Loreley v. Wells Fargo, 13 F.4th 247

Background

Loreley (five special-purpose Jersey entities) invested in three CDOs (Octans II, Sagittarius I, Longshore) in 2006–07 via its German investment advisor IKB; collateral managers were Harding and SAI and the sellers were Wachovia predecessors to Wells Fargo defendants.
Offering materials emphasized that collateral managers would exercise independent, rigorous underwriting and that deals were for sophisticated investors who should conduct due diligence.
Magnetar (a hedge fund) purchased CDO equity tranches and simultaneously took short positions in senior tranches; Loreley alleges Magnetar pressured collateral managers to accept poor assets, defeating the managers’ independence.
IKB conducted extensive due diligence, stress tests, in-person meetings with collateral managers, and produced detailed investment proposals that Loreley relied on exclusively; Loreley did not receive offering memoranda or IKB’s underlying risk reports.
The district court granted summary judgment for defendants; the Second Circuit affirmed, holding Loreley failed to prove (by clear and convincing evidence) reasonable reliance and, for Octans and Sagittarius, failed to show material misrepresentations or omissions about manager independence or Magnetar’s role.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether Loreley reasonably relied on defendants’ offering‑materials representations when Loreley only received IKB’s investment proposals	Loreley contends it relied on defendants’ representations as summarized/transmitted by IKB	Defendants argue Loreley relied solely on IKB’s independent analyses and IKB was not a mere conduit	Held: No reasonable reliance — NY law bars reliance on third‑party‑filtered statements unless the third party was a mere conduit (Loreley failed to show that)
Whether defendants misrepresented that collateral managers would exercise independence (Octans & Sagittarius)	Loreley says Magnetar effectively controlled selection, contradicting representations of manager independence	Defendants say collateral managers vetted and approved each asset and retained selection control	Held: No material misrepresentation — record lacks clear and convincing evidence that managers ceded control to Magnetar
Whether defendants had a duty to disclose Magnetar’s investment strategy or identity (material omission)	Loreley argues defendants knew of Magnetar’s adverse economic motives and failed to disclose them	Defendants say IKB knew an equity investor was driving structuring and had access to inquiry; no fiduciary duty existed	Held: No duty to disclose — information was discoverable by IKB and not the kind of superior, undisclosed knowledge giving rise to concealment liability
Effect on related claims (conspiracy, aiding and abetting, rescission)	Loreley contends related claims survive if fraud is shown	Defendants assert related claims fall with fraud claim	Held: Related claims fail because fraud claim fails (no reliance/misrepresentation established)

Key Cases Cited

Pasternack v. Lab. Corp. of Am. Holdings, 807 F.3d 14 (2d Cir. 2015) (misrepresentations not communicated to plaintiff cannot support reasonable reliance)
Crigger v. Fahnestock & Co., 443 F.3d 230 (2d Cir. 2006) (elements of fraud under New York law)
Banque Arabe et Internationale D’Investissement v. Maryland Nat’l Bank, 57 F.3d 146 (2d Cir. 1995) (fraud elements must be proved by clear and convincing evidence)
Lerner v. Fleet Bank, N.A., 459 F.3d 273 (2d Cir. 2006) (duty to disclose arises where one party has superior knowledge and knows other acts on mistaken basis)
Sec. Investor Prot. Corp. v. BDO Seidman, 95 N.Y.2d 702 (N.Y. 2001) (third‑party filtering defeats conduit theory; mere conduit exception narrow)
Moore v. PaineWebber, Inc., 189 F.3d 165 (2d Cir. 1999) (definition of material fact relevant to investor decisions)
Merrill Lynch & Co. v. Allegheny Energy, Inc., 500 F.3d 171 (2d Cir. 2007) (clear‑and‑convincing standard at summary judgment)