751 F. Supp. 2d 652
S.D.N.Y.2010Background
- King County and Iowa Student Loan Liquidity Corporation filed a putative class action for common law fraud arising from Rhinebridge, a structured investment vehicle collapse.
- The First Amended Complaint added Morgan Stanley as a defendant, alleging it acted as co-arranger and placement agent for Rhinebridge.
- Plaintiffs allege Morgan Stanley, with IKB and rating agencies, designed, marketed, and maintained Rhinebridge and engaged the rating agencies to rate it.
- Allegations include Morgan Stanley pressuring rating agencies to allow high concentrations of risky assets, causing Rhinebridge to hold hundreds of millions in poor-quality assets and Countrywide exposure beyond limits, and breaching its capital and liquidity tests.
- Plaintiffs claim Morgan Stanley helped issue false and misleading Top Ratings and disseminated them through private placement memoranda and selling documents, earning substantial fees.
- Morgan Stanley moved to dismiss for failure to plead misstatement, reliance, or scienter and for aiding and abetting, but the court denied the motion in full.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Actionable misrepresentation | King County asserts Morgan Stanley insiders caused false ratings and core documents. | Morgan Stanley contends ratings were statements of rating agencies, not Morgan Stanley, and no direct misstatement by Morgan Stanley. | Misrepresentation adequately pled under group pleading; Morgan Stanley an insider for purposes of group pleading. |
| Reasonable reliance | King County relied on Top Ratings and non-public information known to Morgan Stanley. | Reliance is unreasonable due to disclaimers and lack of direct Morgan Stanley statements. | Reliance pled as reasonable under Abu Dhabi framework; disclaimers and diligence requirements do not defeat reliance here. |
| Scienter | King County pleads motive, opportunity, and conscious misbehavior or recklessness by Morgan Stanley. | Morgan Stanley argues insufficient evidence of scienter. | Sufficient facts alleged to infer conscious misbehavior or recklessness and motive to commit fraud. |
| Aiding and abetting common law fraud | Morgan Stanley aided fraud by providing substantial assistance to rating agencies and IKB. | Argues lack of direct misstatement attribution and knowledge. | Plaintiffs pled facts showing Morgan Stanley's actual knowledge and substantial assistance; aiding and abetting claim survives. |
Key Cases Cited
- Ouaknine v. MacFarlane, 897 F.2d 75 (2d Cir.1990) (group pleading admissible where insiders participate in offer)
- Eternity Global Master Fund Ltd. v. Morgan Guar. Trust Co. of New York, 375 F.3d 168 (2d Cir.2004) (fraud must be pled with particularity)
- PIMCO v. Mayer Brown LLP, 603 F.3d 144 (2d Cir.2010) (group pleading; attribution requirements in securities fraud)
- Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164 (U.S. Supreme Court 1994) (limits on aiding and abetting liability)
- In re Health Management, Inc. Sec. Litig., 970 F. Supp. 199 (S.D.N.Y. 1997) (insiders or affiliates can be liable under group pleading)
- In re Refco, Inc. Sec. Litig., 609 F. Supp. 2d 304 (S.D.N.Y.2009) (secondary actor liability context; not controlling here)