Abu Dhabi Commercial Bank v. Morgan Stanley & Co.
888 F. Supp. 2d 431
S.D.N.Y.2012Background
- Cheyne Finance SIV issued four note types (senior notes/CP, MCNs/MTNs, junior notes, and CCNs) to finance long-term assets, including RMBSs.
- Morgan Stanley acted as Arranger and Placement Agent, distributing IMs and selling documents that included ratings and terms.
- Moody's and S&P are NRSROs; their ratings affected investor access and regulatory considerations.
- Cheyne SIV encountered enforcement triggering when Major Capital Loss Test was breached in Aug. 2007, leading to liquidation and receivership.
- Plaintiffs, large institutional investors, sue for common law fraud and negligent misrepresentation against Morgan Stanley and the Ratings Agencies; Morgan Stanley and the Agencies move for summary judgment on fraud claims.
- Procedural posture: prior rulings limited to fraud and aiding-and-abetting fraud claims; NY Court of Appeals later clarified Martin Act preemption issue affecting standing and claims.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Standing | Assignees have rights; SEI, Butterfield, Commerzbank, Hapoalim each have standing to sue on assigned or inherited claims. | No valid assignment or lack of legal title defeats standing; some plaintiffs lack evidence of assignment from underlying funds. | Standing recognized for SEI; Butterfield, Commerzbank, and Hapoalim claims either dismissed or unresolved based on assignment evidence. |
| Actionable misstatements | Ratings and related statements by Morgan Stanley and the Agencies are actionable misstatements; at least some ratings were false or misleading and disbelieved when made. | Credit ratings are opinions; actionable only if disbelieved when made and false; attribution of ratings to parties is contested. | Ratings attributed to Agencies; Morgan Stanley may be liable only for aiding and abetting if at all; Rating Agencies’ ratings can be actionable where misstatement and disbelieved when made are shown. |
| Scienter | Evidence shows reckless or conscious disregard by Rating Agencies; some Moody's/S&P employees expressed concern about data quality and model adequacy; plaintiffs may infer intent. | No direct admission of false intent; disclosures of risk and hindsight defense; no motive shown. | Summary judgment denied for Agencies on scienter; evidence supports at least reckless conduct; issues for jury remain. |
| Reliance | Investors relied on high ratings due to limited access to underlying data; reliance inferred from guidelines and statements by investors and CSAM/MOFs; ratings were a substantial factor for many plaintiffs. | Some investors invested before final ratings; individual reliance must be shown; not all plaintiffs prove substantial reliance. | Issues of fact as to reliance remain for many plaintiffs; some claims dismissed for lack of evidence of substantial reliance. |
| Loss causation | Losses were caused in part by misrepresentations in ratings; not all losses must be tied to one cause; market disruption acknowledged but not exclusive cause. | 2007 liquidity crisis explains losses; ratings downgrades alone cannot prove loss causation; need linkage to fraud. | There is a triable issue as to whether the ratings caused some portion of losses; cannot be entirely dismissed on market-wide crisis grounds. |
Key Cases Cited
- CPC Int’l, Inc. v. McKesson Corp., 70 N.Y.2d 268 (1987) (fraud scheme liability not limited to those who utter misstatements)
- Fait v. Regions Financial Corp., 655 F.3d 105 (2d Cir. 2011) (opinions actionable if misstate belief or lack basis; applies to NY fraud claims)
- M & T Bank Corp. v. Gemstone CDO VII, Ltd., Not provided in text (cited as M & T Bank Corp. v. Gemstone CDO VII, Ltd.) (2009) (ratings as present analysis of creditworthiness; not mere puffery)
- In re Lehman Bros. Mortgage-Backed Sec. Litig., 650 F.3d 167 (2d Cir. 2011) (ratings claims analyzed under expert provisions; actionability of ratings)
- Mandarin Trading Ltd. v. Wildenstein, 16 N.Y.3d 173 (2011) (limits on actionable opinions; puffery exception)
- City of Omaha, Neb. Civilian Empls’ Ret. Sys. v. CBS Corp., 679 F.3d 64 (2d Cir. 2012) (ties securities law standards to common-law fraud considerations)
- Merrill Lynch & Co. v. Allegheny Energy, Inc., 500 F.3d 171 (2d Cir. 2007) (loss causation and market expectations; fraud damages in securitization context)
- AIG Global Sec. Lending Corp. v. Banc of America Sec., LLC, 646 F. Supp. 2d 385 (S.D.N.Y. 2009) (loss causation in securitization contexts; applicable standards)