Lbbw Luxemburg S.A. v. Wells Fargo Securities LLC
10 F. Supp. 3d 504
S.D.N.Y.2014Background
- In Sept–Oct 2006 LBBW (formerly LRI) invested ~$16.5M in a CDO of subprime MBSs marketed by Wachovia (now Wells Fargo Securities) and Fortis; marketing materials (POCs/FOC) and oral statements preceded and accompanied the closing.
- Defendants acted as placement agents, structured the deal, warehoused collateral (via a Wachovia affiliate), and sold securities to investors or retained unsold tranches as Initial Purchasers.
- At closing 16,500 equity shares were sold at $1,000 each (aggregate stated ALP ~$16.5M), but Wachovia’s internal valuation contemporaneously placed the shares at ~$8.7M (a ~52.7% discount); the FOC later stated a $27.5M value.
- POCs contained explicit disclaimers: no fiduciary duty, buyers are sophisticated, must do independent diligence, and are not relying on outside statements; POCs also promised notice if material characteristics changed and contained an ‘‘honestly held opinion’’ representation.
- LBBW alleges defendants knew or should have known the shares were overvalued, withheld material facts (including the internal write-down and that Wachovia purchased unsold shares), and that LBBW would not have bought the notes had it known; LBBW brings contract, fraud, constructive fraud, negligent misrepresentation, and fiduciary-duty claims.
- Defendants moved to dismiss; court considered pleading standards (Rules 8/9(b)) and whether disclaimers/POCs negated reliance, duty, or contract formation.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Breach of contract — existence and breach | Marketing materials, POCs, oral statements and course of dealing formed the contract; defendants breached promise to notify of material changes | Disclaimers and POCs negate a contractual promise; no integrated agreement | Contract claim survives as plausible contract existed and disclaimer effectiveness cannot be resolved on pleadings |
| Fraud (Wachovia) — material misrepresentation/omission | Wachovia concealed/internal-wrote down collateral value (52.7%) and misrepresented share value; omission was material and induced reliance | POCs disclosed roles, market volatility, warehousing and advised independent diligence; no duty to disclose | Fraud claim survives as to the internal valuation omission: particularity, materiality, scienter and justifiable reliance adequately pleaded |
| Fraud (Fortis) — particularity re: scienter | Fortis co-authored POCs, solicited LRI, worked closely with Wachovia and thus knew or should have known of misstatements | Fortis lacked direct knowledge of Wachovia’s internal valuation; plaintiff’s allegations are too speculative | Fraud claim survives: allegations sufficiently particular as to Fortis’s knowledge and recklessness given close role and communications |
| Breach of fiduciary duty | Defendants’ conduct created a confidential relationship warranting fiduciary duties | POCs contain explicit no-fiduciary disclaimers; parties sophisticated — no fiduciary duty | Fiduciary-duty claims dismissed: explicit disclaimer defeated fiduciary-duty theory |
| Constructive fraud / Negligent misrepresentation | Defendants had peculiar knowledge, induced reliance, and thus a special/confidential relationship existed despite disclaimers | Disclaimers and sophisticated parties preclude special/confidential relationship | Claims survive: fact questions on confidential/special relationship and peculiar knowledge preclude dismissal |
| Motion to strike exhibits | LBBW sought to strike extraneous exhibits attached to defendants’ briefs | Defendants relied on public filings and precedent; some exhibits not integral | Motion to strike denied as moot — court considered public-record materials but relied on complaint and integral documents |
Key Cases Cited
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (plausibility standard for Rule 8 pleading)
- Ashcroft v. Iqbal, 556 U.S. 662 (application of Twombly plausibility to complaints)
- Kalnit v. Eichler, 264 F.3d 131 (standards for inferring scienter — motive/opportunity or conscious recklessness)
- Novak v. Kasaks, 216 F.3d 300 (circumstantial evidence supporting scienter)
- First Nationwide Bank v. Gelt Funding Corp., 27 F.3d 763 (factors for assessing proximate causation when market collapse intervenes)
- Suez Equity Investors, L.P. v. Toronto-Dominion Bank, 250 F.3d 87 (negligent misrepresentation and role of disclaimers in reliance analysis)