditions of mind may be averred generally," a plaintiff must allege sufficient facts to create a "strong inference" of senter. Kalnit v. Eichler, 264 F.3d 131, 137-38 (2d Cir. 2001). v. Discussion A) The Section lO(b) Claim Survives Under Morrison Deutsche Bank seeks dismissal of t Section 10(b) claim under the transactional test adopted by the Supreme Court in Mo son v. National Australia Bank Ltd., --- U.S. ---, 130 S. Ct. 2869, 177 L. Ed. 2d 535 (2010). Arco purchas It contends that because the Notes offshore, and not on a domestic exchange or in a domestic transaction, Arco cannot avail itself 16 ... of the federal securities laws to bring a claim r alleged securities violations in connection with its transactions. maintains that the Complaint and the documents assoc the Transaction give Arco ed with se to the plausible inference that irrevocable liability arose in New York and that therefore its investment in the Notes was a domestic transaction for Morrison purposes. Morrison involved a "foreign-cubed" class action: one in which one in which "(1) foreign plaintiffs [were] suing (2) a fore issuer in an American court for violations of American securities laws based on securities transactions in (3) foreign countries. rd. at 2894 n.ll (Breyer, J., concurring in part and concurring in the judgment) (emphasis in the original). Australian plaintiffs sued an Australian bank, t Three National Australian Bank, under Section lO(b) of the Exchange Act losses they allegedly suffe Australian exchanges. on stock purchases traded on rd. at 2875. The Supreme Court ld that a private right of action under Section lO(b) and Rule lOb-5 of Exchange Act could be maintained by foreign plaintiffs only if: (1) the security was listed on an American stock exchange or (2) the purchase or sale took place in the U.S. rd. at 2888. ("Section lO(b) reaches the use of a manipulat or decept 17 device or contrivance only in connection with the purchase or sale of a security listed on an American stock exchange, and the purchase or sale of any other security in the United States."). In reaching its decision, the Court directed its attention to the Exchange Act's regulatory center and adopted a "transactional" test, which focused "not upon the place where the deception originated, but upon the purchases and sales of securities in the United States." Id. at 2884. This new transactional test replaced the Second Circuit's conduct and effects test, which asked "whether the wrongful conduct had a substantial effect in the United States or upon United States tizens" or "whether the wrongful conduct occurred in the United States." Id. at 2879 (quoting .SEC v . ------~---~~-. 187, 192-93 (2d. Cir 2003)). 322 F.3d The Court explained that the conduct and effects test lacked textual support in the Exchange Act and contravened the longstanding presumption against extraterritorial application of U.S. legislation in the absence of contrary Congressional intent. Morrison, 130 S. Ct. at 2878. Applying the transactional test to the case before it, the Court concluded that "there is no Exchange Act that § firmative indication in the 10(b) applies extraterritorially," Id. at 2883, and dismissed the action because it "involve[d] no 18 securit s listed on a dome exchange, and all aspects of the purchases complained of by e petitioners who still have live claims occurred outside of t United States." In addition, under son, deceptive conduct is --------- y "in connection wi punished security Id. at 2888. the purchase or sale of any stered on a national securities exchange or any security not so registered" but transacted in the Unit Id. at 2884. The Second Circuit recently addressed States. s second prong of Morrison's transactional test and clarified what In Absolute Act constitutes a domestic transact Master Fund . v. Ficeto, the st Value Circuit endorsed both an "irrevocable liability" and "transfer of title" standard, holding that "to sufficiently all a domestic securities transaction in securities not list on a domestic exchange . a plaintiff must allege facts suggesting that irrevocable liability was United States." red or title was transferred within 677 F.3d 60, 68 (2d Cir. 2012). Thus, under Morrison, a plaintiff must demonstrate that its purchase or sale of a security was domestic by alleging (1) the transact domestic exchange, involved securit s traded on a (2) irrevocable liability was incurred in the 19 United States, or (3) title was passed in the United States. See Morrison, 130 S. Ct. at 2884; see also Absolute Activist 677 F.3d at 66-67. At the pleading stage, it is sufficient the plaintiff "to allege e s leading to the plaus inference" of a domestic transaction. instant transaction does not fall Id. at 68. r As the the first category, Arco must adequately allege fact demonstrating that the Notes that it purchased fall in the latter two categories. To support its claim, Arco contends that (i) "Issuer granted its interest in the Transaction . the . to New York Trust;" (ii) the Trustee "HSBC maintained the bank accounts for the Transactions, and all funds in the Transaction went to and from HSBC in New York;" (iii) "Deutsche Bank controlled the Transaction from its offices in New York;" (iv) the "[relevant agreements] are all governed by New York law;" and (v) "it is plausible that de sions concerning the Transaction, including the decision to sell Notes to Arco, were made by Deutsche Bank in New York." (Opp. Br. at 6-8). To extent that Arco seeks to establi some nexus to the United States because the Deutsche Bank employees involved in the transactions were located in New York or that 20 the contracts were governed by New York law, (Compl. 166), <J[ such assertions are irrelevant as to whether Arco's purchase of its Notes was a domestic transaction a ,' contemplat by ,) Morrison's transactional approach. 2884 See Morrison, 130 S. Ct. at (noting that "the presumption against extraterritorial s a craven watchdog if it retreated to application would kennel whenever some domestic activity is involved in the case.") (emphasis in the original). While potentially relevant under conduct and effects test, courts have found such pleadings that "some acts that ultimately result in the execution of the transaction abroad [took] place the United States amounts to nothing more than the reinstatement of the conducts test." Invs. II LLC v. 3 6621, at *8 Pope No. 10 Civ. 6608, 2012 WL (S.D.N.Y. Aug. 15, 2012); Cornwell v. Credit Suisse Grp., 729 F. Supp. 2d 620, 624 that read as a whole, Court considered (S.D.N.Y. 2010) (finding Morrison opinions indicate t the under its new test § 10(b) would not extend to foreign securities trades executed on foreign exchanges even if purchased or sold by American investors, and even if some aspects of the transaction occurred States . ."). Examples of factual aIle the United ions that would be sufficient under Morrison include "facts concerning the formation of the contracts, the placements of purchase 21 0 s, the passing of title, or the exchange of money, [but] the mere assertion that transactions 'took place in the United States' is insufficient to adequately plead the existence of domestic transactions." Absolute Activist, 677 F.3d at 70. In addition, "the point of irrevocable liability can be used to determine sale." Id. at 68. locus of a securit s purchase or In this Circuit, parties incur irrevocable liability within the United States when the purchaser agrees "to take and pay r a security" in the Uni seller agrees "to del States or when the a security" in the United States. Id. Specifically, the Second Circuit highlighted "the time when the parties to the transaction are committed to one another . . . in classic contractual sense, the minds of the parties; [where] there was a meeting of marks the point at which the parties obligated themselves to perform what they had agreed to perform even if the formal performance of their agreement is to be after a lapse of time." Id. at 67-68 (citing Radiation Dynamics, Inc. v. Goldmuntz, 464 F.2d 876, 891 (2d Cir. 1972)). Deutsche Bank contends that, under the terms of the Note Subscription Agreements between Gramercy and the Issuer, irrevocable liability attached to the transaction when the 22 Issuer accepted each of the executed the agreements in the Cayman Islands. According to Deutsche Bank, the transaction cannot be domestic because the purchase involved a Cayman Islands' purchaser and a Cayman Islands' issuer, which was completed only upon acceptance by the Issuer in the Cayman Islands. ot Arco, on r hand, maintains that, under the Note Subscription Agreements, the sale of the Notes was expressly non-binding until the purchase price was received by HSBC in New York. Specifically, Arco asserts that the Notes Subscription Agreements, (1) required Arco to deliver the purchase price to HSBC in New York on the Closing Date, Subscription Agreements § 2) (Note (delivery of payment to be by "immediately available funds on the Closing Date to the account to be advised to the Purchaser by the Trustee [HSBC]"); (2) the Notes were not "valid and binding" until "paid for by the Purchaser pursuant to Section 2 hereof," (Note Subscription Agreements § 3(i)); (3) receipt of payment "in accordance with Section 2" (i.e. delivery to HSBC) was a condition precedent to the Issuer's obligation to "sell" the Issuer could revoke Notes, Id. § 7(c)); (4) Note Subscription Agreements in "its sole discretion at any time prior to the Closing Date," i.e. 23 pr to Arco's delivery of paymenti (Id. § 9(a)) i and (5) Arco's delivery of funds to HSBC completed the Note Subscription payment of Agreement, which automatically terminated with "t 2 hereof." (Id. the [purchase price] in accordance with Sect §9(b)). Courts have repeatedly held that allegations "that Funds by wir investors subscribed to located in New York . . market . or that money to a bank funds were he ly in the United States and that United States investors were harmed by t defendant's actions," without more, do not satisfy the transactional test announced in Morrison. Activist, 677 F.3d at 70; ----.~------------~-see Absolute LLC v. ... ~--~~------- Vestbirk, No. 2:10-cv-02483-GEB-CKD, 2012 WL 2873371, at *7 (E. D. Cal. July 12, 2012) ("P intiff's allegations concerning the transactions, that certain funds were trans New York-based banking institutions, are establish t suffic rred in between to existence of a domestic transaction, as required under Section 10(b) ."). In Cascade Fund, LLP v. Absolute for example, the Court found that a transaction was not "completed" in New York where the investor's delivery of money was "one step" invest in the funds." the process of "applying to No. 08-cv-01381-MSK-CBS, 2011 WL 1211511, 24 at *7 (D. Colo. Mar. 31, 2011). The agreement in that case also made "clear that simply sending money to New York was not sufficient to complete the transaction" and that the fund manager reserved the right to reject an application, "even if the purchase money had properly been wired to New York." Id. Here, in contrast, the Note Subscription Agreements provide that the 1 funds to HSBC automatically ry terminated or "consummate[d]" the transaction because that act made the contract irrevocably binding. (Note Subscription Agreements § 7) (receipt of funds a "condition" of "obligation" to "sell" Notes) i see also 1 WILLISTON ON CONTRACTS, 1936 Ed., § 116 ("The subscription agreement is not a contract, but an of r to contract, which, when acted upon by incurring liability, becomes a binding obligation."). As outlined in Section 9, the date beyond which the Issuer no longer had the discretion to revoke acceptance was the Closing Date, when the purchaser was to transmit the funds to HSBC in New York. Thus, the irrevocable sale of the Notes occurred with the parties' performance on the Closing Date, when Gramercy livered the funds to HSBC in New York and the Issuer assigned the interest to the Trust York. 25 New Accordingly, the reasons stated above, Arco has alleged facts leading to the plausible inference that irrevocable liability was incurred when the funds were livered to HSBC in New York, and thus, its Section 10(b) claim survives under Morrison. B) Arco's Section lO(b) Claim, However, is Time-Barred A district court may consider timeliness on a motion to smiss when the circumstances are "sufficiently clear on the face of the complaint and related documents as to make the timebar ruling appropriate on a motion to dismiss." Partners LP v. Frontier r. 2003). LC - -.... 318 F. 3d 148, 157 (2d Even if irrevocable liability arose Arco's Section 10(b) cla tal ----"~-- New York and survives under Morrison, the claim is time-bared under the applicable statute of repose. An action under Section 10(b) of the Exchange Act or Rule 10b-5 is subject to a five-year statute of repose or may brought within "2 years after the discovery of the facts constituting the violation." 28 U.S.C. IThe temporal limitations governing Areo's U.S.C. § 1658(b), which states: 26 § § 1658(b).1 Thus, in 10 (b) claims are set forth in 28 is timely, it order to determine whether Arco's § 10(b) cIa must be determined (1) when the violation occurred, and (2) when Arco can be said to have discovered the facts constituting the violation. The five-year statute of repose period is a fixed statutory cutoff, which is independent of a plaintiff's awareness of the violation and is not subject to equitable tolling. See --------~~------~--~~--.--~--.~~----------~------ lbertson, 501 u.S. 350, 363, 111 S. Ct. 2773, 115 L. 321 (1991) (stating that " purpose of t . is clearly to serve as a cutoff . 2d [statute of repose] [and equitable] tolling principles do not apply to that period. H); P. Stolz Family P'ship, L.P. v. Daum, 355 F.3d 92, 102-03 (2d Cir. 2004) ("[A] statute of repose begins to run without interruption once the necess trigge ng event s occurred, even if equitable considerations would warrant tolling. The s .H). ute of repose begins to run "on the dates the parties have committed themselves to complete the purchase or 0= [AJ private right action that involved a claim of fraud, deceit, manipulation, or contrivance in contravention of atory rement concerning the securities laws . . . may be brought not later than the earlier of: (1) 2 years after the discovery of the facts constituting the violation; or (2) 5 years after such violation. 27 sale of transaction. 351 (2d Cir. 2009) Arnold v. KPMG 1,LP, 334 Fed. App' x 349, ff (stating that "Plaintiff's contention that the period of repose begins to run at the time of the last alleged misrepresentation (even when made after final purchase or sale of the securities) ignores the applicable limitations period, and thus is devoid of merit."); Anwar v. Fairfield Greenwich Ltd., 728 F. Supp. 2d 372, 428 2010) (S.D.N.Y. (dismissing Section 10(b) claims as time-barred because the investments were made more than five years be re the complaint was filed.). In the Complaint, Arco alleges that Gramercy purchased the Notes, on its behalf, in June 2006 and January 2007. (Compl. ~~ 81 83). At the very latest, Arco acquired its securities in May 2007 when Gramercy allegedly transferred the Notes to Arco. Id. ~ 84). The Complaint was filed on September 27, 2012, more than five years after the latest purchase day. Arco, however, contends that Deutsche Bank's allegedly deceptive conduct in furtherance of its scheme continued from January 2007 through 2012, which directly reduced the outstanding principal value of Arco's Notes throughout that 28 ·ij&;_ ,·. .1"'_01 _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ __ period. (Opp. Br. at 12). language of the statute . According to Arco, the plain measures the repose period from the 'violation,' which is not the same things as the date of 'purchase or sale.'" (Id.). Arco therefore maintains that, because it commenced this action within a few months of the end of the Transaction in June 2012, its claim is timely. (Id.) . Arco cites to certain cases that it claims supports its position that the statute of repose runs from the date of the last misrepresentation. (Id.). Several of these cases pre date Arnold, are factually inopposite, or are from outside of this Circuit. For example, Arco relies on In re Beacon Assocs. Litig., 282 F.R.D. 315 (S.D.N.Y. 2012) and Plymouth County Ret. Ass'n v. Schroeder, 576 F. Supp. 2d 360 (E.D.N.Y. 2008) for the proposition that "where a series of fraudulent misrepresentations is alleged, this 'period of repose beings when the last alleged misrepresentation was made.'" Both cases cite to In re Dynex Capital, Inc. Secs. Litig., which pre-dates Arnold and which limited the date of the last misrepresentation to circumstances where "plaintiff purchased the bonds at issue less than five years before filing suit." No. 05 Civ. 1897(HB), 2006 WL 314524, at * 5 n. 4 (S. D. N . Y. Feb. 10, 2006). 29 Indeed, district courts that have employed Arco's formulation have done so in the context of claims by plaintiffs who, unlike Arco, purchased their securities within five years prior to the commencement of their action. Tower Automotive Sec. Litig" 2007). Alternatively, t See e. 483 F. Supp. 2d 327, 331 In re (S.D.N.Y. s and other courts in this Circuit have held that the repose period runs from the date of last misrepresentation when the last alleged misrepresentation pre dates the purchase. ~S~e~e~e~.~~~~~~~~~~~~~~__~~~~~~~~ Agricole, --- F. Supp. 2d - Feb. 13, 2013) 2013 WL 525000, at *7 (S.D.N.Y. stinguishing Arnold's holding from a situation where the last alleged misrepresentation pre-dated purchase) ; Isanaka v. rum Tech. USA Inc., 131 F. Supp. 2d 353, 358 (N.D.N.Y. 2001) (stating that "a violation of section 10(b) and Rule 10b-5 can take place before and up to the time when the sale of securities take place, but not after the investment is made.") (citation omitted). Thus, where post-purchase olations are alleged, having a repose period triggered on the date of purchase is consistent with the well-established rule that a statute of repose cannot be equitably tolled. 501 U.S. at 363. 30 See ------~~ In a supplemental letter to the Court, Arco suggests that decisions such as Arnold, which refer to a transaction date, "do so conclusorily, and without addressing the statutory term 'violation'" in 28 U.S.C. § 1658(b). While the Second Circuit in Arnold did not engage in statutory construction, instead relied on a prior decision, which held that "the statute repose in federal securities law claims 'starts to run on the date the parties have committed themselves to complete the purchase or sale transaction.'" Arnold, 334 Fed. App'x at 351 (quoting Grondahl v. Merritt & Harris, Inc., 964 F.2d 1290, 1294 (2d Cir. 1992)). In addition, the Arnold Court was expressly invited to consider several of the cases now cited by Arco, but declined to do so. See Tambe Supp. Decl. Exs. A and B) (highlighting the relevant excerpts of appellant's brie in Arnold making the same argument advanced here by Arco) . Taken together, the allegedly fraudulent conduct here occurred after the date of purchase and Arco has not meaningfully distinguished itself from Arnold to align itself with the line of cases that have allowed for the statute of repose to run from the date of the last misrepresentations. Without any dispositive distinguishing facts from Arnold, there 31 is no reason to disturb the long-l of cases in this district upholding Arnold's holding. In addition, pursuant to § 1658(b), Arco was requi to have asserted its § 10(b) cIa within two rs of the upon which "a reas y diligent plaintiff would have suff about that ient informat a complaint." MBIA, Inc., Cit ~~ to adequately plead Pontiac Gen. _ _~~ ... _~~~~~~~ facts that 'constitut[e] the Inc. v. . v. _ _-L~_ _~~~~~~~ 637 F.3d 169, 175 (2d Cir. 2011). respect to the facts showing sc Co. s' Ret. S in Thus, with er, which are "among those ation" under 1658(b), Merck & 130 S.Ct. 1784, 1796 (2010), they are deemed "discovered" for § 1658(b} purposes when the pIa iff has uncovered (or when a reasonably diligent plaintiff would have uncovered) enough information about the fendant's knowledge or intent "to state with particularity facts giving rise to a strong inference t red state of mind such t t the defendant acted with the it is at least as likely as not the defendant acted with the relevant knowledge or intent." Pontiac 637 F. at 175. A plaintiff may establish the requisite strong inference of if the Complaint (I) demonstrates 'that 32 defendants had both mot and opportunity to commit fraud,' or (2) alleges 'facts that constitute strong rcumstantial evidence of conscious misbehavior or recklessness.'" Campo v. Sears Holding Corp., 635 F. Supp. 2d 323, 332-33 (S.D.N.Y. 2009) (citation omitted). Citing to paragraphs 76, 79, 88 through 96 of the Complaint, Arco contends that its allegations are more than sufficient to allege scienter. These paragraphs re to the Upsize in January 2007, the E&Y Certifications issued after the Credit Events, and a conclusory statement of Deuts Bank's misconduct. See Compl. <J[ 88) (alleging that" [a] r the Upsize, Deutsche Bank systematically violated the terms of the Transaction and engaged in other misconduct so pervasive that it demonstrates an intention to use Transaction to commit fraud on the Noteholders, including Arco."). allegations in the Complaint Because the evant to scienter, as pled, demonstrate that Arco could have discovered "the facts constituting the violation" within two years of the date upon which "a reasonably diligent plaintiff would have sufficient information about that fact to adequately plead it in a complaint[,]" Arco's Section 10(b) claims have expired. Pontiac, 637 F.3d at 175. Accordingly, Arco's Section 10(b) 33 cIa are untimely with respect to § 1658(b)'s five-year atute of repose and two-year post-discovery deadline. C) The SUpplemental Jurisdiction Over Arco's Breach of Contract Claim is Declined Because Arco's Section 10(b) claim is dismissed as time-barred pursuant to 28 U.S.C. § 1658(b), there is no need to reach on the sufficiency of the allegations in the Complaint as to that claim. The Complaint also alleges as breach of contract claim under New York law. party bene Arco contends that it is a third- ciary under the CDS Agreement, whi Deutsche Bank allegedly breached. U[AJ dist ct court 'may decline to exercise supplemental jurisdiction' if which it has ginal jurisdiction.'" Kolari v. N.Y. 455 F.3d 118, 122 (2d Cir. 2006) Pre U.S.C. 'has dismissed all claims over § 1367 (c) (3)). (quoting 28 "[IJn the usual case in which all federal-law claims are eliminated before trial, the balance of factors to be consi red under the pendent jurisdiction doctrine - judicial economy, convenience, fairness, point toward declining to exercise juris remaining state-law claims." and comity - will ction over the Univ. v. Cohi 34 484 u.s. 343, 350 n.7, 108 Kl S. Ct. 614, 98 L. Ed. 2d 720 (1988); & Co. Futures, Inc. v. Bd. of T , 464 F.3d 255, 262 (2d Cir. 2006) (" [Wl here, as here, the federal claims are eliminated in the ea y stages of litigation, courts should generally decline to exercise pendent juri law claims.") ction over remaining state Because Arco's federal claim is dismissed, the Court declines to exercise supplemental juri ction over its breach of contract claim. VI. Conclusion Based on the conclusions set forth above, Defendant's motion to grant smiss Plaintiff's with leave to repl ral securities law claim is within 20 ys. Supplemental jurisdiction over Plaintiff's state law cause of action is declined, without prejudice. It is so ordered. New York, NY June" ' 2013 U.S.D.J. 35
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