Financial Guaranty Insurance Company v. The Putnam Advisory Company, LLC, No. 1:2012cv07372 - Document 33 (S.D.N.Y. 2014)
Court Description: OPINION. Based on the conclusions set forth in this Opinion, the Defendant's motion to dismiss the SAC is granted and the SAC is dismissed. It is so ordered. Re: 23 MOTION to Dismiss the Second Amended Complaint filed by The Putnam Advisory Company, LLC. (Signed by Judge Robert W. Sweet on 4/28/2014) (rjm)
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UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK ----------------------------------------x FINANCIAL GUARANTY INSURANCE COMPANY, Plaintiff,. 12 Civ. 7372 (RWS) - against OPINION THE PUTNAM ADVISORY COMPANY, LLC Defendant. ----------------------------------------x A P P E A R A N C E S: Attorneys for the Plaintiff QUINN EMANUEL URQUHART & SULLIVAN, LLP 51 Madison Avenue, 22nd Floor New York, New York 10010 By: Peter E. Calamari, Esq. A. William Urquhart, Esq. Sean Baldwin, Esq. Paul P. Hughes, Esq. Attorneys for the Defendant MILBANK, TWEED, HADLEY & MCCOY LLP 1 Chase Manhattan Plaza New York, New York 10005 By: James N. Benedict, Esq. Sean M. Murphy, Esq. Thomas A. Arena, Esq. Robert C. Hora, Esq. ~~--~~·~--:-~·· [ ' . ~ '1{)( i .3 i. l n:i<' ..,.. 1 l'- ··-·-·-~·-·"--:: ., . .. . 1. ' ' ·., I " ¢ i ¢ ¢ ¢ ' '. ¢ 1J \~ ·D1\i.... · · . . .~.... _a-·.···- ¢, .· · 1 1 ';, ;. . . . ::·;",. . ¢·-.·-· .. .. . . .. . . .. Sweet, D.J. The or has "Defendant") ("SAC") Complaint Insurance ( 2) Defendant Company Putnam Advisory moved filed to or dismiss and 12 (b) ( 6) and ( 3) LLC ("Putnam" Second Amended Financial "Plaintiff") negligent misrepresentation, Rules 9 (b) the Plaintiff by ( "FGIC" Company, alleging Guaranty ( 1) fraud, negligence pursuant to of the Federal Rules of Civil Procedure. Based on the conclusions set forth below, Defendant's motion is granted. I. Prior Proceedings On Putnam in negligent October which it 1, 2012, FGIC asserted misrepresentation filed an amended complaint causes negligence. and FGIC ("AC") Co., 7372, FGIC alleging fraud, 2013, Ins. 2013 WL 5230818 filed the for fraud, subsequently Defendant's motion to dismiss See Financial Guar. I" ) . against that asserted the same claims, within 20 days. ( " FG IC complaint action the AC was granted on September 10, 12 Civ. a of and Defendant moved to dismiss. No. filed SAC on with leave to replead Co. v. (S.D.N.Y. September Putnam Advisory Sept. 30, 10, 2013) 2013, again negligent misrepresentation and negligence. 1 The instant motion was and heard marked fully submitted on November 20, 2013. II. Allegations of the SAC The following facts, assumed to be true, are taken from the SAC: The allegations of the SAC arises out of Putnam's alleged misrepresentation of the management of a Collateralized Debt Obligation FGIC, which Pyxis (the ("COO") provided "Pyxis a called Pyxis ABS COO 2006-1 financial Guaranty"). for independently Putnam and (i.e., investors performs Pyxis as made in good and and it that it for profit misrepresentations the that do so interests when the Plaintiff to policy induce to to Putnam would select would in succeeds). alleges alone, faith investors designed these and insurance Plaintiff fraudulently misrepresented it, collateral guaranty ("Pyxis") the acting of long investment alleges that Plaintiff to insure $900 million of credit protection on Pyxis, which ensured that Pyxis would close, but that Putnam did not select the Pyxis collateral independently or in good faith. alleges that Instead, Plaintiff Putnam allowed the collateral selection process to be controlled by Magnetar Capital LLC 2 ("Magnetar"), a hedge fund (i.e., manager with short investments on Pyxis investments that would pay off if Pyxis defaulted) . CDO's or purchases, special purchase financial a assumes cash the risk of, such ("portfolio") , They take are bonds or loans, as flow-generating assets portfolio and variety of assets, mortgage-backed securities such as ("CMBS" issues of assets securities. A CDO's portfolio can commercial and or residential "RMBS," respectively), securities issued by other CDOs or credit default swaps referencing the those portfolio types are of obligations. essential collateral for the COO. debt Ideally, The payments) COO the uses that the assets that stream of cash flows to pay its ("CDS") pooled assets obligations portfolio generate a that that and repackaged them into tranches that can be sold to investors. include a vehicles (e.g., serve in as form the COO from mortgage expenses and make interest and principal payments to the CDO's note holders. Any remaining cash flows go to the COO's equity investors, are full any. Whether depends quality a COO' s primarily issued securities will on the COO' s (and subsequent performance) in the COO. Thus, for a structure be and if there repaid in the credit of the portfolio of assets CDO comprised primarily of RMBS, COO noteholders will be more likely to receive promised payments of interest and principal if the 3 rate of collection on the underlying individual mortgages is high. quality of the mortgages in the The higher the credit portfolio, payments to the COO note holders will be made. To buy their portfolio of assets, the more (SAC <JI coos likely 25) raise money from investors by issuing multiple classes of notes and equity interests. A COO's notes are not necessarily all subject to the same level of risk. Rather, representing different reward). of COO notes are issued in "tranches" levels of risk (and therefore potential This is achieved by creating a hierarchical structure note holders in the COO. The senior typically receives the highest "AAA" rating. tranches, are tranche of a COO "Super senior" COO which are intended to be even more remote from loss, senior to another tranche that is also rated AAA. Because the most senior tranches receive proceeds from the COO portfolio first, they bear the lowest risk of sustaining losses in the COO structure. (Id. <JI 26). Correspondingly, CDO notes do not all offer the level of anticipated return to their purchasers. same The interest on COO notes is set according to their expected level of risk. More junior tranches generally offer higher exposed to a higher risk of shortfalls, in the COO structure exposes them to 4 interest, but are because their position losses in the portfolio before the more senior notes. other hand, benefit (Id. receive from The more senior tranches, lower greater investment subordination and returns thus on the because they lower risk. carry 27). CJ[ The Pyxis CDO Pyxis was designed to be a "managed COO," whereby the assets for the COO were to be selected by a collateral manager, and the composition time. (Id. among other initial CJ[ 29). things, of the portfolio may selecting portfolio, underlying assets portfolio of (i.e., collateral the monitoring maturing assets consistent from with manager, assets inclusion credit (the "Pyxis underlying million par a from making buying and COO's status substitutions selling operative can value) included of the CJ[ the reinvesting payment proceeds "hybrid" COO: (SAC in the therefore, Portfolio") assets. to of the and the for greatly its both the to the agreements. impact a A COO's (Id.). $1. 5 billion portfolio "cash" and 44). Approximately assets in 5 in assets) performance and either lower or raise its risk profile. Pyxis was time Managing a COO portfolio typically involves, individual underlying assets, extent change Pyxis was "synthetic" 23% (or $350 comprised of "cash" assets, purchased. the Pyxis The that is, remaining Portfolio was investments T/% (or that Pyxis actually $1.15 billion par value) comprised of "synthetic" assets, of which are assets created through credit default swaps that referenced other asset-backed In (Id.). these protection to The the of (or losses) assets credit these not actually default counterparties performance returns securities swaps, in exchange Pyxis for sold credit premium payments. the to Pyxis under the credit default swaps. If well, Pyxis would Pyxis. 1 determine performed securities by owned would thus enjoy the premium payments without having to make any credit protection payments. However, make if the assets performed badly, then Pyxis would have to credit counterparty, protection to the credit default swap potentially up to the full notional amount of the referenced obligation. Pyxis perform payments through took (Id.) the selling risk that protection 1 the securities would not to Calyon Corporate and Credit default swaps are commonly used forms of credit protection (similar to credit insurance) in which, in return for the payment of premiums by one party (the "buyer" of credit protection), the counterparty (the "seller" of credit protection) agrees to make payments upon the occurrence of one or more agreed upon "Credit Events" (as defined in the CDS transaction documents), generally including, without limitation, a default by the issuer of a specified security to pay when due the principal of or interest on that security. (SAC 1 35). In general, the buyer of credit protection has a "short" position with respect to the specified security, since it will be entitled to a payment if the specified security defaults. Conversely, the seller-and through the seller, the guarantor-of credit protection has a "long" position with respect to the specified security, since it bears the risk of default by the issuer on the specified security. (Id.). 6 Investment Bank ("Calyon"). 'JI (Id. role of credit protection buyer, Calyon performed the 45). in that it paid the premiums to Pyxis under the credit default swap in exchange for protection payments in the event that one or more Credit Events occurred on any of the Portfolio assets. For most of the specified assets, Calyon represented acted meaning that market was the that ultimate participants achieved it short whose through only positions identity was series a as of an were never "back intermediary, held by other This disclosed. to back hedging counterparties. (Id.). transactions" between Calyon and other In this way, Cal yon effectively acted as a conduit for parties willing to take a short position on Pyxis acting as the "long" investor. default swaps counterparty well, would via flow between Calyon; if particular with Payments under the credit Pyxis the assets, and the referenced Pyxis would simply receive its premium, ultimate assets short performed which was paid by the short counterparty to Calyon and then passed from Calyon to Pyxis If (with Calyon keeping a portion of the premium for itself). the referenced obligated to make assets loss performed payments the short party via Calyon. that (Id.). Magnetar 7 badly, Pyxis would would ultimately flow be to Magnetar was founded in 2005. through 2007, management, Magnetar grew in terms of assets under from approximately $1.5 billion under management to approximately $9 billion. this 500% From its launch in 2005 growth occurred (SAC largely Plaintiff alleges that 36). <JI from profits from Magnetar's Magnetar would facilitate the creation of CDOs shorting scheme: with portfolios of RMBS and COO securities ultimately backed by RMBS. means Magnetar then shorted those very same CDOs, of credit default when they defaulted. the heavily United States against netted substantial began securities It did so by through the use of credit default swaps Magnetar to rise, backed by shorting subprime subprime default entered, Magnetar if one and Under or period, Magnetar coos the credit Credit more found bet (Id. RMBS Events would receive payments under the credit default swaps. this to mortgages. RMBS swaps. began occurred on any of the underlying RMBS and RMBS CDOs, During profits as default rates on subprime mortgages 37) . <JI and (Id.) In early 2006, in swaps, generally by it Magnetar (Id.). increasingly difficult to buy large amounts of credit default swap protection on subprime RMBS COO tranches, because investors willing to take the most risky, 8 there were not many equity stakes in CDOs. 'll (Id. Plaintiff 38). alleges that to solve this problem, Magnetar worked secretly with a number of collateral managers to launch a series of COOs which were designed by Magnetar to allow it to take short positions on billions mortgage bonds at below-market costs. as the equity investor procure investors (Id.). In return, for willing these to of dollars (Id.). coos, take making of subprime Magnetar served it long positions possible in the to COOs. Magnetar had control of the composition of the assets within the COOs. (Id.). Magnetar's short position to its equity position was often 6-to-1 or even higher, that when a Magnetar COO failed, meaning the payoff on Magnetar's short positions was at least six times the amount of Magnetar's equity investment in the COO. (Id. 'TI 42). Pyxis and Magnetar Putnam Pyxis. acted as the putative For its role as collateral manager, a fixed (or "senior") collateral fee of fifteen basis points, which, larger than a typical COO billion), first year. Putnam's (Id. fixed 'll 46). on Putnam was to receive the outstanding principal of the Pyxis COO per year. the size of Pyxis, manager or 0 .15% of Because of like all Constellation COOs, was far (with an initial deal volume of $1. 5 fee would be $2. 25 million for the Plaintiff alleges that Putnam's fixed 9 fee of 15 basis points ( 0 .15%) was higher than the fixed fee paid to the collateral manager in all but three of Magnetar's 26 CDOs, and higher than the total incentive fees, addition to additional points, fee, including both fixed and (Id.). on all but six of Magnetar's CDOs. its fixed fee, "incentive" (or Putnam was In an also to receive fee of five "subordinated") amounting to $ 0. 7 5 million for the first basis year. (Id. c:!l 47). Payment of this fee was dependent not on Pyxis performing well, but rather on Magnetar receiving its target return, in turn was effectively guaranteed by certain which provisions favoring the equity investors in the Pyxis governing documents. (Id.). and C)[ The fee subordinated 48) . structure allowed Putnam to fees long after Pyxis receive began to its fixed fail. (Id. The SAC alleges that Putnam was motivated to cooperate with Magnetar on Pyxis because Putnam saw Magnetar as the key to entering the structure finance COO market. (Id. c:!l 51). Indeed, Putnam was selected to serve as collateral manager for a second Pyxis COO, Pyxis ABS COO 2007-1 few months after Pyxis. The equity tranche of notes ("Pyxis 2"), which closed just a (Id.). ("Preference Shares") ("Class X Subordinated Notes") and the Preference Shares 10 had a nominal lowest issued by Pyxis were held equally by Magnetar and Deutsche Bank. Although the (SAC value of c:!l 53). $82.5 million, Magnetar discount, for addition, Magnetar a and total Deutsche payment and Bank of Deutsche bought $20. 625 Bank them paid a total paid a total of they held in Pyxis. Pyxis, $41. 25 for 75% In of $61. 875 meaning that they the shares and notes (Id.). like such a way that, million a (Id.) million. million for their Class X Subordinated Notes, each at as Magnetar' s other CDOs, was long as it avoided default, structured in the preference shares and Class X notes would receive much larger payments of principal five and years interest of its than the existence, senior notes by which time fully paid out-and they would receive a during the first they would both be large portion of their investment back within just over a year if Pyxis avoided default for that long, which it did. (Id. ')[ 54). This structure could only be altered with the consent of the preference shareholders: Magnetar and Deutsche triggers which would Bank. (Id.). Thus, have redirected funds the typical away from COO the holdings of Magnetar and Deutsche Bank to senior note holders in the event of certain events reflecting deterioration performance of the portfolio were removed, and eventual losses, (usually most risky) despite owning the (Id.). 11 the and Magnetar's risks equity tranche of notes in Pyxis, those of senior note holders. in and lowest were lower than Magnetar also received an upfront payment as a rebate to the (Id. <J[ price For Pyxis, positions taken by the Magnetar funds. million. purchase of long this was $4.5 55). Overall, Magnetar's long position on Pyxis by the time Pyxis defaulted was comparison, invested those Magnetar' s averaged coos. million bought approximate other position on approximately This short short $21 million. amounts position on protection the 7% of by Pyxis. the (Id. Pyxis a assets total 57). In in which aggregate <J[ from 56). <J[ coos estimate, to, on (Id. of it of $105 Magnetar also dealers who wished to offset their exposure; the protection amounted to a total of $60 million. (Id. <J[ 58). Putnam's Representations To FGIC In July 2006, Pyxis. As totally dependent collateral. with In all Putnam, coos, upon early the the with Calyon, financial success performance July 2006, of Calyon solicit credit protection for the Pyxis COO. that the COO would be managed by Putnam, portfolio acting independently interests of the investors. and (SAC 12 <JI in 62). began marketing of the Pyxis underlying contacted FGIC to Calyon represented who would select good was faith in the its best Under the deal Calyon presented to FGIC, FGIC was to insure all payments owed by its wholly-owned subsidiary FGIC Credit Products LLC under a credit default swap which would provide credit protection on the $ 900 million Super Senior Pyxis tranche. (Id. <JI The closing of 63). the Pyxis COO required FGIC or another investor to provide this insurance. (Id. To represented 64). <JI induce to FGIC issue that FGIC to it was the Guaranty, experienced an Pyxis and Putnam reputable collateral manager and that it would select the assets for the Pyxis Portfolio diligently and independently in the interest of long-term investors. (Id. 65-71). <][<][ Putnam represented that the "target portfolio" for also initially Pyxis would include at least $60 million of prime RMBS assets. (Id. Prime 72). <JI RMBS assets are RMBS in which the underlying loans are made to "prime" borrowers, that is, those with high credit scores and other characteristics indicating a high likelihood of repayment of the loan. Mid-prime and subprime RMBS, by contrast, consist of loans made to higher risk borrowers. Documents Pyxis Pitchbook provided and Offering by Putnam to Memorandum, FGIC, such contained as the extensive representations that Putnam would select the Pyxis portfolio and described Putnam's duties, strategy 13 and "long-term investment" goals in doing so. 'II'II 66-72, (Id. 86-87). Putnam made similar written and oral representations to FGIC in the course of FGIC's extensive due diligence for Pyxis. On August Putnam and meeting, FGIC Putnam, Putnam alone, Portfolio. during integrity. Putnam met as part face-to-£ ace. would select meeting of FGIC' s 'II (Id. due Putnam Putnam's diligence, During 77). this represented that Putnam, and manage the assets 'II 77). also made in the affirmed and Pyxis FGIC independence experience, to and In a follow-up due diligence call with FGIC, (Id.). again 2006, led by Carl Bell, (Id. this 3, 'II'II 73-74, 76-78). (Id. made clear that it would select and manage the assets for Pyxis, and that it had considerable experience in the RMBS market, particularly which the Pyxis in the market for subprime RMBS, Portfolio would primarily be composed. of (Id. 'II 78) . On August 9, 2006, Putnam provided an updated target portfolio that purported to show the final target portfolio for Pyxis for FGIC's review and analysis. portfolio showed Portfolio would times the portfolio. that be amount (Id. at prime of 'II 79) such least RMBS $145 assets, assets (Id. 'II 79). million almost previously of two This target the and slated Pyxis a half for the There were no prime assets in the final 14 portfolio. (Id. 11 75). FGIC would ultimately provide the Pyxis Guaranty. The Pyxis Guaranty insured payment of all obligations owed by FGIC's wholly-owned subsidiary, referencing Pyxis Swap, Credit Pyxis in Products (the return LLC FGIC Credit "Pyxis for Products LLC, Swap") . Calyon' s agreed that, if (Id. payment Pyxis 11 of under a CDS 8). Under premiums, defaulted, it the FGIC would make all the payments owed by Calyon on its underlying swap with Pyxis. (Id.). Magnetar's Control Of Putnam And Pyxis The SAC alleges that Putnam's representations to FGIC as to its independence were false. Plaintiff's allegations as to Magnetar's control over Pyxis include the following: ¢ Magnetar selected Putnam to act for Pyxis. (SAC 11 91) . ¢ Magnetar was actually in control over the Pyxis asset selection process, and Magnetar used Pyxis as a vehicle for its short strategy. (Id. 1111 91-92). According to the testimony of Carl Bell (Head of Investments at Putnam), Jim Prusko (Magnetar executive) approached Bell to ask if Putnam would act as the collateral manager for Pyxis. Prusko used to work for Putnam and supervised Bell while he was at the company. Prusko made clear to Bell that Pyxis would have a hybrid structure focused on "subordinate BBB rated residential bonds." (Id. 11 92). 15 as the collateral manager ¢ Prusko and Michael Henriques (Deutsche Bank, Magnetar' s coequi ty investor on Pyxis) discussed Magnetar's COO shorting strategy with Bell. (Icl. errerr 93-95, 99-101, 110, 115, 130, 145) . ¢ Prusko insisted that Putnam would "have to play ball" on Pyxis, and executed a "behind the scenes" side letter giving Magnetar and Deutsche Bank "veto rights over any" collateral purchased for Pyxis. ( Icl. errerr 93, 95) . ¢ Prusko and Bell had numerous communications in which Prusko made clear which collateral he wanted to include in the Pyxis portfolio. Prusko told Bell that Magnetar would "source the COO exposure synthetically" and that "[w]e will buy COO CDS on names of your choosing." Prusko further told Alex Rekeda (Calyon) that he did not want Putnam "buying COO' s without us knowing about it," and that he thought Putnam was "on the same page with us buying the cdo eds [sic]." (Id. errerr 91-93, 95-107, 120). ¢ Prusko, Bell and other Putnam employees had communications in which Prusko made clear Magnetar's intention to short tens of millions of dollars of the collateral he was selecting for Pyxis. In one communication, Prusko suggested to Bell that Putnam increase the synthetic portion of Pyxis, which would allow Magnetar to short more of the assets in Pyxis. (Id. err 98). Prusko explained: "It's very hard to get off sizable COO CDS trades unless they're done against a deal, and this is a natural delta hedge against our equity." Bell replied: "Got it. So when we find a deal we want to buy, we shouldn't put in an order with the syndicate desk but have Calyon broker a synthetic trade between you and [Pyxis] at an agreed upon level?" Prusko responded: "That would be preferable .... " (Id. err 98; see also id. errerr 91-93, 98-99, 109). ¢ Bell and Rekeda discussed the importance of concealing Magnetar's involvement in Pyxis. As Rekeda explained: "any time a manager is trying to negotiate a structure, while mentioning the equity investor, it immediately raises a redflag . . . . we should try to offer [the investor] some other rationale rather than interests [sic] of the junior investors." (Id. err 113). ¢ Magnetar selected Putnam to act as collateral manager for Pyxis 2 due to its satisfaction with Putnam's cooperation on Pyxis. (Id. errerr 51, 91, 112). 16 ¢ After Pyxis defaulted, Bell joked with Prusko about how much money Magnetar had made from its short-selling strategy. (Id. 'JI 115). Putnam's investments in the Pyxis coos itself were allegedly suspicious: ¢ Putnam invested over half of Pyxis' cash allocated to COO investments in four other Magnetar coos, even though there were 223 ABS coos issued in 2006 alone from which Putnam could have selected. (Id. 'JI 117). ¢ There was a high correlation between the issuers of securities included in Pyxis' portfolio and the issuers of securities included in other Constellation coos. 55% of the referenced RMBS or CDOs in the Pyxis Portfolio were included in at least five other Magnetar coos, and 28% of referenced RMBS or coos were included in at least ten other Magnetar CDOs. (Id. 'JI 121). There were over 1,000 RMBS and 500 ABS COOs issued in 2005-2007. (Id.). Economic consultants retained by Plaintiff concluded that the probability of this happening by chance was less than 1 in a billion. (Id. 'JI 122). ¢ Putnam concealed the extent to which Pyxis sold protection on the ABX Index of low-rated RMBS. The ABS Index is an independent benchmark de:signed to measure the overall value of mortgages made to borrowers with subprime or weak credit. Magnetar pushed Putnam to push the limit represented to Pyxis investors on investment in the ABX Index to a level more than three times the specified concentration limit. This led to a greater concentration of risk on a small number of transactions and worked in favor of Magnetar's short investments. (Id. 'JI 123). Plaintiff believed that more likely the to alleges assets default that Maqnetar than the 17 both Putnam selected assets for and Magnetar Pyxis would be Putnam would have selected had it acted independently. 'JI (Id. Magnetar's coos defaulted in greater numbers, quickly, than comparable coos. On April 30, Pyxis notes that 2008, the credit rating of the tranche of FGIC had insured incurred potential the Pyxis Guaranty. (the "Super Senior Tranche") Ultimately, liability (Id. and defaulted more 'l!l56). (Id. was downgraded from AAA to C. FGIC Moreover, 155). of up Pyxis defaulted and to $900 million under 'JI 1'52). III. Discussion A. The Applicable Standard Putnam negligent 12 (b) ( 6) has moved to misrepresentation and, dismiss and FGIC' s negligence to the extent applicable, all allegations inferences are in the drawn in favor of 12 F.3d 1170, issue a plaintiff is entitled whether not the the claims." whether claimant Ci v. 0 County of Sufi olk, 18 the 1174 will P. N. Y. v. Am. all and Mills prevail to Real v. "The 1993). evidence First Rule true, pleader. ultimately offer to 12 (b) ( 6) , (2d Cir. to fraud, and the PSLRA. complaint are accepted as Polar Molecular Corp., is R. of pursuant Rule 9 (b) On a motion to dismiss pursuant to Fed. factual claims but support Estate Solutions, 261 Pond, Inc. v. cert. denied, F.3d 179, 187 (2d Town of Darien, 519 U.S. Cir. 2001) 56 F.3d 375, 808, 117 S. Ct. Villager (quoting 378 50, (2d Cir. 136 L. 1995), Ed. 2d 14 ( 1996)) . To "a 12 (b) ( 6), survive complaint accepted as true, 1940, 173 L. Twombly, (2007)) . This "nudge[] their satisfy the 9(b), Iqbal, 570, not only claims 556 U.S. 127 S. intended Ct. " ( 1) 108 specify fraudulent, Rule matter, across 663, 129 S. Ct. to be an 167 L. Ed. onerous line 2d 929 the burden, as order to to in from fraud, v. conceivable sufficient the Corp. 550 U.S. at 570. that sound in requirements complaint in Rule the pleading standard mandated by the Private Corp. v. Merrill ( "PSLRA") , Lynch (2d Cir.2012). Under Rule the that statements identify the the speaker, 19 set "must forth Anschutz ( 2) factual 662, 1955, Securities Litigation Reform Act of 19 95 F.3d 98, to (quoting Bell Atl. facts heightened pleading as well as 78u-4 (b)." pursuant sufficient (2009) allege claims Twombly, For dismiss 'state a claim to relief that is plausible 2d 868 is to contain 544, need plausible." must Ed. 550 U.S. plaintiffs motion Ashcroft v. on its face."' 1937, to a 9 (b), & Co., Inc., § 690 a plaintiff must plaintiff ( 3) 15 U.S. C. contends were state when and where the statements were were fraudulent." 170 a (2d Cir. 2004)) forth ( 4) explain why ( 1) "specify on each which formed," and a ( 3) the Under the PSLRA, misleading belief statements 355 F.3d 164, Chang, (quotation marks omitted). facts misleading was and (quoting Rombach v. Id. plaintiff must "set made, that statement," ( 2) statement is a "state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." Broudo, 544 U.S. 336, 345 Id. (2005)) (quoting Dura Pharms. , Inc. v. (quotation marks and brackets omitted). B. The SAC Has Failed To State A Claim For Fraud As fraud previously noted under New York law, a in fact, to justifiable damages." Partners, 2009)) . fraud reliance, FGIC LP v. 818 534, 536 2013 knowledge WL to of reliance 5230818, Seward & Kissel, at its state a allege claim for "a material falsity, by the *2 an (quoting plaintiff and Eurycleia 910 N.E.2d 976, LLP, intent 979 (N.Y. "[L]oss causation is an element of New York common law action." 815, I, I, plaintiff must misrepresentation of induce FGIC Gordon (2d Cir. Partners 2008) (3d Dep't 2002)) (citing v. Blumenthal, Laub v. 293 Faessel, Fed. 745 App' x N.Y.S.2d To adequately allege loss causation, a plaintiff "must plead facts that indicate that the information 20 concealed by the defendant['s] misrepresentations was the reason the transaction turned out to be a losing one." Bear, 856499, at *8 v. Bank & Co., Stearns (S.D.N.Y. Gelt Funding No. Inc., Feb. 27, Corp., 12 Civ. 2013) 27 Dexia SA/NV v. 476l(JSR), 2013 WL (quoting First Nationwide F.3d 763, 769 (2d Cir. 1994)) (quotation marks omitted). Reraising an argument previously it made, FGIC contends that it is not required to allege loss causation under New York common law and Insurance Law § 3105, which entitles an insurer to "avoid any contract of insurance or defeat recovery thereunder" if it was induced to enter into an contract by a material misrepresentation of fact. Law § Inc., 3105 (b); also MBIA. 936 N.Y.S.2d 513, FGIC contends made see to an § 523-24 3105(b) Co v. Ins. (N.Y. II") Loans, insurance policy without Inc., (affirming Insurance Law §§ Ct. 2012) Home Ins. Loans ("MBIA I"). entitles an insurer to recover "payments without proof of loss causation. Home See N. Y. Countrywide Sup. insurance MBIA Ins. 105 A.D.3d 412, lower resort court's 3105 and 3106, 412 to Corp. (1st holding rescission" v. Dep't that Countrywide 2013) ("MBIA "pursuant plaintiff was not and to required to establish causation in order to prevail on its fraud and breach of contract claims"); see a_[so MBIA I, 936 N. Y. S. 2d at ("It is without basis in case law to require 21 523-24 [the plaintiff] to provide a causal link between the alleged misrepresentations and [the losses suffered by the plaintiff]."). FGIC I previously held that the law on fraud in the inducement of an insurance contract and MBIA I was inapplicable because Putnam "did not apply for any insurance, nor did it enter into any sort of contract-insurance-related or otherwise2 0 13 WL 5 2 3 0 8 18 , at * 4 . with FGIC." is nevertheless applicable misrepresentations insured, made by FGIC contends that § 3105 because the it applies applicant for not only insurance to or the but also to misrepresentations made "by the authority of" the applicant or the insured. See N.Y. Ins. Law§ 3105(a) (defining "representation" as "a statement as to past or present fact, made to the insurer by, or by the authority of, the applicant for insurance or the prospective insured"). Calyon was the applicant for insurance and the insured under the Pyxis Guaranty. neither a party to the swap with FGIC's misrepresentations 62-63, 88). Putnam was Pyxis Guaranty nor a party to Cal yon' s subsidiary. thus 3105 2, 7, <][<][ must to be apply. Putnam's made "by alleged the authority of" the authority of" Calyon for Calyon, Putnam must have acted as Calyon's agent under New York law. § (SAC See Falcon To Crest Diamonds, 22 act Inc. "by v. Dixon, 655 N.Y.S. 2d 232, 236 (N.Y. Sup. Ct. 1996) (construing "by the authority of" to mean that "a party may make a material representation through a broker") . "Courts in this District have required that facts establishing agency be pled with Rule 9 particularity where the agency relationship itself was an alleged fraud." Meisel (S.D.N.Y. (citing Kolbeck v. 557, 2009) 569 Supp. (S.D.N.Y. 2d 112, v. 121 LIT Am., of the relationship "is an integral element of an alleged fraud, courts 9 (b) particularity"). inference that facts establishing agency be pled with Rule The SAC alleges Putnam a 807 F. agency required the (if Supp. purported have 2011) 923 F. Inc., v. Maytag Co., see also Woods (E.D.N.Y. element 651 F. Supp. 2d 98, 111 n.6 Grunberg, 1996)); integral acted facts to support an Calyon's as no agent or broker in obtaining the Pyxis Guaranty or when it made its representations to FGIC. FGIC contends that "most of Putnam's misrepresentations were made in offering materials [alleged] . which, in turn, were prepared by Calyon and were presented by Calyon to FGIC" (Opp. at 12), but the SAC does not allege that Calyon directed Putnam's statements in the offering materials regarding the Pyxis were "prepared by Instead, Cal yon" and as FGIC concedes, "presented by the materials Cal yon to FGIC." As such, the SAC does not allege sufficient facts for an (Id.). inference when Guaranty. it that made Putnam was its acting "by the statements in 23 the authority" offering of materials Cal yon or to FGIC. In any event, where an that insurer is, to seeks rescind "is never to the '"avoid abrogated any contract, N.Y. recovery thereunder." law 3105 contemplates two situations: § Ins. by contract or Law (ii) implication" insurance," seeks and to "defeat New York common 3105. § of (i) "must be held no further changed than the clear import of the language used in a statute absolutely (McKinney present are requires." 2013) here. Neither Rescission in pri vi ty of Park & Similarly, FGIC Guaranty by party to the l' 301, in § cmt. 2 3105 is C' See, e.g., 143 "def eat suit Guaranty. proposed § Co. Ins. of Penn. v. FGIC has (1st Dep't 1920). and rescission is not available here. 2 cannot bringing Law ,, available only where the parties 180 N.Y.S. no contract with Putnam, Stat. situation contract. Pollard Co., N.Y. ai;rainst recovery" Putnam, Consequently, § under as 3105 the Putnam is Pyxis is not a inapplicable here. Turning sufficiently pled to that loss causation, Ma9netar's the alleged SAC control has of collateral selection process for Pyxis caused FGIC's losses, 2 not the as FGIC contends that where a plaintiff seeks rescission, the link between the misrepresentation and the loss ultimately suffered is irrelevant, thus loss causation need not be pled here because FGIC seeks rescissory relief. However, as noted, rescission is not available here. 24 opposed to the global financial crisis. Allegations of loss causation are not subject to the heightened pleading standard of Rule 9(b); they need standard in Rule 8(a), . merely to satisfy the notice under which "a short and plain statement that provides defendants with some indication of the loss and the causal connection that the plaintiff has Freudenberg v. suffice. 171, 202 544 U.S. 2011) 336, (2005)); 347 ERISA Litig., & see there 586 is no also F.Supp.2d heightened For pleading purposes, caused the loss was misrepresentations investor." Corp., 763 F. re Bristol 148, 163 Supp. 712 F. Inc. 2d 423, Myers (S.D.N.Y. standard loss in mind" will for zone omissions of alleged Lentell v. Merri_Il Lynch & Co., Sec. that causation). "if the by (S.D.N.Y. Co. loss risk Sec., (noting 2008) causation exists the 488 2d Broudo, Inc. Squibb pleading Supp. v. In re Bear Stearns Co., In within and Fin. (quoting Dura Pharms., 2010) (same); Litig., E*Trade (S.D.N.Y. Derivative, 173 pleading risk that concealed by the a disappointed Inc., 396 F.3d 161, (2d Cir. 2005). When a loss occurs around the time of a marketwide economic collapse, loss causation issues are difficult. with a "[W]hen the plaintiff's loss coincides marketwide phenomenon causing comparable losses to other investors, the prospect that the plaintiff's 25 loss was caused by the fraud decreases," and the plaintiff's claim fails when "it has not adequately ple[]d facts which, if proven, would show that its loss was caused by the alleged misstatements as opposed to intervening events." F.3d 161, 174 (2d Cir. 2005) . To plead loss causation in the backdrop of a marketwide the Lynch 396 v. downturn, Merrill Co., Lentell & complaint inference that must facts that support "an . plaintiffs would have been spared all or an ascertainable portion of that 175; see also Lattanzio v. 158 (2d Cir. allege 2007) allege "facts rough proportion misstatements") . would of absent Deloitte (under that loss Rule allow the Therefore, & the a plaintiff a fact-finder whole loss state a to to Id. at 476 F.3d 147, Touche LLP, 8(a), to fraud." need only ascribe some [defendants' claim, the SAC J must allege that Putnam's misstatements regarding its independence or omissions regarding Magnetar's involvement in Pyxis caused some proportion of the loss suffered by FGIC. The SAC alleged facts: alleges First, COOs defaulted in than comparable causation with the following compared to non-Magentar coos, greater coos. loss numbers, (SAC and 'JI 156) . Magnetar defaulted more Second, certain quickly assets selected by Magnetar for Pyxis were significantly more likely to default than assets that Putnam 26 would have selected acting independently, namely that $145 original target portfolio was (Id. to Third, 157). <JI have been million prime swapped with $145 RMBS in the subprime RMBS. the assets in the Pyxis Portfolio alleged selected by Magnetar defaulted more other assets in the Pyxis portfolio. (Id. quickly than 158-60). <J[<J[ Fourth, $95.5 million of known Magnetar-selected assets defaulted before the events that allegations, precipitated taken together, the financial allow do not crisis. for an SAC does These inference of allege how loss causation. As Magnetar's Pyxis to Guaranty an initial selection default, and of the FGIC's matter, the assets in event that loss. (Id. the Pyxis would Portfolio trigger The 8). <JI not pool caused the Pyxis of assets alleged to be controlled by Magnetar represented roughly 11% of the $1. 5 billion collateral pool, how the selection of safer assets prevented a default. and the SAC does in this 11% pool would have Similarly, the SAC alleges not allege that $145 million of prime RMBS was swapped with $145 million of subprime RMBS, but this represents only 10% of the portfolio. Putnam also represented to FGIC in the due diligence process that the Pyxis Portfolio would be composed primarily of subprime RMBS. In addition, the SAC 27 does not allege that but for Magnetar's override responsibilities, of Putnam's Putnam would have collateral management selected other assets would have performed better than those in the that Pyxis collateral Even though Putnam's original target portfolio for Pyxis pool. included a substantial amount of prime RMBS that was swapped for subprime RMBS, the SAC does not make any allegation that there are any set of assets Putnam could have selected that would have complied with the Pyxis eligibility requirements and constraints set forth in the Offering Memoranda and still would have avoided Similarly, default. FGIC' s allegation that $ 95. 5 million of known Magnetar-selected assets defaulted before the events that precipitated the financial crisis does not promote an inference that the defaults were caused by anything other than marketwide Even if the events leading up to the market downturn in 2008. Magnetar-selected assets quickly than other alleges that this ahead of the in the assets, 11% of remaining Pyxis there the Pyxis is portfolio defaulted more nothing portfolio assets in the defaulting was SAC that 4. 2 months sufficient to cause Pyxis to default ahead of any market-wide downturn or isolates Pyxis' default in any reasonable manner from the market downturn. The SAC provides a comparison that shows that compared to non-Magnetar coos, Magnetar 28 coos defaulted in greater numbers, (SAC <J[ and defaulted much more quickly, 156) . As of December 2008, than comparable coos. when Pyxis defaulted, 94% of Magnetar's 2006-vintage mezzanine CDOs had defaulted, while only 40% of non-Magnetar 2006-vintage mezzanine coos had done so. of April 2012, had As all 18 of Magnetar's 2006-vintage mezzanine CDOs defaulted while only 72% of 2006-vintage However, mezzanine CDOs had defaulted. non-Magnetar this comparison does not necessarily lead to an inference that Putnam's misrepresentation caused FGIC's losses. The comparison itself is problematic, as the SAC does not plead what exactly made the Magnetar and nonMagnetar coos comparable, including whether the alleged Magnetar CDOs or comparable CDOs had the same asset eligibility criteria, payment waterfall, trigger structure or other features of Pyxis. FGIC alleges that the CDOs compared have identical vintages and collateral classes, but FGIC fails to allege any basis that vintage and collateral classes are more significant than any of other structural features. Magnetar CDOs and the FGIC further fails hundreds of to show how the non-Magnetar CDOs issued during 2006 could have had identical collateral classes and can be compared with each other given that they likely all included different sets of RMBS and CDOs as collateral, not provide any link as to this Portfolio and its default. 29 comparison and the SAC does and to the Pyxis As with the AC, alleged facts collateral sufficient conforming to Pyxis' to ascribe "allege [ avoided (citing Lentell, some facts there was any pool default while that would allow Westland and Police 2d 705, 715 than Fire Ret. (S.D.N.Y. Accordingly, external Sys. See FGIC I, :2013) Since the SAC has f actf inder loss market v. a to City Inc., (quoting Lentell, to the forces. MetLife, of still 396 F.3d at 174). rough proportion of the whole rather 174) . have that default would trigger the loss to FGIC, misstatements," Supp. infer detailed eligibility criteria. 2013 WL 5230818, at *3 failed to could that only Pyxis' FGIC has not provided the SAC with any of 928 F. 396 F.3d at the SAC has failed to plead loss causation, and FGIC's fraud claim must be dismissed. The SAC Has Failed To State A Claim Negligent Misrepresentation C. For Negligence Or In granting Putnam's prior Motion to held that to prevail on negligent misrepresentation, FGIC's claims Dismiss, for FGIC negligence I or FGIC must allege facts showing that the relationship between FGIC and Putnam was "sufficiently close as to approach that of pri vi ty'" since it was undisputed that "there is no actual privity between the parties." WL 5230818, at *4 (quoting Anschutz 30 Corp. v. FGIC I, Merrill 2013 Lynch & Co., Inc., 690 F. 3d 98, 114 As in its (2d Cir. 2012)). opposition to the previous Motion to FGIC contends that a "special relationship" was formed Dismiss, between Putnam and FGIC as delineated in Bayerische Landesbank, New York Branch v. Aladdin (2d Cir. 2012). special relationship, Putnam's off ices The also from SAC Putnam Capital Management LLC, 692 F. 3d 42 The SAC provides new allegations regarding this including and phone alleges "FGIC representations its and sought and assurances professional meeting Putnam and FGIC. received to the directly effect that expertise to manage These representations were made "directly to FGIC 2006, August 7, well as in "the Pitchbook, 2006, the Pyxis and (SAC on August 3, for at select 180) . collateral a independently <JI the to interviews between that Putnam would exercise references Portfolio." and on other occasions," as Offering Memorandum, Term Sheet, and Collateral Management Agreement." (Id.). The SAC alleges that FGIC which "created relied relationship' (Id. on the assurances, a 'special of trust and confidence between Putnam and FGIC." 'JI 181). As an relied expressly "[T]he Pyxis initial matter, disclaim Pitchbook any the documents creation expressly 31 of upon a which special stated that FGIC duty. "[n] one of the Putnam Advisory Company, LLC . ' or any of their respective affiliates are acting as a [a] fiduciary capacity investor ff [ i] n respect FGIC of 2013 I, financial the WL transaction 5230818, Similarly, the "Presentation for Investors" July and cited SAC (SAC 2006 "[n]one of . in the ~~ [a] that Ex. 4 at 2). "investors must Corp. Dep't v. Ex. (Id. numerous Co., 'Debt disclaimers due diligence"); & 821 . , or any F. ff Such disclosures preclude manager Investor and 2d e.g., where 1749 misrepresentation "'Preliminary plaintiff to BadenWiirttemberg 624 (S.D.N.Y. negligent misrepresentation claim where "the (4th claim Offering perform its v. Goldman, 2011) own Sachs (dismissing [Offering] expressly disclaimed any special relationship"). 32 M&T contained Presentation' advised 616, See, 68 A.D.3d 1747, Ltd., negligent Landesbank Supp. adviser including the merits and 1 at iii). CDO VIL collateral and that The Pyxis Offering Memorandum states (dismissing COO Circular' states rely on their own examination of the co- Gemstone 2009) against dated financial any claim of a direct fiduciary or similar duty. Bank Pyxis, 68-18), n.3). to any investor issuers and the terms of the offering, risks involved." to any *4 . the Putnam Advisory Company, LLC . fiduciary capacity (Hora Deel. at for of their respective affiliates are acting as nor in advisor nor in Circular FGIC contends formed, notwithstanding similar language that was a this special relationship language contained in in the was documents, Bayerische the still as offering circular but the Bayerische court still held that a "legal duty" arose between the third-party beneficiary of notes and the notes issuer. at 59. Id. As previously noted plaintiff, Bayerische Landesbank by a COO (the "Alladin COO") and circumstances purchaser, the Bayerische, in finding a issuer legal to between of the marketed and In ignoring the duty totality made the had purchased notes sold 692 F.3d at 46. Bayerische emphasized the Alladin, and language ("BL") I, that was structured, managed by defendant Alladin. disclaimer FGIC in BL and representations third-party including the issuer's marketing materials, notes face-to- face meetings with the issuer and statements made by the issuer, which were enough to conclude that a sufficiently close relationship had developed between Bayerische and Alladin. at 59. Notably, Bayerische manager had of the Bayerische. Id. Unlike an Portfolio the "end and portfolio aim" on Management to behalf Agreement Id. in install Aladdin as the of noteholders and the at 60. in Bayerische, FGIC was 33 the guarantor of the third-party swap between Calyon and a FGIC subsidiary and not a direct third-party beneficiary. Section Management Agreement thereunder, and does not name FGIC. While FGIC' s benefit. of third-party critical to Collateral beneficiaries 2 at § 20). of the the "end and aim" of Pyxis was not for the the holder waE> much closing investing the COO marketer and manager, notes the (Hora Deel. Ex. Bayerische, In between Alladin, third-party the participation was (SAC 'II 64) , transaction FGIC's identified 20 closer in relationship and Bayerische, scope and a shared goals than the one a guarantor of a transaction has with a COO manager. FGIC's Credit transaction," 435, 483 benefit N.E.2d 233 alleged sufficient guarantor, N.Y. could not Alliance, 110 Shepard, was 65 (emphasis 236, have a "end N. Y. 2d at omitted) 135 N.E. facts the 275 to Bayerische, Corp. v. Arthur Andersen & Co., 435, would the N. Y. S. 2d Glanzer v. and FGIC has not FGIC, as a Putnam with that can be if not completely one (quoting Credit Alliance 65 N.Y.2d 536, 550, 493 N.Y.S.2d 483 N.E.2d 110 (N.Y. 1985)). FGIC from 4 93 of how demonstrate 692 F. 3d at 60 aim (quoting "'so close as to approach that of privity, with it.'" 54 9, (1922)), relationship and FGIC' s employ contends that a special known reliance on Putnam's its superior knowledge 34 of relationship did representations the interests arise that of it long investors. superior However, knowledge as and previously reliance by requisite special relationship. see also MBIA A.D.3d 287, Ins. 297 Corp. v. noted FGIC FGIC I, does I, not Putnam's create the 2013 WL 5230818, at *4; Countrywide (1st Dep't 2011) FGIC in Home Loans, Inc., 87 (finding that "[t]he claim that [the defendant] had superior knowledge of the particulars of its own business practices is action [for "ha [d] failed to allege commercial length negligent entities business insufficient to sustain misrepresentation]" facts engaged in anything 78 A.D.3d more Sebastian 446, 447 cause of the showing that these transaction"); Deutsche Bank AG, where [a] plaintiff sophisticated than an Holdings, (1st Dep't arm's Inc. 2010) v. ("[The plaintiff J's alleged reliance on defendant's superior knowledge and expertise . . ignores the reality that the parties engaged in transactions arm's-length sophisticated business type of] fiduciary pursuant entities duties that to [necessary between not do contracts give to to support rise a [the negligent To increase the scope of the "orbit misrepresentation claim]"). of duty" a defendant owes to include any party who relied upon a defendant privity and the exists significantly between broaden relationship" cases, in Bayerische. defendant's the the a superior party scope of and knowledge the liability where defendant under no would "special factor the Circuit Court warned against Bayerische, 692 F.3d at 59 35 ("[I]n the absence of privity, the scope of the 'orbit of duty' to third parties must be carefully examined 'to limit the legal consequences of wrongs to a controllable exposure to 65 N.Y.2d 1985))) . degree liability.'" 399, 402, and protect (quoting Strauss v. 492 N.Y.S.2d a "special Accordingly, 555, against Belle Realty Co., 482 N.E.2d relationship" established based on the allegations crushing has 34 not contained in the SAC, (N.Y. been and FGIC has failed to allege facts sufficient to state a claim for negligence or negligent misrepresentation. IV. Conclusion Based on the conclusions set forth above, the Defendant's motion to dismiss the SAC is granted and the SAC is dismissed. It is so ordered. New York, NY April 2014 i8' , I 36
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