OPINION AND ORDER
Table of Contents
Page
I. INTRODUCTION.......................................................439
II. BACKGROUND........................................................440
A. Undisputed Facts...................................................440
B. Procedural History.................................................442
III. LEGAL STANDARDS...................................................443
A. Summary Judgment ................................................443
B. Summary Judgment Standard for Fraud and Aiding and Abetting Claims...........................................................444
IY. APPLICABLE LAW....................................................444
A. Fraud .............................................................444
C. Standing...........................................................446
V. DISCUSSION...........................................................446
A. Standing...........................................................446
1. SEI...........................................................446
2. Butterfield....................................................447
3. Commerzbank.................................................447
4. Hapoalim .....................................................448
B. Actionable Misstatements...........................................448
1. Morgan Stanley................................................448
a. Participation in a Scheme to Defraud........................449
b. Whether the Ratings May Be Attributed to Morgan Stanley..................................................451
2. Rating Agencies...............................................453
a. Whether Credit Ratings Are Opinions........................453
b. When Opinions Are Actionable..............................455
c. Whether Plaintiffs Have Proof that the Ratings Were Both Misleading and Disbelieved When Made ..............456
C. Scienter............................................................458
1. Whether the Rating Agencies Had the Required Intent............458
2. Disclosure of the Risks.........................................460
3. Hindsight.....................................................460
4. Motive........................................................460
D. Reliance...........................................................462
1. GIB...........................................................463
2. NACF.........................................................464
3. SinoPac.......................................................465
4. Hapoalim.....................................................465
5. Postbank......................................................466
6. Commerzbank.................................................466
7. PSERS........................................................466
8. SFT...........................................................467
9. FSBA.........................................................467
10. SEI...........................................................468
11. ADCB.........................................................469
12. GIS...........................................................470
13. SEI Strategies.................................................470
14. King County...................................................471
E. Loss Causation.....................................................471
1. The Cause of Plaintiffs’ Losses..................................472
2. Whether Plaintiffs Suffered Losses When the Ratings Were Downgraded.................................................473
3. Disclosure of the Risks.........................................473
4. The Senior Noteholders’ Evidence of Damages ...................474
F. Aiding and Abetting ................................................476
1. The Rating Agencies...........................................476
2. Morgan Stanley............................ 477
YI. ADDENDUM...........................................................478
VII. CONCLUSION .........................................................478
I. INTRODUCTION
Plaintiffs — institutional investors who invested in the Cheyne structured investment vehicle (“SIV”) — initiated this action on August 25, 2008, seeking to recover losses stemming from the liquidation of notes issued by the SIV between October 2004 and October 2007.
II. BACKGROUND
A. Undisputed Facts
An STV is a special purpose entity designed to undertake arbitrage by issuing short-term commercial paper and medium-term notes to finance the acquisition of long-term fixed-income assets such as mortgage bonds and asset-backed securities, including residential mortgage-backed securities (“RMBSs”).
Morgan Stanley acted as the Arranger and Placement Agent for the Rated Notes of the Cheyne SIV.
Moody’s and S & P are “nationally recognized statistical rating organizations” or “NRSROs,” having a special status that was created by the SEC in 1975.
[Issuers] have their securities rated for two reasons. First, once the security or debt has received a favorable rating, that rating makes it easier to sell the security to investors, who rely upon [the rating agency’s] analysis and evaluation. The second reason is that a favorable rating carries with it a regulatory benefit as well. Fitch, along with its direct competitors Amici Moody’s Investors Service, Inc. (“Moody’s”) and Standard & Poor’s (“S & P”), has been designated by the Securities and Exchange Commission (“SEC”) as a “nationally recognized statistical rating organization” (“NRSRO”) whose endorsement of a given security has regulatory significance, as many regulated institutional investors are limited in what types of securities they may invest based on the securities’ NRSRO rating.11
On May 17, 2005, S & P assigned a credit rating of AAA to the MTNs issued by the Cheyne SIV and a credit rating of A-l + to the CP issued by the Cheyne SIV.
Plaintiffs are large institutional investors who acquired notes issued by the Cheyne SIV.
B. Procedural History
Plaintiffs filed their First Amended Complaint on March 30, 2009, alleging thirty-two common law claims against Morgan Stanley, The Bank of New York (“BoNY”), and the Rating Agencies, including (1) common law fraud;
On December 20, 2011, the New York Court of Appeals ruled that the Martin Act does not preempt common law claims in the securities context,
III. LEGAL STANDARDS
A. Summary Judgment
“Summary judgment is designed to pierce the pleadings to flush out those cases that are predestined to result in a directed verdict.”
In a summary judgment setting, “[t]he burden is on the moving party to demonstrate that no genuine issue respecting any material fact exists.”
In deciding a motion for summary judgment, a court must “ ‘construe the facts in the light most favorable to the non-moving party and must resolve all ambiguities and draw all reasonable inferences against the movant.’ ”
B. Summary Judgment Standard for Fraud and Aiding and Abetting Claims
In New York, a plaintiff alleging fraud must establish each element of its fraud claim by “clear and convincing evidence.”
IV. APPLICABLE LAW
A. Fraud
To recover damages for fraud under New York law, a plaintiff must prove: “ ‘(1) a misrepresentation or a material omission of fact which was false and known to be false by defendant; (2) made for the purpose of inducing the other party to rely upon it; (3) justifiable reliance of the other party on the misrepresentation or material omission; and (4) injury.’ ”
The standard for evaluating whether plaintiffs have presented sufficient evidence of scienter is the same under New York common law as it is under Section 10(b) of the Securities Exchange Act of 1934 (“1934 Act”).
“[A]t the least, conduct which is highly unreasonable and which represents an*445 extreme departure from the standards of ordinary care ... to the extent that the danger was either known to the defendant or so obvious that the defendant must have been aware of it.”[ ] “An egregious refusal to see the obvious, or to investigate the doubtful, may in some cases give rise to an inference of ... recklessness.”46
The Second Circuit has further directed courts to be “ ‘lenient in allowing scienter issues to withstand summary judgment based on fairly tenuous inferences,’ because such issues are ‘appropriate for resolution by the trier of fact.’ ”
In addition to establishing scienter, plaintiffs must show that they reasonably relied on the false and misleading statements to their detriment.
Reasonable reliance entails a duty to investigate the legitimacy of an investment opportunity where plaintiff was placed on guard or practically faced with the facts. Only [w]hen matters are held to be peculiarly within defendant’s knowledge [is it] said that plaintiff may rely without prosecuting an investigation, as he ha[d] no independent means of ascertaining the truth.48
An “evaluation of the reasonable-reliance element [should involve] many factors to ‘consider and balance,’ no single one of which is ‘dispositive.’ ”
B. Aiding and Abetting
“To establish liability for aiding and abetting fraud, the plaintiffs must show ‘(1) the existence of a fraud; (2) [the] defendant’s knowledge of the fraud; and (3) that the defendant provided substantial assistance to advance the fraud’s commission.’ ”
“The ‘knowledge’ element of an aiding and abetting fraud claim is not identical to the scienter required for the underlying fraud.”
C. Standing
“Whether a party has a sufficient stake in an otherwise justiciable controversy to obtain judicial resolution of that controversy is what has traditionally been referred to as the question of standing to sue.”
An assignee who holds “legal title to an injured party’s claim has constitutional standing to pursue the claim....”
V. DISCUSSION
A. Standing
1. SEI
SEI is suing on six investments made on behalf of three money market mutual funds sponsored by SEI (“the SEI Funds”).
2. Butterfield
Butterfield is suing on an investment made by the Butterfield Money Market Fund (“BMMF”), which was managed by Butterfield’s wholly-owned subsidiary, Butterfield Asset Management (“BAM”). Defendants argue that Butterfield lacks standing to sue on behalf of BMMF because there is no evidence that BMMF assigned its right of action to Butterfield.
3. Commerzbank
Commerzbank is suing both on MCNs it purchased for itself and on the AIlianz-Dresdner Daily Asset Fund’s (“DAF”) investments in Cheyne. Dresdner Bank A.G. (“Dresdner”) purchased the DAF notes on October 9, 2007, and Commerzbank acquired Dresdner in May 2009.
4. Hapoalim
Hapoalim is suing on MCNs purchased pursuant to a Note Purchase Agreement (“NPA”) and a Loan Asset Purchase Agreement (“LAPA”) on behalf of a fully-sponsored commercial paper conduit, Venus Funding Corporation (“Venus”).
B. Actionable Misstatements 1. Morgan Stanley
In its motion to dismiss plaintiffs’ fraud claims, Morgan Stanley argued that plaintiffs had failed to identify any actionable misstatements that could be attributed to it.
Morgan Stanley now argues that it cannot be liable for fraud because as a matter of law, the ratings — which are the only alleged misstatements
a. Participation in a Scheme to Defraud
In support of their argument that Morgan Stanley can be liable even if it made no actionable misstatement, plaintiffs rely on CPC International, Inc. v. McKesson Corp., in which the New York Court of Appeals reversed the Appellate Division’s dismissal of common law fraud claims against Morgan Stanley and other defendants based on allegations that all defendants were involved in a “scheme ... devised and executed for the specific purpose of defrauding the prospective purchaser by selling [a stock] for more than it was worth.”
Plaintiffs cite several additional cases for the proposition that a defendant may be liable under New York law based on its knowing participation in a scheme to defraud. But plaintiffs have not cited a single New York case in which a common law fraud claim against a defendant who made no actionable misstatement survived summary judgment. Plaintiffs cite Danna v. Malco Realty, Inc. for the proposition that “[liability for fraud may be premised on knowing participation in a scheme to defraud, even if that participation does not by itself suffice to constitute the fraud.”
b. Whether the Ratings May Be Attributed to Morgan Stanley
In its memoranda of law, Morgan Stanley relies heavily on Eurycleia Partners, LP v. Seward & Kissel, LLP
In a more recent case, Mateo v. Senterfitt,
To the extent plaintiffs contend that defendant made actionable misrepresentations in the transactional documents it drafted by incorporating [the third party]’s misrepresentations into the documents, they are alleging substantial assistance by defendant to aid and abet [the third party]’s fraud. However, the complaint fails to state a cause of action for aiding and abetting because it does not allege that defendant had actual knowledge of any fraud perpetrated by [the third party].106
Thus, under New York law, although some of the statements in the IMs may be attributable to Morgan Stanley, the ratings are attributable only to the Rating Agencies that issued them. Even if Morgan Stanley had actual knowledge that the ratings were false, it could only be liable for aiding and abetting fraud.
This conclusion of law is supported by the following evidence: (1) the IMs indicate that Morgan Stanley is not responsible for and has not verified the information contained in the ratings;
Plaintiffs nonetheless argue that Morgan Stanley authored the rating report based on an e-mail in which a Morgan Stanley employee says “I attach the Moody’s [NIR] (that we ended up writing).”
2. Rating Agencies
Defendants argue that the credit ratings are opinions which cannot provide the basis of a fraud claim unless they are both disbelieved by the speaker when made and false or misleading.
a. Whether Credit Ratings Are Opinions
Defendants offer testimony from plaintiffs and plaintiffs’ expert indicating that plaintiffs understood that the ratings are subjective opinions of the Rating Agencies regarding the creditworthiness of the Cheyne notes.
Recently, several New York courts have defined credit ratings not as opinions regarding future valuation but statements analyzing current worth. In M & T Bank Corp. v. Gemstone CDO VII, Ltd., the Erie County Supreme Court discussed the actionability of credit ratings at length:
DBSI argues that its alleged misrepresentations, including the credit ratings, the statements by Mr. Whelan and the representations as to HBK’s skills, were all opinions and/or predictions and are therefore not actionable. The Court disagrees. The ratings by Moody’s and S & P are facts constituting the actual evaluation by reputable independent entities concerning the creditworthiness of the Notes. Plaintiff alleges that these ratings were false because the Defendants provided false information to the ratings agencies. The ratings by Moody’s and S & P are not just predictions of future valuation but a present analysis of current valuation. Such ratings have been highly regarded and eagerly sought for years. To characterize them merely as predictions or opinions would undercut the necessary reliability such ratings furnish in the world of credit.119
This decision was affirmed by the Appellate Division — although it did not discuss how credit ratings should be defined
In contrast, federal courts have consistently described credit ratings as opinions. In Fait v. Regions Financial Corp., the Second Circuit provided guidance for courts faced with the question of whether a representation is an opinion or a fact:
[Plaintiffs allegations regarding goodwill do not involve misstatements or omissions of material fact, but rather a misstatement regarding Regions’ opinion. Estimates of goodwill depend on management’s determination of the “fair value” of the assets acquired and liabilities assumed, which are not matters of objective fact. Plaintiff does not point to any objective standard such as market price that he claims Regions should have but failed to use in determining the value of AmSouth’s assets.122
Because plaintiffs have not offered any objective standard by which credit ratings can be evaluated, Fait implies that the ratings must be considered opinions. Other federal courts that have considered the nature of credit ratings have come to the same conclusion.
At first blush, the New York cases appear to be in tension with Fait. In reality, there is no conflict — the New York cases do not treat credit ratings as pure statements of either fact or opinion but rather as a hybrid of the two. These opinions hold that ratings are actionable because they are understood to be statements of creditworthiness based on an analysis of underlying facts conducted by respected ratings organizations.
b. When Opinions Are Actionable
Plaintiffs argue that an opinion may be actionable in fraud if either the speaker genuinely disbelieves it or the opinion is without basis in fact. In support of this, plaintiffs cite this Court’s decision denying defendants’ motion to dismiss plaintiffs’ fraud claims, in which I said “ ‘[a]n opinion may still be actionable if the speaker does not genuinely and reasonably believe it or if it is without basis in fact.’ ”
Defendants concede that opinions may serve as the basis for a fraud claim,
c. Whether Plaintiffs Have Proof that the Ratings Were Both Misleading and Disbelieved When Made
Defendants argue that “even if the truth or falsity of rating opinions could be evaluated objectively — which it cannot, as a matter of law — plaintiffs’ claims fail because there is no evidence that the ratings of the Cheyne SIV notes were ‘wrong’ when issued.”
Plaintiffs have also offered sufficient evidence from which a reasonable jury could infer that the Rating Agencies did not believe the ratings when they issued them.
Shah, Rahul Dilip (Structured Finance — New York): btw — that deal is ridiculous
Mooney, Shannon: i know right ... model def does not capture half of the rish
Mooney, Shannon: risk
Shah, Rahul Dilip (Structured Finance — New York): we should not be rating it
Mooney, Shannon: we rate every deal
Mooney, Shannon: it could be structured by cows and we would rate it Shah, Rahul Dilip (Structured Finance — New York): but there’s a lot of risk associated with it — I personally don’t feel comfy signing off as a committee member.148
And as with Moody’s, plaintiffs offer additional e-mails, deposition testimony, and internal memoranda in which S & P employees indicate concern with the paucity of data and the adequacy of the models used to rate Cheyne and SIVs in general.
C. Scienter
Defendants make the following arguments that summary judgment is appropriate due to lack of scienter: (1) plaintiffs have offered no evidence that any defendant disbelieved the SIV credit ratings; (2) defendants disclosed the risks of investing in Cheyne, thus negating any theory of scienter; (3) fraud cannot be proven in hindsight; and (4) there was no motive for defendants to commit fraud. Defendants’ first argument misstates the test of scienter — plaintiffs need not demonstrate that the Rating Agencies disbelieved the ratings when they issued them; rather “[pllaintiffs may satisfy the scienter requirement by producing ‘evidence of conscious misbehavior or recklessness.’ ”
1. Whether the Rating Agencies Had the Required Intent
Defendants argue that to demonstrate scienter, plaintiffs must provide direct evidence that individuals who worked on the Cheyne SIV transaction admitted that they believed the ratings were false.
Defendants next argue that there is no evidence that those responsible for issuing the ratings had the requisite state of mind.
The parties dispute whether plaintiffs must demonstrate that specific individuals within the Rating Agencies — such as executives or those who worked on the rating committees — had the requisite state of mind. “To prove liability against a corporation, of course, a plaintiff must prove that an agent of the corporation committed a culpable act with the requisite scienter, and that the act (and accompanying mental state) are attributable to the corporation.”
2.Disclosure of the Risks
Defendants argue that general disclaimers in the offering documents disclosed the risk of loss, and that “ ‘[t]he mere fact of that disclosure undermines any credible theory of scienter,’ ”
3.Hindsight
Defendants assert that plaintiffs’ case proceeds from the premise that, because the SIV ultimately collapsed, the ratings must have been false when issued.
4.Motive
While a plaintiff need not show a motive to establish scienter, evidence of a motive to commit fraud can support an inference of fraudulent intent.
D. Reliance
To survive summary judgment, each plaintiff must provide evidence from which a reasonable jury could infer that the ratings were a substantial factor in its decision to invest in Cheyne.
Plaintiffs argue that because some of the key information pertaining to the Cheyne SIV was available to the Rating Agencies but not to investors,
[T]he question of reliance requires hearing from each investor as to what it did, what it relied on when deciding to invest in the Cheyne SIV, and whether it relied substantially on the credit ratings, minimally on the ratings or did not rely on them at all.189
Accordingly, I will evaluate plaintiffs’ evidence as to whether each plaintiff relied on the ratings in making its investment decision, taking into consideration .that each plaintiff lacked access to all the information available to the Rating Agencies.
1. GIB
Defendants argue that GIB could not have relied on the ratings because it decided to invest in Cheyne before the ratings were issued.
Defendants also argue that because Yaser Humaidan — GIB’s Rule 30(b)(6) designee — did not speak to five of the six individuals who approved GIB’s investment and could not recall anything from his conversation with the sixth, there is no evidence of what GIB considered in mak
2. NACF
As with GIB, defendants argue that NACF’s decision to invest in Cheyne was made before the ratings were issued. Byung-Gyu Pahk — NACF’s Rule 30(b)(6) designee — testified that NACF approved its decision to invest in Cheyne on June 8, 2005.
Although NACF’s internal “investment evaluation document” does mention S & P, it refers only to an “expected” rating from S & P.
3. SinoPac
SinoPac invested in Cheyne CCNs, which were assigned a Baa2 rating by Moody’s, but which were not rated by S & P.
4. Hapoalim
Hapoalim offers the following evidence demonstrating that it relied on the ratings: (1) testimony that it considered the ratings, and that the ratings served as the basis for the decision to invest in Cheyne;
5.Postbank
Postbank offers the following evidence that it relied on the ratings in making its decision to invest in Cheyne: (1) testimony from its 30(b)(6) designee that it was “particularly interested in the ratings by S & P and Moody,” and that “[i]n evaluating the risk, we relied on the A3 and A rating of S & P”;
6.Commerzbank
With regard to the MCNs Commerzbank purchased on its own behalf,
7.PSERS
PSERS invested through its ad-visor, Credit Suisse Asset Management (“CSAM”) on whose judgment it relied.
8. SFT
SFT has provided testimony that “in order to even look at [an investment], it had to be AAA rated,” and that SFT “look[ed] at the rating agencies for their AAA rating at first and then look[ed] at the underlying assets that would fall into that category.”
9. FSBA
FSBA invested through an investment advisor, Victory Capital Management (“Victory”), which had “full discretion” to make investment decisions on FSBA’s be
10. SEI
SEI is suing on investments made by an investment advisor, Columbia Management Advisors (“CMA”).
11. ADCB
Vikas Vijayan — ADCB’s 30(b)(6) designee — testified that ADCB’s investment committee fully approved the decision to invest in Cheyne on July 18, 2005.
12. GIS
Defendants argue that there is no genuine issue of fact as to whether GIS relied on the ratings because: (1) GIS decided to invest before the ratings were issued; (2) GIS conducted its own analysis on which it relied; and (3) GIS purchased CCNs, which it knew were not rated by S & P.
To demonstrate that it relied on the ratings despite conducting its own analysis and even though the CCNs were not rated by S & P, GIS offers testimony that: (1) it purchased MCNs in addition to CCNs; (2) the ratings of the MCNs that the CCN contained were “very important” to its decision to purchase CCNs; and (3) the CCNs contained an MCN to junior notes ratio of 6.5 to l.
13. SEI Strategies
SEI Strategies has provided testimony that “[t]he rating reports from the credit rating agencies [were] always at the forefront” of its investment decision and that “the ratings opened the door for [SEI
14. King County
King County, too, provides testimony that it relied on the ratings in making its investment decision.
E. Loss Causation
Defendants argue that summary judgment is appropriate because “plaintiffs have no evidence, let alone clear and convincing evidence, that ‘out of the myriad of factors’ that impacted plaintiffs’ investments, ‘it was the alleged misrepresentations ... that caused any loss.’ ”
1. The Cause of Plaintiffs’ Losses
Defendants assert that plaintiffs’ losses were caused by the unprecedented and market-wide liquidity crisis that began in 2007.
Defendants argue extensively that given the structure of the Cheyne SIV and the nature of commercial paper, the notion that plaintiffs’ losses were caused by anything other than the liquidity crisis is “at odds with the evidence, logic and the law.”
To hold that plaintiffs failed to plead loss causation solely because the credit crisis occurred contemporaneously with [the collapse of the SIV at issue in King County ] would place too much weight on one single factor and would permit S & P and Moody’s to blame the asset-backed securities industry when their alleged conduct plausibly caused at least some proportion of plaintiffs’ losses.273
Thus, I have already determined that plaintiffs’ position on loss causation is both logical and legally viable.
In King County I, I allowed that “S & P and Moody’s argument may yet prevail at a later stage in this case,” and that “[i]f defendants ultimately prove that plaintiffs’ losses were, in fact, caused entirely by an intervening event, then defendants will prevail either at summary judgment or at trial.”
2. Whether Plaintiffs Suffered Losses When the Ratings Were Downgraded
Defendants argue that:
Plaintiffs did not suffer any losses when the Cheyne SIV entered enforcement and its notes were downgraded. Had the SIV sold its assets at the market prices then, the senior noteholders would have recovered in full, and the capital noteholders would have recovered all or nearly all of their investments as well.278
This argument is legally irrelevant and defies common sense. Rated notes do not trade in an efficient market like shares of publicly-traded stock.
3. Disclosure of the Risks
Defendants argue that summary judgment is appropriate because plaintiffs provided no evidence that the ratings concealed a risk which caused plaintiffs’ losses.
4. The Senior Noteholders’ Evidence of Damages
While defendants do not dispute that the MCN-holding plaintiffs
Plaintiffs provide the following background regarding the Gryphon Notes:
2. On July 17, 2008, all of Cheyne Finance’s assets were sold. A vertical slice of Cheyne’s portfolio was sold through a competitive auction process that involved 11 bidders. The winning bid came in at 43.9% of notional value. The remaining assets were then sold to Goldman Sachs International (“GSI”) at the same price as in the auction. The assets purchased by GSI were then sold to a new entity, Gryphon Funding Limited (“Gryphon”). The Senior Noteholders chose whether to receive cash (from the sale of a vertical slice) or new long-term Gryphon notes (cash flow from the remaining Cheyne assets in Gryphon).
*475 3. King County and PSERS chose the cash option described in ¶ 2, above. Accounting for the cash payment at liquidation and other principal payments, King County and PSERS incurred losses in excess of 30% on their investment in the Cheyne SIV. Following the Cheyne SIV’s insolvency, SEI, SEI Strategies, SFTCIF, FSBA, Commerzbank and Butterfield elected to take the Gryphon option.291
Defendants’ argument that these plaintiffs’ damages are unknowable rests on two assumptions: (1) that the Gryphon notes represent a continuation of plaintiffs’ investment in Cheyne; and (2) that damages can only be calculated when plaintiffs have liquidated any vestiges of their investment in Cheyne. Neither assumption is correct.
The Gryphon notes’ offering memorandum states:
The Gryphon Offers are not part of the Receivership or the Receivership Process. None of SIV Portfolio pic (in receivership), Cheyne Finance LLC or the Receivers [] have any role whatsoever in, and are not in any way affiliated with or responsible for, the Issuer or the Gryphon Offers.292
Thus, plaintiffs’ possession of the Gryphon notes is not a continuation of their investment in Cheyne, but a new investment concerning a completely different note. If King County and PSERS invested the cash they received from the sale of the vertical slice in a new investment, the subsequent success or failure of that investment would have no bearing on the measure of the damages they suffered due to Cheyne’s collapse.
Defendants also argue that the economic loss of the Gryphon note-holding plaintiffs is not ascertainable because these plaintiffs have yet to sell their notes. This is not so. In Merrill Lynch & Co. v. Allegheny Energy, Inc., the Second Circuit held that while “in securities cases there is a presumption that shares are purchased for the purpose of investment and their true value to the investor is the price at which they may later be sold,”
[The] presumption does not apply here, where the plaintiffs do not allege that they suffered losses from selling the Certificates at some reduced price after the fraud was uncovered. Rather, the plaintiffs allege that they suffered losses when, after the securitization went into early amortization, there was not enough money in the Trust to pay them back. The plaintiffs purchased the Trust Certificates with the expectation that they would receive a stream of interest payments for the life of the securitization and, at the end of the securitization, the return of their principal. Therefore, the plaintiffs’ loss was not a decrease in market price, but a decrease in the amount of money returned to them over the course of the securitization.296
The AIG Global court thus held that plaintiffs could recover for an approximation of their losses even though they still held Trust Certificates.
Applying the reasoning of these cases, the damages of the senior noteholders holding Gryphon notes should be reduced by an approximation of the value of the Gryphon notes as of the day plaintiffs aequired them in return for the remainder of their interest in Cheyne. Plaintiffs have provided evidence that the return on the Gryphon notes will not match the expected revenue stream of the senior notes, and that the reduced bid prices for the notes reflect this decreased value.
F. Aiding and Abetting
1. The Rating Agencies
Because plaintiffs’ fraud claims against Morgan Stanley are dismissed, plaintiffs’ claims against the Rating Agencies for aiding and abetting Morgan Stanley’s fraud must also be dismissed.
2. Morgan Stanley
To avoid summary judgment on the aiding and abetting claims, plaintiffs must provide evidence that Morgan Stanley had actual knowledge of the Rating Agencies’ fraud.
Plaintiffs have offered evidence suggesting that despite misgivings, Morgan Stanley manipulated the Cheyne SIV modeling process to create the ratings it desired. Gregg Drennan, Morgan Stanley’s lead strueturer, wrote that Morgan Stanley had “developed] a new model for the [Cheyne SPV] transaction” and “adapt[ed] and creat[ed] a new form of SIV methodology that was presented to the rating agencies and the client for their approval.”
Perhaps most relevant is evidence provided by plaintiffs indicating that Morgan Stanley pressured the Rating Agencies to issue ratings it did not believe were accurate. In an e-mail to Drennan, Lapo Guadagnuolo — -an S & P analyst involved in rating the Cheyne SIV — informed Morgan Stanley that S & P was only willing to assign a BBB rating to the MCNs.
VI. ADDENDUM
Plaintiffs are hereby ordered to show cause, by August 31, 2012, as to why their negligent misrepresentation claims against the Rating Agencies should not be dismissed based on the Second Circuit’s recent holding in Anschutz Corp. v. Merrill Lynch & Co. Plaintiffs are also ordered to show cause as to why their negligent misrepresentation claims against Morgan Stanley should not be dismissed in light of my holding that there is no evidence of an actionable misrepresentation that may be attributed to it.
VII. CONCLUSION
For the reasons set forth above, plaintiffs’ claims for fraud against Morgan Stanley and aiding and abetting fraud against the Rating Agencies are dismissed. Further: (1) NACF’s claims against Moody’s for fraud and Morgan Stanley for aiding and abetting Moody’s fraud are dismissed; (2) SEI’s and Butterfield’s claims are dismissed; and (3) Commerzbank’s claims based on DAF’s purchase of notes are dismissed. The Clerk of the Court is directed to close this motion (Docket No. 358). A conference is scheduled for September 19, 2012 at 3:00 p.m.
SO ORDERED.
. See First Amended Complaint for Common Law Fraud, Negligent Misrepresentation,
.The following facts are derived from the Ninth Amended Complaint for Common Law Fraud, Negligent Misrepresentation, Negligence, Breach of Fiduciary Duty, and Aiding and Abetting ("NAC”), defendants’ Answers, and the parties’ Rule 56.1 statements and supporting documents. For facts derived from the NAC, defendants have either denied knowledge of them or declined to dispute them with specificity. Otherwise, the facts are undisputed unless noted; where disputed, they are construed in the light most favorable to the plaintiffs. See, e.g., Federal Ins. Co. v. American Home Assurance Co.,
. See NAC ¶ 43.
. See id. V 44; Cheyne Capital PLC Information Memoranda ("IMs”), at MS_000014806. I use some of these terms — for example MCNs and MTNs — interchangeably throughout this opinion, in each instance deferring to the usage of the terms in the documents, deposition transcripts, and the parties’ memoranda of law and Rule 56.1 statements.
. See id. ¶ 46; IMs at MS-000014813 to -814.
. See NAC ¶ 46.
. See id.
. See id. ¶ 7; IMs at MS-000014800 to - 801, -814 to -815.
. See NAC ¶ 54.
. In re Fitch, Inc.,
. See Answer of Defendants Standard & Poor’s Rating Services and the McGraw Hill Companies, Inc. to Plaintiffs’ Ninth Amended Complaint, ¶ 48.
. See Moody's Answer to Plaintiffs’ Ninth Amended Complaint, V 48; Moody's New Issue Report for the Cheyne SIV ("NIR”), at MS-000077900 to -903.
. See Defendants’ Joint Statement of Undisputed Material Facts Pursuant to Local Rule 56.1 ("Def. 56.1”) ¶ 27.
. See NAC ¶¶ 2, 16-18. The sixteen plaintiffs in this action are Abu Dhabi Commercial Bank ("ADCB”); Bank Hapoalim B.M. ("Hapoalim”); The Bank of N.T. Butterfield & Son Limited ("Butterfield”); Bank SinoPac ("SinoPac”); Commerzbank AG ("Commerzbank”); Commonwealth of Pennsylvania Public School Employees’ Retirement System ("PSERS”); Deutsche Postbank AG ("Post-bank”); Global Investment Services Limited (“GIS”); Gulf International Bank B.S.C. ("GIB”); King County, Washington ("King County”); National Agricultural Cooperative Federation ("NACF”); SEI Investments Company ("SEI”); SEI Investment Strategies, LLC ("SEI Strategies”); SFT Collective Investment Fund (“SFT”); State Board of Administration of Florida (“FSBA”); and KBL European Private Bankers S.A. ("KBL”). This opinion does not address the claims of KBL because none of the parties mentioned this plaintiff in their memoranda of law.
. See Def. 56.1 ¶ 107.
. Only Morgan Stanley and the Rating Agencies were alleged to have committed common law fraud. See FAC ¶¶ 155-167, 240-254.
. Only BoNY and the Rating Agencies were alleged to have acted negligently. See id. ¶¶ 255-264, 330-336.
. Only Morgan Stanley was alleged to have tortiously interfered with the contract between the Cheyne SIV and other defendants to which plaintiffs allege they were third-party beneficiaries. See id. ¶¶ 229-234.
. See id. ¶¶ 155-398.
. See Castellano v. Young & Rubicam, Inc.,
. See Abu Dhabi Commercial Bank v. Morgan Stanley & Co. Inc.,
. See Assured Guar. (UK) Ltd. v. J.P. Morgan Inv. Mgmt. Inc.,
. See May 4 Order (Docket No. 404), referring to King County, Washington v. IKB Deutsche Industriebank AG (King County II),
. Lightfoot v. Union Carbide Corp.,
. Fed.R.Civ.P. 56(c).
. Sanchez v. Connecticut Natural Gas Co.,
. Carter v. Incorporated Vill. of Ocean Beach,
. Miner v. Clinton County, N.Y.,
. Jaramillo v. Weyerhaeuser Co.,
. Mavrommatis v. Carey Limousine Westchester, Inc.,
. Cordiano v. Metacon Gun Club, Inc.,
. Id.
. Brown v. Eli Lilly & Co.,
. Id. (quoting Federal Deposit Ins. Corp. v. Great Am. Ins. Co.,
. Brod v. Omya, Inc.,
. Kaytor v. Electric Boat Corp.,
. Brod,
. Merrill Lynch & Co., Inc. v. Allegheny Energy, Inc.,
. See de Abreu v. Bank of America Corp.,
. See Anderson v. Liberty Lobby, Inc.,
. Premium Mortg. Corp. v. Equifax, Inc.,
. Suez Equity Investors, L.P. v. Toronto-Dominion Bank,
. See Pension Comm. of Univ. of Montreal Pension Plan v. Banc of Am. Sec., LLC,
. Gould v. Winstar Commc’ns, Inc., Nos. 10 Civ. 4028, 10 Civ. 4280,
. Chill v. General Elec. Co.,
. In re DDAVP Direct Purchaser Antitrust Litig.,
. Crigger v. Fahnestock & Co., Inc.,
. STMicroelectronics, N.V. v. Credit Suisse Sec. (USA) LLC,
. Id.
. Lerner v. Fleet Bank, N.A.,
. See id. (citing Kolbeck v. LIT America, Inc.,
. Winnick, 406 F.Supp.2d at 253 n. 4.
. Id. (quoting Shields v. Citytrust Bancorp., Inc.,
. Lerner,
. Lerner,
. Sierra Club v. Morton,
. Lujan v. Defenders of Wildlife,
. Comer v. Cisneros,
. W.R. Huff Asset Mgmt. Co., LLC v. Deloitte & Touche LLP,
. Banque Arabe et Internationale D'Investissement v. Maryland Nat’l Bank, 57 F.3d 146, 153 (2d Cir.1995).
. Id. at 151-52.
. Id. The transaction at issue in Banque Arabe was participation in a particular loan.
. Bank Brussels Lambert v. Credit Lyonnais (Suisse) S.A., Nos. 93 Civ. 6876, 94 Civ. 2713,
. See Def. 56.1 ¶ 94; Declaration of Plaintiffs Regarding Reliance in Support of Plaintiffs’ Opposition to Defendants’ Joint Motion for Summary Judgment Pursuant to Federal Rule of Civil Procedure 56(c) (“Reliance Decl.”), ¶ 10.
. See Reliance Decl. ¶ 10.
. Id., Ex. F.
. See Second Amended Complaint for Common Law Fraud, Breach of Contract and Aiding and Abetting.
. See Defendants' Joint Memorandum of Law in Support of Their Motion for Summary Judgment Pursuant to Federal Rule of Civil Procedure 56(c) ("Def. Mem.”), at 19, 20-21.
. Reliance Decl. ¶ 7.
. Plaintiffs cite to this Court’s decision in Pension Comm. of Univ. of Montreal Pension Plan v. Banc of Am. Sec., LLC, No. 05 Civ. 9016,
. See Reliance Decl. ¶ 7 (“For the avoidance of doubt, BMMF ratifies that Butterfield is authorized to pursue recovery related to the CP and MTNs and BMMF agrees to be bound by any decisions or judgments in this action.”).
. See Def. 56.1 ¶ 82.
. Plaintiffs' Memorandum of Law in Support of Their Opposition to Defendants' Joint Motion for Summary Judgment Pursuant to Federal Rule of Civil Procedure 56(c) (“PL Mem.”), at 31.
. Lemanik, S.A. v. McKinley Allsopp — cited by plaintiffs — holds only that in federal securities cases under federal law, "[t]he record holder of securities is a 'real party in interest’ who may sue in his own name for securities fraud.”
. See Def. 56.1 ¶ 72; PL Mem. at 31.
. See Def. 56.1 ¶ 72; Deposition of Frederic Becker, Hapoalim’s 30(b)(6) designee (“Becker Dep.”), at 19:7-20:25, 28:2-5 (explaining that Hapoalim took "over the credit responsibility of the issuer, [took] an assignment of the notes and step[ped] into the shoes” of Venus); Reliance Deck ¶ 9.
. Note Purchase Agreement, BHA0002647 at -654; Liquidity Asset Purchase Agreement, BHA0002606 at-614.
. See Memorandum of Law in Support of Defendants Morgan Stanley & Co. Incorporated, Morgan Stanley & Co. International Limited, the Bank of New York Mellon, and QSR Management Limited's Motion to Dismiss the Amended Complaint Pursuant to Federal Rules of Civil Procedure 8(a), 9(b) and 12(b)(6) (Docket No. 56), at 10. The Bank of New York Mellon and QSR Management Limited were dismissed from this action in 2009. See Abu Dhabi,
. See Abu Dhabi,
. Id. (quoting Adelphia Recovery Trust v. Bank of Am., N.A.,
. See SEC v. Espuelas,
. See NAC ¶¶ 202-211. Plaintiffs assert that they identified additional false or misleading statements made by Morgan Stanley to plaintiffs. See Pl. Mem. at 3. The only evidence plaintiffs cite for this assertion is a response to an interrogatory and several paragraphs in their Complaint. See Plaintiffs’ Response to
. See Def. Mem. at 3-4.
. PL Mem. at 6.
. CPC Int’l, Inc. v. McKesson Corp.,
. See id. at 285-86,
. On the contrary, it explained that “[i]n order to state a cause of action for common-law fraud, it is sufficient for plaintiff to allege that ‘defendant knowingly uttered a falsehood intending to deprive the plaintiff of a benefit and that the plaintiff was thereby deceived and damaged.'” Id. at 285,
. See id. at 286,
. See CPC Int'l,
. See Def. Mem. at 4.
. While plaintiffs’ definition of fraud would allow the same conduct to serve as the basis of a claim for either fraud or aiding and abetting fraud, there is a difference in the type of knowledge required for each. See supra Part IV.B.
.
. Although the Appellate Division’s opinion in Danna does not reference the group pleading doctrine, plaintiffs-respondents’ arguments that their claims should survive a motion to dismiss were based on reasoning identical to that underlying the doctrine. See Brief for Plaintiffs-Respondents, Danna v. Malco Realty, Inc.,
.See Chubb & Son Inc. v. Kelleher, Nos. 92 Civ. 4484, 95 Civ. 0951,
. Whether Morgan Stanley made an omission is irrelevant. This is because under New York law, it is well-settled that " '[a]n omission does not constitute fraud unless there is a fiduciary relationship between the parties.’ ” Cobalt Partners, L.P. v. GSC Capital Corp.,
. New York does recognize a cause of action for conspiracy to commit fraud. See Brackett v. Griswold,
.
. See Def. Mem. at 4; Defendants' Joint Reply Memorandum of Law in Further Support of Their Motion for Summary Judgment Pursuant to Federal Rule of Civil Procedure 56(c) ("Def. Reply Mem.”), at 2, 4.
. See Eurycleia,
. Id. at 512.
. Id.
.
. Id. at 440.
. Id.
. Id. (citations omitted).
. Morgan Stanley also relies on the recent Supreme Court decision in Janus Capital Grp., Inc. v. First Derivative Traders, in which the Court held that under Rule 1 Ob-5, the "maker” of a statement is only the one with "ultimate authority over the statement, including its content and whether and how to communicate it.” — U.S. —,
. See MS_000014799 at -800 to -801; MS-000097388 at -392 to -394; MS-000646545 at-550 to -551.
. Deposition of Charles C. Cox, plaintiffs' expert on class certification, at 42:15-18 ("Q. Okay. So it's pretty well understood in the market that a rating is a rating agency's opinion as to risk of default, right? A. I think so.”).
. SeeDef. 56.1 ¶ 1.
. 6/3/06 E-mail from Rany Moubarak, employee in Morgan Stanley’s Fixed Income Division, to Elena Miteva, Executive Director in Morgan Stanley’s Fixed Income Division, MS-000418510 at-510.
. See Def. 56.1 ¶ 53.
. Moreover, the NIR itself gives no indication that Morgan Stanley was involved in its
. See Def. Mem. at 5-8. A statement that is either false or misleading may serve as the basis for a fraud claim under both New York and federal securities law. See High Tides, LLC v. DeMichele,
. See Def. Mem. at 7-8.
. See id. at 6-7; Def. 56.1 ¶¶ 1, 2.
. See Pl. Mem. at 4; Pl. 56.1 ¶¶ l(a)-(c).
. See, e.g., In re Lehman Bros. Mortgage-Backed Sec. Litig.,
.
. See M & T Bank Corp. v. Gemstone CDO VII, Ltd. (M & T II),
. See MBIA,
. Fait v. Regions Fin. Corp.,
. See, e.g., In re Lehman Bros.,
. See M & T I,
. See Fait,
. See id. at 110.
. See Mandarin Trading,
. See M & T I,
. Cf. Assured Guar. Mun. Corp. v. UBS Real Estate Sec., Inc., No. 12 Civ. 1579 (Docket No. 25), at 7,
. Abu Dhabi,
. Id. Plaintiffs also cite ADL, LLC v. Tirakian, which stated that "even statements of opinion are actionable if they are made in bad faith or are not reasonably supported by the available evidence.” No. 06 Civ. 5076,
. Defendants do briefly state that “Opinions generally cannot provide the basis for a claim of fraud,” Def. Mem. at 6, and in support cite to Mandarin Trading,
. Def. Mem. at 6-7.
. Fait,
. See City of Omaha, Nebraska Civilian Employees’ Ret. Sys. v. CBS Corp.,
. See, e.g., Marcus v. AT & T Corp.,
. See Arthur Props. S.A. v. ABA Gallery, Inc., No. 11 Civ. 4409,
. Def. Mem. at 8.
. See In re Citigroup Inc. Sec. Litig.,
. See Declaration of Sanjiv Das (“Das Decl.”), ¶ 6.
. See PL 56.1 ¶ 1.
. This inquiry is distinct from the scienter inquiry. See Fait,
. "The Desired Meaning of Triple-A,” Ex. 689 at MDYS ADCB 936594.
. 5/20/05 E-mail from David Rosa, Senior Analyst at Moody’s, to numerous parties, Ex. 49 at MS_000695506. The NIR indicates that David Rosa was the "Lead Analyst” behind Moody's ratings of the Cheyne SIV. See NIR at MS_000077900.
. See Deposition of David Rosa at 282:23-284:1 ("Q. And at the time you rated the Cheyne SIV you were familiar with the U.S. RMBS market, weren't you, sir?” "A. Not in detail, no.... Q. Notwithstanding the fact that you understood the Cheyne SIV was going to hold 50 percent, up to 50 percent [Home Equity Loans], your testimony is that you were not familiar with the U.S. RMBS market in detail. Is that right?” "A. That is the — yes, I was not familiar with it in detail, yes.”).
. See PL 56.1 ¶¶ 1(f), 1(g). Because I find that the evidence pertaining to the rating of the Cheyne SIV is sufficient to sustain plaintiffs’ fraud claims, I decline to make any ruling at this time regarding the admissibility of evidence pertaining to the rating of other SIVs.
. Summary of Interviews with Kai Gilkes— Former S & P’s Quantitative Analyst (Managing Director) in the London Office, Ex. A to Declaration of Jason Rowe in Support of Plaintiffs’ Opposition to Defendants’ Motion for Summary Judgment, at 3.
. 4/5/07 Instant Message Conversation between Rahul Dilip Shah and Shannon Mooney, PSI-SP-000015 (time-stamps removed and names bolded for clarity). While the above conversation took place after the Cheyne SIV launched, it is unclear to which deal the analysts are referring. There is an issue of fact as to whether it discusses Cheyne. Even if it refers to the rating of other SIVs, if such evidence is admissible, a jury could infer from it that S & P was in the practice of issuing ratings that it did not believe were accurate.
. See PL 56.1 ¶ l(j). In one striking example, upon receiving pressure from Morgan
.Cf. In re Deutsche Bank AG Sec. Litig., No. 09 Civ. 1714,
. Gould,
. See Def. Mem. at 9 ("In the millions of pages of documents produced, plaintiffs cannot point to a single instance in which anyone who worked on the Cheyne SIV transaction suggested he or she believed that the SIV ratings were false. Plaintiffs have simply come up empty. Nor has any witness in this case — from defendants or plaintiffs or third parties — testified that anyone at the rating agencies expressed any such beliefs concerning the Cheyne SIV.”).
. See Gould,
. See Tellabs, Inc. v. Malcor Issues & Rights, Ltd.,
. In re DDAVP,
. See Def. Mem. at 11.
. See Def. 56.1 ¶¶ 35, 54.
. See McClellan v. Smith,
. Chill,
. 9/6/04 E-mail from Lapo Guadagnuolo to Stephen McCabe, Ex. 148.
. 5/20/05 E-mail from David Rosa to numerous parties, Ex. 49 at MS_000695506.
. See Das Decl.
. See Pl. 56.1 ¶ 3.
. Teamsters Local 445 Freight Div. Pension Fund v. Dynex Capital Inc.,
. Def. Mem. at 10.
. PL Mem. at 18 (quoting In re Marsh & Mclennan Cos. Sec. Litig.,
. Def. Mem. at 13 (quoting In re Wachovia Equity Sec. Litig.,
. Footbridge Ltd. v. Countrywide Home Loans, Inc., No. 09 Civ. 4050,
. See N.J. Carpenters,
. See Def. Mem. at 13.
. See Shields,
. See supra Part V.B.2.C.
. See Tellabs,
. Def. Mem. at 14.
. See PL 56.1 ¶¶ 8, 9.
. See 7/12/04 Letter from Brian M. Clark-son, Executive Vice President of Moody’s, to Jonathan G. Katz, Secretary of the Securities and Exchange Commission, Ex. 588 at MDYS ADCB 1261874 (‘‘[T]he issuer could take its business elsewhere unless the rating agency provides a higher rating.”) (emphasis in original).
. 6/8/04 E-mail from Khalid Howladar, analyst in Moody's Structured Finance Group, to others at Moody's, Ex. 676 at MDYS ADCB 998832 ("CDO is the cash cow for the rest of structured.”). Accord 4/23/10 Memorandum from Senators Carl Levin and Tom Coburn to Members of the Permanent Subcommittee on Investigations, CRDT_RTG_EXH_0000015 at -19 ("From 2004 to 2007, Moody’s and S & P produced a record number of ratings and a record amount of revenues, primarily because of RMBS and CDO ratings____ Revenues increased dramatically over time as well. Moody's gross revenues from RMBS and CDOs increased from just over $61 million in 2002 to over $208 million in 2006. S & P's net annual revenues from ratings nearly doubled from $517 million in 2002, to $1.16 billion in 2007. During that same period, the structured finance group’s revenues tripled from $184 million in 2002, to $561 million in 2007.... Top [Rating Agency] executives were also compensated handsomely.”).
. See PI. 56.1 ¶¶ 8(f), 9(h).
. See Deposition of Frank L. Raiter, former Managing Director and Head of RMBS Ratings at S & P, at 270:5-11, 271:14-272:7 ("A. It was a house of cards because they had violated the diversification premise that the CDO concept was based on.... Q .... you responded, well, I just think it's a further indictment that there was a big breakdown between the people that were trying to maximize profits and the people that were trying to maximize the credit ratings methodology and activities. And that the people with the profit motive won____ [W]as that testimony accurate? A. Yes.”). When Richard Gugliada, S & P's former Global Practice Leader for CDOs, was asked, "[i]f you didn't have the data, and you're a data-based credit rating agency, why not walk away” from rating the deals, he responded: "The revenue potential was too large.” See Transcript of NOW on PBS: Credit and Credibility (PBS television broadcast, week of 12/26/08), Ex. 96 at 5, available at http: //www.pbs.org/now/shows/ 446/transcript.html.
. See Def. Mem. at 14-15.
. See id. at 11 ("Plaintiffs now point to inflammatory language plucked out of context from disparate emails, irrelevant testimony on matters and ratings not at issue in this case, and hindsight re-evaluations aimed at improving future processes.”). Indeed, the Rating Agency defendants each submitted separate briefs solely to argue that they lacked the requisite state of mind. See Reply Memorandum of the McGraw Hill Companies, Inc. in Further Support of Its Motion for Summary Judgment; Reply Memorandum of Law of Moody's Investors Service, Inc. and Moody's Investors Service Ltd. in Further Support of Their Motion for Summary Judgment, at 2-3 (referring to plaintiffs’ evidence as "out-of-context scraps” and "a driblet of water-cooler gossip”).
. See Curiale v. Peat, Marwick, Mitchell & Co.,
. STMicroelectronics,
. Gabriel Capital L.P. v. NatWest Fin., Inc., 177 F.Supp.2d 169, 174-75 (S.D.N.Y.2001).
. See 1/6/05 E-mail from Ronan Mellon, employee in Morgan Stanley's Fixed Income Division, to Cheyne and others at Morgan Stanley, Ex. 71 at MS-00656659 ("[Djisclosure is significantly less [in an SIV such as Cheyne] than [in] a typical CDO as many of the specific details are contained in the operating manual which is not made public and can be amended in consultation with the rating agencies.”); Review of Structured Investment Vehicles and Introduction to Moody's New Quantitative Model, Ex. 316 at MDYS ADCB 776952 (“Each SIV has a detailed Operations Manual, which provides the genetic blueprint for the SIV. The operations manual is not a legal document and is not made public. However, compliance with the manual is a necessary, though not sufficient, condition for the maintenance of the ratings.”); 6/22/05 E-mail from Peter Fagan, employee in Morgan Stanley’s Fixed Income Division, to Erin Morahan, Vice President in Morgan Stanley's Global Capital Markets Division, Ex. 628 at MS-000240237 (in response to a request to send certain information to potential investors in Cheyne: “[n]o, we cannot send the warehouse report to CP investors. It is my understanding that Cheyne [does] not want to show this level of breakdown (i.e. asset by asset) to the CP investors.”).
. See Pl. Mem. at 27-28.
. See 9/30/09 Testimony of Raymond W. McDaniel, Chairman and CEO of Moody’s, before the U.S. House of Representatives Subcommittee on Capital Markets, Insurance and Government-Sponsored Enterprises, Ex. 688 at 7 ("Unlike in the corporate market, where investors and other market participants can reasonably develop their own informed opinions based on publicly available information, in the structured finance market, there is insufficient public information to do so. Disclosure requirements for publicly offered securities do not require the public dissemination of sufficient information about the structure or underlying assets of a securitization to make reliable analysis possible. Indeed, under this limited information disclosure model, [Rating Agencies] must ask for additional information to analyze and rate securities. In the absence of sufficient data, investors are unable to conduct their own analysis and develop their own independent views about potential or existing investments. Furthermore, [Rating Agencies] are practically unable to offer unsolicited ratings and research, which has the effect of restricting information available to investors and increasing the potential for rating shopping by issuers.”); S & P's CDO Strategic Plan Draft,
. See Crigger,
. Abu Dhabi Commercial Bank v. Morgan Stanley & Co.,
. See Def. Mem. at 19.
. See Def. 56.1 ¶ 38.
. See id. ¶ 53.
. See id. ¶ 59.
. See GIB Credit Approval Routing Slip, Ex. 456 at GIB0000029 to -30.
. See id.
. Even if GIB made an initial decision to invest in Cheyne before the final ratings were issued, defendants provide no evidence that GIB made a binding commitment such that, had Cheyne received lower ratings than expected, GIB could not back out. Cf. Absolute Activist Value Master Fund Ltd. v. Ficeto,
. See Def. Mem. at 19-20; Def. 56.1 ¶ 60.
. See Deposition of Yaser Humaidan at 21:10-22:1 ("We relied on the rating of [the Cheyne SIV].”)-
. See Deposition of Byung-Gyu Pahk ("Pahk Dep.”) at 386:18-387:3.
. See id. at 387:10-14.
. See id. at 13:16-22, 32:9-20, 126:23-129:11.
. See DX 520-Pahk at 1; DX 522-Pahk at 1.
. See Pahk Dep. at 360:10-362:5 ("Q.... Did NACF receive any reports specifically about Cheyne written by Moody’s prior to its investment in Cheyne? A. I haven't heard that NACF received any document from Moody's prior to investment.”).
. See Pl. 56.1 ¶ 14.
. See Pahk Dep. at 380:22-381:2, 414:20-415:15; DX 520-Pahk at 1; DX 522-Pahk at 1.
. S & P's Rating Definitions, at MDYS ADCB 790158.
. Id.
. See Reliance Decl. ¶ 6 ("When ADCB, GIB, GIS, and NACF considered the MCNs, they understood that the final ratings would be the same as the preliminary/provisional A/A3 ratings and that preliminary/provisional ratings are virtually identical to final ratings. Their investments were not actually consummated until the final ratings were issued on August 3, 2005 — the settlement date of their MCN purchases. Had the final ratings been different, ADCB, GIB, GIS, and NACF would have canceled their trades.”). Declarations are properly considered as evidence on a motion for summary judgment when they set forth specific facts based on a party’s personal
. See Def. Mem. at 20; Def. 56.1 ¶ 66.
. See Deposition of James Chen, SinoPac’s 30(b)(6) designee, at 386:16-388:21; Ex. 527 at 1-15 (internal investment approval memorandum and analysis report prepared before SinoPac’s investment explicitly states that it relied on the A/A3 credit ratings on the MCNs and the high ratings on the Cheyne SIV's underlying assets).
. This is not to suggest that under all circumstances, a party that purchases a complex asset-backed security may pursue a claim based on fraudulent misrepresentations Concerning the assets comprising the security. I hold only that when an SIV issues both rated notes and unrated combination notes comprised primarily of the rated notes, a purchaser of the combined notes may pursue a fraud claim if the ratings of the underlying notes were fraudulent.
. See Becker Dep. at 51:16-22, 195:13— 196:13 (“Q. Other than the pitch book and the IM, what other documents did Hapoalim consider in deciding whether to invest in the Cheyne SIV? A. The ratings reports. Q. Which ratings reports? A. The new issue reports issued by S & P and Moody’s.” "Q. Why Cheyne as opposed to some other SIV? A. Because the ratings were single A, which was not always the case on other mezzanine notes.”).
. See Bank Hapoalim International Credit Review Unit (ICRU) Procedures, BHAe0053543 at-550.
. See Bank Hapoalim B.M. U.S. Credit Application, BHAe0052548 at -551 to -556 (enabling Venus to invest in "A/A3 rated 10-year mezzanine capital notes issued by [Cheyne],” and requiring that any potential investment of
. Deposition of Christian Herter ("Herter Dep.”) at 25:23-24, 67:8-11.
. See Ex. 433 at PSTBNK0000087.
. See Herter Dep. at 147:21-24, ("I can tell you that according to our own guidelines, which are also set forth in handbooks, we are only allowed to invest in investment grade assets.”).
. See Def. 56.1 ¶¶ 76-78; Def. Mem. at 25.
. See supra Part V.D.
. Commerzbank's claims based on the MCNs purchased by DAF have been dismissed. See supra Part V.A.3.
. See Deposition of Sascha Klaus, Commerzbank's 30(b)(6) designee, at 360:17-362:22, 363:17-365:2 ("Q. Did Ms. Medora identify any specific communications on rating that she considered in choosing to propose this investment? A. Yeah. The rating .... [t]he communication on the rating of the capital notes.... Q. Which rating agency report did [] Ms. Medora tell you that she reviewed in choosing to propose this investment? [ ] A. I can only tell you the brand, if you ask which, which documents. If I recollect from, from my conversation and from— from the file review, was the—the two major—'major' I should not say. I have seen Moody's and—Moody's and S & P reports, if I recall correctly.”).
. See Def. 56.1 ¶ 84; PL Mem. at 25.
. See Deposition of James Grossman, PSERS' 30(b)(6) designee, at 30:16-18 ("The guidelines were provided as a framework under which [CSAM] was to operate."); Deposition of Christopher Burton, CSAM's 30(b)(6) designee ("Burton Dep.”), at 101:15-17 ("As a portfolio manager, we would need to see
. See PSERS Investment Objectives and Guidelines, Ex. 4 (Grossman) at PSERSe0049960.
. See Burton Dep. at 99:14-101:20 ("There was a memo which was previously described and there was a list of various characteristics of the security. The rating was one of those characteristics but I’m not aware of how much of a weight would've been placed on that versus any other characteristic listed on — or any weight, if at all, was on that characteristic versus other characteristics in that memo.”).
. See id. at 95:3-25, 98:3-13 (“Q. What, if anything, did CSAM do when it selected the Cheyne medium-term notes on behalf of PSERS to fulfill its duty as a fiduciary with respect to PSERS? What information did— did CSAM look at to make sure they’re fulfilling that duty? [] A____[S]ome of the information that was — that was used to purchase it is contained in that credit file. Q. And one of the items that you saw earlier in the credit file were the ratings on the [Cheyne] medium-term notes, correct? A. Correct. Q. And those were rated AAA by both — by Moody’s, correct? A. Correct. Q. And rated AAA by Standard & Poor’s, correct? A. Correct." "Q. [W]hy should an analyst be aware of what the ratings are before putting an investment on the approved list? A.... I’d say it’s an important item to — to understand — I guess it’s an item that’s very relevant to the investments for a variety of reasons, including sometimes guidelines, limit, a particular type of — a particular rating.”).
. See Jay Dees Inc. v. Defense Tech. Sys., Inc., No. 05 Civ. 6954,
. Deposition of Phillip N. Picariello, SFT's 30(b)(6) designee, at 181:17-18, 254:24-255:3.
. See id. at 255:6-8; 256:5-6.
. Picariello clarified that when he used the phrase "AAA rating,” he was referring to ratings issued by both Moody's and S & P. See id. at 185:2-7 ("Highest credit quality means the top rating, and according to S & P and Moody’s, that is AAA rated. So, the AAA rating acts as the gateway to look at the assets within a sector, and then from there the due diligence is done within the different selected assets.”).
. See Def. 56.1 ¶ 91.
. See id. ¶ 92; Def. Mem. at 24.
. Deposition of Dennis Walsh, FSBA’s 30(b)(6) designee, at 23:21-25, 79:5-22, 83:21-25, 84:2-11 ("And she would have, you know, read the Moody’s and S & P reports to make sure they have the, you know, kind of initial door-opener, that it's Al, PI to get — to begin her analysis.” “Q. [I]s it fair to say that the credit rating agency was a significant factor in the determination whether to pursue any analysis? [] A. Significant is hard to define. If it doesn’t have a specific rating, we’re not going to go any farther.”).
. See Deposition of William R. Allen, Victory’s 30(b)(6) designee, at 47:5-48:3 ("A.... [T]he Cheyne rating was AAA rated, so it fit within those guidelines. Q. Which guidelines specifically are you referring to? A. All right. Let’s take it word for word. 'At the time of purchase, all investments must carry a program or instrument rating of ... either Aa3 or higher by Moody's, AA- or higher by S & P, or AA- or higher by Fitch.' So I believe it satisfied all three of those. Correct. Okay. Q. Is it your testimony, Mr. Allen, that the Cheyne medium-term notes that were purchased in connection with the FSBA securities lending arrangement, fell within policy because they were rated ... AA- or higher by S & P? A. Yes. Q. And also, Aa3 or higher by Moody's; is that right? A. That is correct.”).
. Defendants argue that the "substantial factor” test of reliance is essentially a "but for” causation test, Def. Mem. at 16, and indeed, there is some support for this. See McLaughlin v. American Tobacco Co.,
. See Def. 56.1 ¶ 94; Reliance Decl. ¶ 10.
. See Deposition of Paul T. Quistberg, CMA’s 30(b)(6) designee ("Quistberg Dep.”), at 37:14-43:16 ("Q .... is it your understanding that the analyst who prepared this cash investments analyst report disagreed with the Moody’s opinion? [ ] A. Yes. In the context of having a different opinion from Moody's. Q. And did the analyst disagree with the S & P opinion? [] A. Yes.”); CMA0000735 at-735.
. See Def. Mem. at 24.
. Quistberg Dep. at 256:13-19 ("[I]f a deal ... were to come to market and not have a Tier 1 rating from Moody’s, S & P or an expectation that it couldn’t get a rating like that, then it wouldn't be looked at. As a preliminary screen. Not the only factor, but
. See Deposition of James F. Smigiel, SEI’s 30(b)(6) designee, at 32:25-33:2, 84:25-85:5, 386:21-387:3 ("They could not purchase this note in our funds unless it had a rating attached to it.” "[The analysts at CMA are] required to rely on the rating agencies via Rule 2a-7, and in [a] typical scenario there is no access to the underlying collateral so there is very little else they can do.” "We need to rely on the ratings to do that since we don't have a look through to the underlying [collateral], so the assumption made there is that a AAA rated subprime securitization is actually, the AAA rating is actually comparable to the U.S. Treasury and has the same potential default as the U.S. Treasury.”).
. See id. at 32:25-33:2.
. See Quistberg Dep. at 38:1-44:14 ("Q. Do you have an understanding of what the analyst does? [ ] A. He or she conducts their own independent analysis of credit factors that they deem important to determine the CI4 rating.” "Q. And do you consider that ability to reach opinions different from that of the rating agencies to be one of CMA’s strengths? [ ] A. I view research as a strength, not necessarily forming a different opinion, in and of itself. Q. But the independence, do you think that's a strength? [ ] A. Yes.”).
. See id. at 253:19-254:10 ("Q. Let's start with the first factor that you mentioned. You said '[the ratings are] an important first screen.’ What does that mean? A. Typical first screen for new issues ... was to look at — for 2a-7 funds it had to have Tier 1 holdings, the type of issue, issuer coming to market, the size of the issue coming to market, and the ratings. And usually, the major rating agencies provided an initial indication of what the rating could be. So if it wasn't deemed to be Tier 1, it likely wouldn't have been looked at. Could have, but unlikely to be looked at. If something came in, for example, at Bal, BB + , Moody's S & P junk ratings, usually a 2a-7 analyst wouldn’t look at that.”).
. See Deposition of Vikas Vijayan ("Vijayan Dep.”), at 146:9-148:9.
. See Def. 56.1 ¶¶ 38, 53.
. See 4/13/05 E-mail from Vikrant Bhansali, Executive Director in Morgan Stanley's Fixed Income Division, to Jim Coleman and Vikas Vijayan, employees at ADCB, at MS-000221694 to-696.
. See Vijayan Dep. at 25:25-26:3 ("The decision to invest in the Cheyne SIV was actually made based on the ratings of the SIV.”), 36:4-6; Deposition of Olivia Birchall, an ad
. See ADCB Memorandum re: "Investment Proposal” from Neil Sharp, Head of Investments, Ex. 5 at ADCB00000922 to -927.
. See Reliance Decl. ¶ 6.
. See Def. Mem. at 25; Def. 56.1 ¶ 100.
. See supra Parts V.D.2, V.D.3, V.D.9.
. See 11/1/04 E-mail from Linda Meade, Vice President in Morgan Stanley’s Fixed Income Division, to GIS, Ex. 514.
. See Deposition of David Wilson ("Wilson Dep.”), at 12:9-10 ("I think that was made in around June 2005 and I think the deal settled in around about August 2005.”).
. See Reliance Decl. ¶ 6
. See Wilson Dep. at 9:2-10:8, 12:22-14:18 ("[I]n buying the product, we were very aware of the rating. We were, as I said, we made the decision essentially to buy the equity and also to buy the mezzanine capital notes, so to ensure that we had a sufficient rating for that portfolio.”).
. See supra Part V.D.
. See supra Part V.D.3.
. Deposition of Daisy Lac, SEI Strategies' 30(b)(6) designee, at 120:2-4, 172:6-12.
. See id. at 435:21-436:11 ("Q. And did you read this portion of the Information Memorandum prior to making your investment in the Cheyne SIV in March of 2007? [] A. Yes. Q. And you understand that 'this portion’ refers to the paragraph that begins, 'The program has been rated AAA by Moody’s [and] ... S & P.’ Did you read that sentence when you reviewed the Information Memorandum? A. Yes.”).
. See Deposition of Kenneth M. Guy, King County’s 30(b)(6) designee, at 72:24-25 ("[T]he communication we relied on was the credit rating, the short-term credit rating and long-term credit rating.”); Deposition of Mike Smith, a King County employee involved in the purchase of notes issued by Cheyne, at 12:20-24 (''[T]he most critical item we look at is the ratings by, in this case Moody’s and Standard & Poor’s, was the most important thing that we relied on in placing the trade.”).
. See id. at 207:21-209:24.
. See Def. 56.1 ¶¶ 103, 105.
. Def. Mem. at 26 (citing Def. 56.1 ¶ 100).
. Further, defendants’ assertion that King County should have conducted a diligent investigation rather than rely on the ratings is undercut by plaintiffs’ declaration that "[r]eliance on ratings was particularly critical and necessary due to the Cheyne SIV’s complexity and the limited information available to plaintiffs.” Reliance Decl. ¶ 5. Accord supra Part V.D. As I noted in King County II, it is highly relevant to plaintiffs' claims that the Rating Agencies had access to information about the SIV's assets that investors did not. See
. See Def. Mem. at 26 (quoting JSMS Rural LP v. GMG Capital Partners III, LP, No. 04 Civ. 8591,
. See id. at 28.
. See Def. 56.1 ¶ 110.
. "The Desired Meaning of Triple-A,” Ex. 689 at MDYS ADCB 936594.
. King County v. IKB Deutsche Industriebank AG (King County I),
. Id. (emphasis in original).
. Def. Mem. at 28-30.
. See King County I,
. Id. at 343.
. Id. at 345-46.
. See Pl. Mem. at 34-37; PL 56.1 ¶¶ 29, 39.
. See Declaration of Bjorn I. Steinholt, CFA, in Support of Plaintiffs' Opposition to Defendants’ Joint Motion for Summary Judgment Pursuant to Federal Rule of Civil Procedure 56(c) (“Steinholt Dec!.”). Defendants assert that Steinholt’s report “lacks any scientific methodology, [and] should be ascribed no weight.” Def. Reply Mem. at 19 n. 35. However, I cannot reach such a conclusion at this point in the litigation. Defendants also requested “permission to brief the issue of whether plaintiffs' two expert reports satisfy Fed.R.Evid. 702 if the Court is inclined to rely on them in deciding this motion.” Id. Because this summary judgment motion comes before the close of expert discovery, neither expert reports nor rebuttal reports have been made available to the Court. As such, briefing on the admissibility of expert testimony is inappropriate at this time.
. See Def. 56.1 ¶¶ 114-125.
. Def. Mem. at 30.
. See AIG Global Sec. Lending Corp. v. Banc of Am. Sec. LLC,
. It is undisputed that asset-backed securities do not trade in an efficient market and that their present value is therefore difficult to ascertain. Defendants acknowledge this in making their argument pertaining to the Gryphon notes. See infra Part V.E.4., Def. Reply Mem. at 20 n. 37 ("The Gryphon notes do not trade in an efficient market and their potential, future sale prices cannot serve as proxies for value.”).
. AIG Global,
. See PI. 56.1 ¶ 35(e); Steinholt. Decl. ¶¶ 33-34.
. See Def. Mem. at 31.
. IM, MS_000014799 at -816.
. Cheyne Capital Management Limited's Presentation to Prospective Capital Note Investors, MS_000221699 at-744.
. N.J. Carpenters,
. The MCN-holding plaintiffs were ADCB, Hapoalim, SinoPac, Postbank, NACF, GIB and GIS. Commerzbank purchased both MCNs and senior notes. See Declaration of Plaintiffs Regarding Damages in Support of Plaintiffs’ Opposition to Defendants’ Joint Motion for Summary Judgment Pursuant to Federal Rule of Civil Procedure 56(c) (“Damages Deck”), ¶ 1 n. 1.
. See Pl. 56.1 ¶¶ 39(a), 39(d), 39(f).
. See Def. 56.1 ¶ 137.
. See Def. Mem. at 32; Def. 56.1 ¶¶ 138-139.
. Damages Decl. ¶¶ 2, 3.
. Offering Memorandum of Gryphon Funding Limited, at CMA0000995.
. See Acticon AG v. China North East Petroleum Holdings Ltd.,
. See In re Oxford Health Plans, Inc. Sec. Litig.,
.
. AIG Global, 646 F.Supp.2d at 403.
. See id.
. See Pl. 56.1 ¶ 39(a).
. See Steinholt Decl. ¶¶ 35-36.
. See Design Strategy, Inc. v. Davis, 469 F.3d 284, 303 (2d Cir.2006).
. See Winnick,
. See Chemtex, LLC v. St. Anthony Enters., Inc.,
. Rosner v. Bank of China, No. 06 Civ. 13562,
. Ex. 279 at MS 000558825.
. Deposition of Gregg Drennan at 474:4-22.
. See 10/19/04 E-mail from Howard Hubler, a former Morgan Stanley mortgage bond trader, to Robert Rooney, employee at Morgan Stanley, at MS_001439223 (“The more I think about [the Cheyne deal] the worse I feel about the risk/ reward that it has.”). Hubler has been widely blamed for a nine billion dollar trading loss at Morgan Stanley — more than has ever been lost by a single trader— stemming from his bets on RMBSs. See Max Abelson, Howie Hubler of New Jersey: the Return of a Subprime Villain, New York Observer, Mar. 24, 2010, http://observer.com/ 2010/03/howie-hubler-of-new-jersey-the-return-of-a-subprime-villain/.
. See 7/22/04 E-mail from Lapo Guadagnuolo to Gregg Drennan, Ex. 72 at S & PADCB 0072366.
. See 7/23/04 E-mail from Gregg Drennan to Lapo Guadagnuolo and Perry Inglis, Ex. 72 at S & P-ADCB 0072365.
. See 8/3/05 Letter from Perry Inglis to Cheyne Finance PLC, Ex. 284.
. 1/20/06 E-mail from Gregg Drennan to Pinar Onur, Morgan Stanley employee in Fixed Income Research, at MS_001277854 to -855.
. See supra Part V.B.l.b.