| Loreley Fin. (Jersey) No. 28, Ltd. v Merrill Lynch, Pierce,Fenner & Smith Inc. |
| 2014 NY Slip Op 03326 [117 AD3d 463] |
| May 8, 2014 |
| Appellate Division, First Department |
[*1]
| Loreley Financing (Jersey) No. 28, Limited,Respondent-Appellant, v Merrill Lynch, Pierce, Fenner & SmithIncorporated, et al., Appellants-Respondents, and 250 Capital LLC, Appellant, et al.,Defendant. |
Cleary Gottlieb Steen & Hamilton LLP, New York (Michael R. Lazerwitz ofcounsel), for appellants-respondents.
Meister Seelig & Fein LLP, New York (James M. Ringer of counsel), forrespondent-appellant.
Morvillo LLP, New York (Andrew J. Morris of counsel), for appellant.
Order, Supreme Court, New York County (Jeffrey K. Oing, J.), entered May 16,2013, which, to the extent appealed from as limited by the briefs, granted the motion ofdefendants Merrill Lynch, Pierce, Fenner & Smith Inc. (MLPFS), Merrill LynchInternational Inc. (MLI), and Merrill Lynch & Co., Inc. (Merrill Lynch) (the Merrilldefendants) to dismiss the first cause of action (rescission) as against them and thesecond, third and fourth causes of action (fraud, conspiracy and aiding and abetting) asagainst MLI and Merrill Lynch, denied the Merrill defendants' and defendant 250 CapitalLLC's motions to dismiss the second cause of action as against MLPFS and 250 Capital,and denied the Merrill defendants' and 250 Capital's motion to dismiss the sixth cause ofaction (unjust enrichment) as against them, unanimously modified, on the law, to denythe motion to dismiss the second cause of action as against Merrill Lynch and MLI, andto grant the motions to dismiss the sixth cause of action as against the Merrill defendantsand 250 Capital, and otherwise affirmed, without costs.
Plaintiff Loreley Financing (Jersey) No. 28 Limited is a company organized underthe laws of Jersey, Channel Islands. It was formed to purchase $60 million of securitiesissued in connection to a credit default obligation (CDO). The CDO was structuredaround a special purpose entity, Auriga CDO, Ltd. (Auriga). Auriga was formed byMerrill Lynch. Residential mortgage-backed securities (RMBS) accounted for all thecollaterals in Auriga's CDO.
Pursuant to a Collateral Management Agreement, 250 Capital, a subsidiary of Merrill[*2]Lynch, was the collateral manager for Auriga'scollateral debt securities. As such, 250 Capital selected the securities for the pool and hadthe right to substitute assets in and out of the pool. Two other subsidiaries of MerrillLynch, MLPFS and MLI, were intended third-party beneficiaries of the CollateralManagement Agreement.
In addition, MLPFS was the initial purchasers of the securities issued by Auriga, andMLI provided interim financing as a warehouse lender. At the same time, MLI acted as acounterparty, as purchaser of a credit default swap (CDS). At the time the CDO wascreated, Auriga was required to enter into a CDS with MLI. Specifically, as the buyer ofthe CDS, MLI agreed to make periodic payments to the seller, Auriga. In return, Aurigaagreed to compensate MLI in the event the underlying RMBS defaulted or experienced asimilar credit event. In effect, under the CDS, the risk of default was transferred from theholder of the fixed-income security emanating from the CDO, to the seller of the CDS,Auriga.
In 2011, plaintiff Loreley Financing commenced this action against Merrill Lynchand its affiliates MLI, MLPFS and 250 Capital, among others, accusing them of causingplaintiff to purchase a fraudulent CDO investment that is now worthless. In itscomplaint, plaintiff raises causes of action sounding in (1) rescission; (2) common-lawfraud; (3) conspiracy to defraud; (4) aiding and abetting fraud; (5) fraudulentconveyance; and (6) unjust enrichment. The rescission claims are asserted againstMLPFS and MLI only, while the remaining claims are asserted against alldefendants.
Merrill defendants and 250 Capital moved to dismiss the action pursuant to CPLR3211 (a) (1) and (7) and 3016 (b). The motion court dismissed the claims of conspiracyto defraud, aiding and abetting fraud, fraudulent conveyance and rescission. The motioncourt also dismissed the common-law fraud and unjust enrichment claims assertedagainst MLI and Merrill Lynch. The motion court, however, denied the dismissal of thecommon-law fraud claims and unjust enrichment claims against MLPFS and 250 Capital.Both plaintiff and defendants appealed from the part of the court's order adverselyaffecting them.
We first examine defendants' contentions. With regard to the fraud claims,defendants contend that plaintiff, who is a resident of Jersey in the Channel Islands, istime-barred from raising the fraud claims pursuant to New York's borrowing statute(CPLR 202) and Jersey law. A cause of action for fraud accrues where the loss wassustained (Prefabco, Inc. v Olin Corp., 71 AD2d 587, 588 [1st Dept 1979]).Generally, the loss is sustained "where the investors resided" (Matter of SmithBarney, Harris Upham & Co. v Luckie, 85 NY2d 193, 207 [1995], certdenied 516 US 811 [1995]). However, a court can consider all relevant factors indetermining the situs of the loss, including "how and where plaintiff paid for thesecurities, where plaintiff maintained the trading account in which the loss was reflected,and the manner in which the securities were handled" (Grosser v Commodity Exch.,Inc., 639 F Supp 1293, 1300 [SD NY 1986], affd 859 F2d 148 [2d Cir1988]). Because there is an issue of fact as to where plaintiff sustained loss, the motioncourt correctly denied defendants statute of limitations motion, with leave to move forsummary judgment later (seee.g. Oxbow Calcining USA Inc. v American Indus. Partners, 96 AD3d 646, 651[1st Dept 2012]).
Defendants alternatively argue that the fraud claim should be dismissed because it isnot sufficiently detailed. Generally, in a claim for fraud, a plaintiff must allege "amisrepresentation or a material omission of fact which was false and known to be falseby defendant, made for the purpose of inducing the other party to rely upon it, [and]justifiable reliance of the other party on the misrepresentation or material omission, andinjury" (Lama Holding Co. v Smith Barney, 88 [*3]NY2d 413, 421 [1996]). Furthermore, "the circumstancesconstituting the wrong shall be stated in detail" (CPLR 3016 [b]; see also Lanzi vBrooks, 43 NY2d 778, 780 [1977] ["(CPLR 3016 [b]) requires only that themisconduct complained of be set forth in sufficient detail to clearly inform a defendantwith respect to the incidents complained of"]).
In this case, the complaint describes the alleged fraudulent conduct as follows:"Auriga was one of a series of now-infamous deals, known as the 'Constellation CDOs,'that were initiated and designed by an undisclosed hedge-fund, Magnetar Capital LLC('Magnetar'), that was secretly placing massive short bets against the very same deals itwas sponsoring. As with its other Constellation CDOs, Magnetar sponsored Auriga bypurchasing the deal's 'equity' tranche, which is typically the most junior long-position in aCDO and the hardest to sell. Magnetar, however, assumed the role of Auriga's equitysponsor for the very purpose of creating a vehicle through which it could place a muchlarger short bet against hand picked collateral via credit default swaps ('CDS')that would yield huge pay-outs for Magnetar at the expense of Plaintiff and Auriga'sother long investors—when the deal defaulted.
"Without an equity sponsor, there could be no CDO. Thus, in order to ensure that itsshort bets would pay off, Magnetar conditioned its agreement to act as Auriga's equitysponsor on Merrill allowing Magnetar to influence collateral selection and dictate keyaspects of Auriga's structure, and selling Magnetar both the equity and the CDOs at adiscount. Merrill readily accepted, since without an equity investor the deal would notclose and Merrill would not pocket the lucrative fees it stood to earn from the deal.
"Merrill was one of Magnetar's favored partners, having arranged at least fiveConstellation CDOs (more than any other bank with whom Magnetar colluded) betweenJune 2006 and March 2007 for a total issuance of over $7.5 billion. Auriga was thefourth one, and by the time it closed Merrill was well versed in the scheme. Merrillearned tens of millions of dollars in fees over a very short period of time arrangingConstellation CDOs at Magnetar's behest. Plaintiff, however, at the time it invested inAuriga had no way of knowing of Magnetar's involvement or the true facts behind thedeal—and none of these material facts were disclosed to Plaintiff. To the contrary,Defendants affirmatively concealed from Plaintiff and other investors that Auriga hadbeen designed to meet the specifications of an undisclosed hedge fund whose interests asa net-short investor were diametrically opposed to the deal's success. Indeed, Magnetar'sshort interests in Auriga were more than twice the size of its long interest. Thus, whereaslong investors like Plaintiff needed Auriga to succeed for their investments to pay out,Magnetar—in collusion with Defendants—had stacked the deck so thatMagnetar could reap massive profits from the failure of the deal."
These factual allegations provide sufficient details to inform the Merrill defendantsand 250 Capital of the alleged fraudulent conduct, namely that the CDO was secretlydesigned by an undisclosed hedge fund, Magnetar, which was secretly placing massiveshort bets against the [*4]very same deals it wassponsoring. Defendants, however, argue that plaintiff cannot establish the element ofreasonable reliance (an element of both affirmative misrepresentation and concealment)as a result of the disclosures and disclaimers for the Auriga CDO. We cannot agree.
The offering circular states, "All or most of the Collateral Debt Securities Acquiredby the Issuer . . . will be Acquired from a portfolio of Collateral DebtSecurities selected by the Collateral Manager . . . ." If Magnetarrather than 250 Capital was doing the selecting, the statement in the offering circular wasmisleading. The identity of the person selecting the collateral was material: The offeringcircular says, "The performance of the portfolio of Collateral Debt Securities dependsheavily on the skills of the Collateral Manager in analyzing and selecting the CollateralDebt Securities." Furthermore, Magnetar's interests were not the same as 250 Capital's.The complaint alleges that "Magnetar's short interests in Auriga were more than twice thesize of its long interest," so it had a vested interest in Auriga's failure; hence, the assetsthat Magnetar "designated for inclusion . . . [in] the Auriga CDO[collateralized debt obligation] were riddled with high percentages of nonconformingloans and were much more likely to default than their credit ratings suggested."
Under the circumstances, it cannot be said that the disclaimers and disclosures in theoffering circulars preclude a claim of fraud on the ground of a prior misrepresentation asto the specific matter, namely that the CDO's collateral had been carefully selected by anindependent collateral manager, in the interests of the success of the deal and for thebenefit of Auriga's long investors. Whether it was reasonable for plaintiff to rely on therepresentation in the offering circular that 250 Capital would select Auriga's collateral isa factual matter that cannot be determined on a CPLR 3211 motion to dismiss (see e.g. Skillgames, LLC vBrody, 1 AD3d 247, 251 [1st Dept 2003]; Swersky v Dreyer &Traub, 219 AD2d 321, 328 [1st Dept 1996]).
Moreover, we agree with plaintiff that Supreme Court erred in dismissing thecommon-law fraud claims against Merrill Lynch and MLI. The motion court dismissedthe fraud claims against these defendants on the ground that there are no specificallegations that they engaged in any fraudulent conduct. However, plaintiff's theory offraud does not rest upon a single decisive event which manifestly demonstratesdefendants' wrongdoing, but on a series of interrelated events which, viewed as whole,portray the alleged fraudulent scheme. It is clear from the complaint that Merrill Lynchand MLI were key players integrally involved in the structuring and sale of Auriga toinvestors such as plaintiff. In essence, Merrill Lynch, through its affiliates, structured theCDO, was the initial purchaser of the securities, provided the initial financing, and actedas a counterparty by purchasing the CDS.
We find, however, that the unjust enrichment cause of action should have beendismissed because the CDO transaction was governed by written agreements. "Thetheory of unjust enrichment is one created in law in the absence of any agreement" (Basis Yield Alpha Fund [Master] vGoldman Sachs Group, Inc., 115 AD3d 128, 141 [1st Dept 2014]; see also Goldman v MetropolitanLife Ins. Co., 5 NY3d 561, 572 [2005]). Finally, contrary to plaintiff's [*5]contention, the motion court properly dismissed therescission cause of action because the complaint fails to allege the absence of a"complete and adequate remedy at law" (see Rudman v Cowles Communications,30 NY2d 1, 13 [1972]). Concur—Mazzarelli, J.P., Sweeny, Renwick, Freedmanand Gische, JJ.