| AIG Fin. Prods. Corp. v ICP Asset Mgt., LLC |
| 2013 NY Slip Op 05177 [108 AD3d 444] |
| July 9, 2013 |
| Appellate Division, First Department |
| AIG Financial Products Corp., Respondent, v ICPAsset Management, LLC, et al., Appellants, et al.,Defendants. |
—[*1] Quinn Emanuel Urquhart & Sullivan, LLP, New York (Jonathan E. Pickhardt ofcounsel), for respondent.
Order, Supreme Court, New York County (Jeffrey K. Oing, J.), entered August 8,2012, which, insofar as appealed from, denied the motion of defendants Moore andSeychelles to dismiss the cause of action against them for aiding and abetting fraud,unanimously affirmed, with costs. Appeal by ICP Asset Management, LLC, ICPSecurities LLC, and Institutional Credit Partners LLC from the aforesaid orderunanimously withdrawn in accordance with the stipulation of the parties dated April 2,2013.
Defendants Moore Capital Management, LP and Seychelles Ltd. (Moore) contendthat plaintiff AIG Financial Products Corp. (AIG) failed to allege sufficient facts toestablish a cause of action for aiding and abetting fraud. According to the first amendedcomplaint, the underlying fraud was committed by the ICP defendants (ICP) when theyentered into an arrangement with Moore to secure from it residential mortgage backedsecurities pursuant to a forward purchasing agreement. AIG, which had issued creditdefault swaps in connection with the collateralized debt obligations (CDOs) that thoseresidential mortgage backed securities were associated with, claims that the forwardpurchasing agreement between ICP, the collateral manager for the CDOs, and Moore,was purposely structured to deplete the CDOs' assets by setting the price for themortgage backed securities at a level much higher than that justified by the deterioratingmarket for those products at the time in question, 2007 and 2008. Plaintiff asserts thatICP was required, pursuant to the indentures governing the CDOs, to obtain its consentbefore [*2]purchasing new collateral, and that it wasdefrauded when ICP failed to obtain such authorization before entering into the forwardpurchasing agreement.
With respect to Moore, the first amended complaint specifically alleges that it wasprivy to the indentures, and thus knew of AIG's veto power over transactions such as theforward purchase agreement. Further, AIG alleged various facts intended to suggest thatthe forward purchase agreement was designed to defraud AIG. For example, it assertedthat the CDOs themselves, which were the actual parties in interest to the forwardpurchase agreement, were not made signatories to the agreement. In addition, AIGalleged that the forward purchase agreement made little economic sense for the CDOs,since it promised to purchase mortgage backed securities from Moore at prices notcommensurate with the foundering market for those products. The first amendedcomplaint alleges that Moore did not obtain the securities in question independently, butrather that ICP "arranged for them to be acquired" by Moore. AIG further avers in thefirst amended complaint that Moore realized a large windfall as a result of its transactionswith ICP. Finally, AIG alleges that Moore participated in "swapping" with TOP certainmortgage backed securities in place of securities with respect to which AIG did exerciseits right to veto, as a way of quashing AIG's approval rights under the indentureagreements. While this allegation does not appear in the first amended complaint itself, itis apparent from papers submitted by the parties in connection with a related SECenforcement action, which papers were considered by the motion court for purposes ofamplifying the first amended complaint.
Moore asserts that the first amended complaint fails because it does not allege thatMoore had actual knowledge of the facts supporting each and every element of the fraudcause of action against ICP. It claims that, at best, the first amended complaint allegesthat Moore had constructive knowledge of the facts, which it correctly notes isinsufficient on an aiding and abetting claim (see CRT Invs., Ltd. v BDO Seidman, LLP, 85 AD3d 470,472 [1st Dept 2011]). Moore further argues that AIG did not sufficiently allege that itsubstantially assisted ICP in carrying out its fraud, or that its conduct as allegedproximately caused damage to AIG.
Initially, we note that ICP has not appealed the finding that AIG sufficiently pleadeda cause of action for fraud against it. Further, Moore has not challenged that aspect of themotion court's order. Accordingly, we accept for purposes of this appeal that AIG hasmade out a claim for fraud, the necessary predicate to the cause of action against Moorefor aiding and [*3]abetting.
While the allegations in the first amended complaint alone, if proven, would notdefinitively establish that Moore had actual knowledge of ICP's efforts to defraud AIGsufficient to trigger aiding and abetting liability, that is not the standard on a motion todismiss pursuant to CPLR 3211 (a) (7). This Court held in Oster v Kirschner (77 AD3d51, 55-56 [1st Dept 2010]) that "[a] plaintiff alleging an aiding-and-abetting fraudclaim must allege the existence of the underlying fraud, actual knowledge, andsubstantial assistance. This Court has stated that actual knowledge need only be pleadedgenerally, cognizant, particularly at the prediscovery stage, that a plaintiff lacks access tothe very discovery materials which would illuminate a defendant's state of mind.Participants in a fraud do not affirmatively declare to the world that they are engaged inthe perpetration of a fraud. The Court of Appeals has stated that an intent to commitfraud is to be divined from surrounding circumstances (see Eurycleia Partners, LP vSeward & Kissel, LLP, 12 NY3d 553 [2009])."
Here the "surrounding circumstances" described in the first amended complaintpermit the reasonable inference that Moore actually knew of ICP's alleged fraud. AIGalleges not merely that Moore was a passive beneficiary of ICP's largesse in purchasingits securities at well-above-market rates, but that Moore willingly turned a blind eye toevidence that the forward purchase agreement was a sham. At the pleadings stage, suchan allegation is sufficient to state a claim for aiding and abetting fraud, since to holdotherwise would be to "endorse what is essentially a 'see no evil, hear no evil' approach,"which this Court has refused to do (id. at 57).
In any event, all that is needed to overcome a motion to dismiss a fraud claim is arational inference of actual knowledge (see Houbigant, Inc. v Deloitte & Touche,303 AD2d 92, 98 [1st Dept 2003]). Here, the allegations provide ample reason to believethat Moore was a willing conspirator with ICP against AIG. First, AIG asserts that therewas an enormous economic incentive to Moore in entering into the forward purchaseagreement, in realizing profits on the sale of mortgage backed securities that were almosttoo good to be true. One could reasonably infer based on the allegations that theopportunity to realize such an unexpected windfall, considering the market conditions,would not be randomly bestowed on an innocent party, but rather that the party had to beknowledgeable as to why it was the recipient of such good fortune. Further, the "swaps"allegedly made between ICP and Moore were outside the ordinary course of the forwardpurchase agreement and suggest an even greater level of awareness by Moore that theformer was attempting to do an end-run around AIG. Indeed, it can be inferred from thepapers in the SEC action that Moore actually initiated the swaps.[*4]
The first amended complaint also supports theother necessary element of AIG's aiding and abetting claim, which is that Moore musthave provided "substantial assistance" to ICP, in a manner beyond just performingroutine business services (see CRT Invs., Ltd. v BDO Seidman, LLP, 85 AD3dat 472). For instance, AIG alleges that Moore implored ICP to begin theforward-purchasing arrangement when Moore realized that the market for mortgagebacked securities was entering its decline. Further, Moore's willing entrance into the"swaps" with ICP evinces a concerted effort on Moore's part to help ICP avoid itsobligation under the indentures to obtain AIG's consent for each and every asset purchaseon behalf of the CDOs.
Finally, we reject Moore's contention that the first amended complaint fails to allegethat its activities proximately caused injury to AIG. As alleged, Moore activelyparticipated in the transactions at issue and moved assets into the CDOs at above-marketprices to its benefit while leaving the CDOs with less money to repay the note holders.This allegedly caused a foreseeable increase in the risk that AIG's payment obligationswould be triggered.
We have considered Moore's other contentions and find them unavailing.Concur—Gonzalez, P.J., Mazzarelli, Moskowitz, Renwick and Manzanet-Daniels,JJ.