Case 1:12-cv-02683-RWS Document 38 Filed 07/20/12 Page 1 of 32 UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK ---------------------------------x INTESA SANPAOLO, S.P.A., : Plaintiff, : against : CR?DIT AGRICOLE CORPORATE AND : INVESTMENT BANK, CR?DIT AGRICOLE SECURITIES (U.S.A.) INC., : THE PUTNAM ADVISORY COMPANY, LLC, MAGNETAR CAPITAL LLC, : MAGNETAR FINANCIAL LLC, AND MAGNETAR CAPITAL FUND, LP, : Defendants. ---------------------------------x No. 12-cv-2683 (RWS) ECF CASE Electronically Filed MEMORANDUM OF LAW IN SUPPORT OF MOTION BY CR?DIT AGRICOLE CORPORATE AND INVESTMENT BANK AND CR?DIT AGRICOLE SECURITIES (USA) INC. TO DISMISS THE AMENDED COMPLAINT SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP Lea Haber Kuck Gregory A. Litt Four Times Square New York, New York 10036-6522 (212) 735-3000 Attorneys for Cr?dit Agricole Corporate and Investment Bank and Cr?dit Agricole Securities (USA) Inc. Case 1:12-cv-02683-RWS Document 38 Filed 07/20/12 Page 2 of 32 TABLE OF CONTENTS TABLE OF AUTHORITIES ......................................................................................................... iii PRELIMINARY STATEMENT .....................................................................................................1 BACKGROUND .............................................................................................................................3 A. B. C. D. E. The Transaction .......................................................................................................3 As Equity Purchaser, Magnetar Took the First Risk on the CDO ...........................4 Intesa Held Both Long and Short Positions on Pyxis ..............................................4 The Amended Complaint Relies Heavily on General News Reports and Anecdotal Accounts Rather Than Facts Relating to Pyxis ......................................5 The Dispositive Decision in Prior Litigation ...........................................................7 ARGUMENT ...................................................................................................................................8 I. INTESA FAILS TO PLEAD THE BASIC ELEMENTS OF FRAUD ...............................8 A. B. C. Well-Established Heightened Pleading Standards Apply to Intesa's Claims ..........8 Intesa Cannot Satisfy These Pleading Standards by Relying on News Reports About Other CDO Arrangers and Other Transactions ...............................9 Intesa Fails to Allege Any Misstatement by CA-CIB ...........................................11 1. 2. 3. 4. 5. D. Intesa Fails to Allege Any Actionable Pre-Closing Misrepresentation .......................................................................................11 Intesa Fails to Allege Any Misrepresentation Regarding Putnam's Role or Qualifications ................................................................................13 Intesa Has No Claim Based on the Composition of the Portfolio .............14 Intesa Fails to Allege Any Misrepresentation As to the Identity of Any Short Counterparty .............................................................................15 CA-CIB Did Not Misrepresent the Market Value of Any Pyxis Notes ..........................................................................................................16 The Allegations in the Amended Complaint Defeat Any Assertion of Scienter ..................................................................................................................18 1. Intesa Fails to Plead Motive and Even Contradicts It ................................19 i Case 1:12-cv-02683-RWS Document 38 Filed 07/20/12 Page 3 of 32 2. E. II. III. IV. V. Intesa Fails to Plead Conscious Misbehavior ............................................20 Intesa Fails to Plead Facts Showing Loss Causation .............................................22 INTESA'S FEDERAL SECURITIES CLAIM IS TIME-BARRED .................................23 INTESA'S CDS IS A FOREIGN TRANSACTION..........................................................24 INTESA HAS NOT PLED A CONSPIRACY CAUSE OF ACTION..............................25 THE REQUEST FOR PUNITIVE DAMAGES MUST BE STRICKEN .........................25 CONCLUSION ..............................................................................................................................25 ii Case 1:12-cv-02683-RWS Document 38 Filed 07/20/12 Page 4 of 32 TABLE OF AUTHORITIES Page(s) CASES Absolute Activist Value Master Fund v. Ficeto, 677 F.3d 60 (2d Cir. 2012).................................................................................................24 In re Aegon N.V. Securities Litigation, No. 03 Civ. 0603, 2004 WL 1415973 (S.D.N.Y. June 23, 2004) ......................................20 Alki Partners, L.P. v. Windhorst, No. 11-1071-CV, 2012 WL 933979 (2d Cir. Mar. 21, 2012) ............................................19 Ashcroft v. Iqbal, 556 U.S. 662 (2009) .............................................................................................................8 Ashland Inc. v. Morgan Stanley & Co., 652 F.3d 333 (2d Cir. 2011).................................................................................................9 ATSI Communciations, Inc. v. Shaar Fund, Ltd., 493 F.3d 87 (2d Cir. 2007)...................................................................................5, 9, 11, 19 Banco Espirito Santo de Investimento, S.A. v. Citibank, N.A., No. 03 Civ. 1537, 2003 WL 23018888 (S.D.N.Y. Dec. 22, 2003) ..............................12, 13 In re Beacon Associates Litigation, No. 09 Civ. 777, 2012 WL 1123728 (S.D.N.Y. April 4, 2012 ) ........................................23 Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007) .............................................................................................................8 Bell v. Hubbert, No. 95 Civ. 10456, 2007 WL 60513 (S.D.N.Y. Jan. 8, 2007) .............................................3 Boudinot v. Shrader, No. 09-CV-10163, 2012 WL 489215 (S.D.N.Y. Feb. 15, 2012) .......................................23 Campo v. Sears Holdings Corp., 371 F. App'x 212 (2d Cir. 2010) ....................................................................................9, 19 Chill v. General Electric Co., 101 F.3d 263 (2d Cir. 1996)...............................................................................................19 CIFG Assurance North America, Inc.v. Goldman, Sachs & Co., No. 652286/2011, 2012 WL 1562718 (N.Y. Sup. Ct. N.Y. County May 1, 2012) ...........25 iii Case 1:12-cv-02683-RWS Document 38 Filed 07/20/12 Page 5 of 32 Cohen v. Stevanovich, 722 F. Supp. 2d 416 (S.D.N.Y. 2010)..........................................................................19, 20 In re Dean Witter Managed Futures Ltd. Partnership Litigation, 282 A.D.2d 271 (1st Dep't 2001) .......................................................................................13 Dooner v. Keefe, Bruyette & Woods, Inc., No. 00 Civ. 572, 2003 WL 135706 (S.D.N.Y. Jan. 17, 2003) ...........................................20 Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336 (2005) ...........................................................................................................22 Elliott Associates v. Porsche Automobil Holdings SE, 759 F. Supp. 2d 469 (S.D.N.Y. 2010)................................................................................24 Employees' Retirement System of the Government of the Virgin Islands v. Morgan Stanley & Co., 814 F. Supp. 2d 344 (S.D.N.Y. 2011) ...................................10, 13 Epirus Capital Management, LLC v. Citigroup Inc., No. 09 Civ. 2594, 2010 WL 1779348 (S.D.N.Y. Apr. 29, 2010) ......................................16 In re Exxon Mobil Corp. Securities Litigation, 500 F.3d 189 (3d Cir. 2007)...............................................................................................23 Fait v. Regions Financial Corp., 655 F.3d 105 (2d Cir. 2011)...............................................................................................17 In re Flag Telecom Holdings, Ltd. Securities Litigation, 308 F. Supp. 2d 249 (S.D.N.Y. 2004)..................................................................................9 Finn v. Smith Barney, No. 11-1270-CV, 2012 WL 1003656 (2d Cir. Mar. 27, 2012) ..........................................24 First Nationwide Bank v. Gelt Funding Corp., 27 F.3d 763 (2d Cir. 1994)...................................................................................................3 Footbridge Ltd. v. Countrywide Home Loans, Inc., No. 09 Civ. 4050, 2010 WL 3790810 (S.D.N.Y. Sept. 28, 2010) ...............9, 10, 18, 19, 22 Graham Packaging Co. v. Owens-Illinois, Inc., 67 A.D.3d 465 (1st Dep't 2009) ...................................................................................14, 16 HSH Nordbank AG v. UBS AG, 95 A.D. 3d 185 (1st Dep't 2012) ..................................................................................14, 25 Janbay v. Canadian Solar, Inc., No. 10 Civ. 4430, 2012 WL 1080306 (S.D.N.Y. Mar. 30, 2012) .................................7, 20 iv Case 1:12-cv-02683-RWS Document 38 Filed 07/20/12 Page 6 of 32 Kirch v. Liberty Media Corp., 449 F.3d 388 (2d Cir. 2006)...............................................................................................25 Landesbank Baden-Wurttemberg v. Goldman, Sachs & Co., No. 11-4443, 2012 WL 1352590 (2d Cir. Apr. 19, 2012) ...........................................18, 19 Lattanzio v. Deloitte & Touche LLP, 476 F.3d 147 (2d Cir. 2007)...............................................................................................22 Lentell v. Merrill Lynch & Co., 396 F.3d 161 (2d Cir. 2005)...............................................................................................22 Loreley Financing (Jersey) No. 7 Ltd. v. Cr?dit Agricole Corporate & Investment Bank, No. 650673/2010 (Sup. Ct. N.Y. County June 9, 2011) .........3, 7, 10, 15 MBIA Insurance Corp. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 81 A.D.3d 419 (1st Dep't 2011) ..................................................................................12, 18 MBIA Ins. Corp. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., No. 601324/2010, 2010 WL 2347014 (Sup. Ct. N.Y. County Apr. 9, 2010) ....................18 McCann v. Hy-Vee, Inc., 663 F.3d 926 (7th Cir. 2011) .............................................................................................23 In re Merrill Lynch Auction Rate Securities Litigation, __ F. Supp. 2d __, 2012 WL 523553 (S.D.N.Y. Feb. 15, 2012) .......................................14 Miller v. Lazard, Ltd., 473 F. Supp. 2d 571 (S.D.N.Y. 2007)............................................................................9, 20 Morrison v. National Australia Bank Ltd., 130 S. Ct. 2869 (2010) .......................................................................................................24 Naughright v. Weiss, __ F. Supp. 2d __, 2012 WL 760185 (S.D.N.Y. Mar. 8, 2012) .......................................4, 5 New Jersey Carpenters Health Fund v. NovaStar Mortgage, Inc., No. 08 Civ. 5310, 2012 WL 1076143 (S.D.N.Y. Mar. 29, 2012) .....................................10 Permasteelisa, S.p.A. v. Lincolnshire Management, Inc., 16 A.D.3d 352 (1st Dep't 2005) .........................................................................................16 Pontiac General Employees Retirement Systems v. MBIA, Inc., 637 F.3d 169 (2d Cir. 2011)...............................................................................................24 Rocanova v. Equitable Life Assurance Society, 83 N.Y.2d 603 (1994) ........................................................................................................25 v Case 1:12-cv-02683-RWS Document 38 Filed 07/20/12 Page 7 of 32 Rombach v. Chang, 355 F.3d 164 (2d Cir. 2004)...............................................................................................11 Ruotolo v. City of New York, 514 F.3d 184 (2d Cir. 2008).................................................................................................8 SEC v. Goldman Sachs & Co., 790 F. Supp. 2d 147 (S.D.N.Y. 2011)..................................................................................6 Small v. Lorillard Tobacco Co., 94 N.Y.2d 43 (1999) ............................................................................................................9 Staehr v. Hartford Financial Services Group, 547 F.3d 406 (2d Cir. 2008)...............................................................................................24 Stern v. Leucadia National Corp., 844 F.2d 997 (2d Cir. 1988).................................................................................................9 Sun Oil Corp v. Govostes, 474 F.2d 1048 (2d Cir. 1973)...............................................................................................8 Teamsters Local 445 Freight Division Pension Fund v. Bombardier Inc., No. 05 Civ. 1898, 2005 WL 2148919 (S.D.N.Y. Sept. 6, 2005) .......................................23 Teamsters Local 445 Freight Division Pension Fund v. Dynex Capital Inc., 531 F.3d 190 (2d Cir. 2008) ........................................................................................18, 20 STATUTES Fed. R. Civ. P. 9(b) ............................................................................................................... 3, 8, 11 Fed. R. Civ. P. 12(b) ....................................................................................................................... 4 17 C.F.R. 240.10b-5(b) ................................................................................................................... 8 28 U.S.C. ? 1658(b) ...................................................................................................................... 23 vi Case 1:12-cv-02683-RWS Document 38 Filed 07/20/12 Page 8 of 32 Defendants Cr?dit Agricole Corporate and Investment Bank and Cr?dit Agricole Securities (USA) Inc. (together, "CA-CIB") respectfully submit this memorandum of law in support of their motion, pursuant to Rules 12(b)(6) and 9(b) of the Federal Rules of Civil Procedure to dismiss the First Amended Complaint ("Amended Complaint" or "Compl.") filed by Plaintiff Intesa Sanpaolo, S.p.A. ("Intesa") with prejudice. PRELIMINARY STATEMENT Intesa, a sophisticated, self-proclaimed leading European financial institution, brings this action in an attempt to capitalize on press reports and cases relating to transactions which did not involve CA-CIB. The core of Intesa's theory appears to be that because certain press reports stated, based on anonymous sources, that certain conduct allegedly occurred in these other transactions, the same conduct must have occurred in the transaction in which Intesa was involved. This widely discredited pleading tactic is not sufficient to support any claim. In fact, when the hyperbole and generalized allegations relating to other CDO arrangers and collateral managers in connection with other CDOs are stripped away, it is clear that Intesa has not pled that CA-CIB made any misstatement with respect to this transaction. After the defendants confronted Intesa with the patent deficiencies in its pleading in their motions to dismiss the original complaint, Intesa attempted to salvage its claims by adding to its complaint a handful of e-mails - all of which were available to Intesa at the time it filed its original complaint. But these e-mails provide no support for its fraud claim and do not remedy the multiple pleading defects previously identified by the defendants. The Amended Complaint should therefore be dismissed with prejudice on the following grounds: First, Intesa has not identified any misstatement by CA-CIB in connection with the Pyxis 2006-1 CDO ("Pyxis") on which the Amended Complaint is based. Intesa claims that Case 1:12-cv-02683-RWS Document 38 Filed 07/20/12 Page 9 of 32 investors were misled concerning the selection and nature of the assets that made up the portfolio underlying Pyxis, but it does not - and cannot - point to even a single asset in the portfolio that failed to meet the very detailed eligibility criteria disclosed in the Pyxis Offering Memorandum. Intesa also claims that defendants Magnetar Capital LLC, Magnetar Financial LLC, and Magnetar Capital Fund, LP (collectively "Magnetar") "hijacked" the collateral selection from defendant The Putnam Advisory Company, LLC ("Putnam"), the Pyxis collateral manager, "to benefit Magnetar's shorting strategy at the expense of CDO investors." (Compl. ? 7.) However, Intesa has not pointed to a single asset that was included in the portfolio without Putnam's exercise of independent judgment; nor has it pointed to any action taken by Magnetar with respect to asset selection that was inconsistent with the interests of any long investor. Similarly, although Intesa also claims that after the transaction closed, CA-CIB provided inaccurate "market valuations" of certain notes issued by Pyxis, Intesa fails to allege facts indicating that those "valuations" were not as represented. Second, Intesa has not pled scienter. Its generalized motive allegations, that CACIB's parent company had a goal of expanding its structured finance business, not only are insufficient as a matter of law, but also are demolished by (1) Intesa's own allegation that CACIB had a sizeable CDO business - both before and after the Pyxis transaction - which included only a very small number of deals in which Magnetar invested (see Compl. ? 40), and (2) the very document on which Intesa relies that reveals that CA-CIB's parent was Intesa's largest shareholder and that it hoped to grow its business with Intesa. Nor are there any allegations, including those based on the new e-mails, that suggest any conscious misbehavior by CA-CIB. Finally, Intesa's various claims suffer from a number of additional legal deficiencies mandating dismissal, including that: (a) the Section 10(b) claim is untimely; (b) the transaction at issue is a foreign transaction beyond the reach of federal securities laws; (c) Intesa 2 Case 1:12-cv-02683-RWS Document 38 Filed 07/20/12 Page 10 of 32 has not pled loss causation; and (d) the conspiracy claim cannot stand absent an underlying tort. For all these reasons and as set forth below, the Amended Complaint should be dismissed. BACKGROUND A. The Transaction Pyxis was a $1.5 billion cash/synthetic hybrid CDO arranged by CA-CIB in 2006 and managed by Putnam. As alleged in the Amended Complaint, "[a] CDO is a special purpose vehicle that purchases, or assumes the risk of, a portfolio of assets (the 'portfolio') - such as bonds or loans - and issues securities which then make payments to investors based on the income generated by the assets." (Compl. ? 29.)1 The portfolio of a cash/synthetic hybrid CDO such as Pyxis consists of assets purchased for cash, such as residential mortgage-backed securities ("RMBS"), as well as synthetic assets known as credit default swaps ("CDS") that are intended to replicate the performance of cash assets. To create the synthetic assets, which made up 77% of the Pyxis portfolio, "Pyxis sold protection to counterparties (i.e., agreed to make payments in the event of specified credit events, such as failure by the security to make interest or principal payments) in exchange for premium payments." (Compl. ? 54.) By their nature, synthetic assets can only exist if investors agree to take the short positions - which Intesa characterizes as a "bet[] against the credit quality" of the assets - to allow the CDO to take the long position approximating ownership of the asset. (Compl. ?? 2, 54.) See also Loreley Fin. (Jersey) No. 7 Ltd. v. Cr?dit Agricole Corp. & Inv. Bank, No. 650673/2010, slip op. at 4-5 (Sup. Ct. N.Y. Cnty. June 9, 2011). Pyxis closed on October 3, 2006 and Pyxis ABS CDO 2006-1 Ltd. and/or Pyxis 1 While the allegations of the Amended Complaint are, solely for purposes of this motion, accepted as true, "'conclusions of law or unwarranted deductions of fact are not admitted.' This principle applies with even greater force in a fraud case governed by the more stringent pleading requirements of Fed. R. Civ. P. 9(b)." First Nationwide Bank v. Gelt Funding Corp., 27 F.3d 763, 771 (2d Cir. 1994) (citations omitted); see also Bell v. Hubbert, No. 95 Civ. 10456, 2007 WL 60513, *2 (S.D.N.Y. Jan. 8, 2007). 3 Case 1:12-cv-02683-RWS Document 38 Filed 07/20/12 Page 11 of 32 ABS CDO 2006-1 LLC (together, the "Co-Issuers") issued six classes of notes as well as equity. (See Compl. ?? 57-58.) CA-CIB initially purchased the securities and sold most of them to investors. (See Kuck Decl. Ex. A, at i, 1; see also Compl. ? 58.)2 B. As Equity Purchaser, Magnetar Took the First Risk on the CDO In Pyxis, as with CDOs generally, the equity holders are the last in line to receive payments from the CDO. If the assets selected and purchased by the CDO do not generate sufficient cash flow to distribute to all of the CDO's investors, the equity holders suffer the first loss. Thus, Intesa characterizes the equity position as the riskiest stake in the CDO. (Compl. ? 43.) According to Intesa, Magnetar and its "co-equity sponsor" Deutsche Bank ("DB") purchased the equity stake in Pyxis. (Compl. ?? 7, 58.) Magnetar also allegedly made a second long investment, purchasing the $61.875 million Class X Subordinate Notes which were just one rung above the equity and, after the equity holders, would suffer the next loss if the CDO's assets did not generate sufficient cash flow. (Compl. ?? 57-58; see also Kuck Decl. Ex. A, at i.) Additionally, Intesa alleges that Magnetar committed to invest in the CDO before any of the CDO's assets were purchased or selected (Compl. ? 44), meaning that Magnetar could not evaluate the CDO's asset portfolio in determining whether to make its commitment. C. Intesa Held Both Long and Short Positions on Pyxis Intesa, which describes itself as "the leading Italian banking group and one of the protagonists in the European financial arena,"3 was not an "investor" in Pyxis, but rather a swap counterparty that took both long and short synthetic positions on Pyxis notes. Instead of 2 References to "Kuck Decl. Ex. __" refer to the exhibits to the Declaration of Lea Haber Kuck in Support of Motion to Dismiss the Amended Complaint, dated July 20, 2012. "When presented with a motion to dismiss pursuant to Rule 12(b)(6), the Court may consider documents that are referenced in the complaint, documents that the plaintiff relied on in bringing suit and that are either in the plaintiff's possession or that the plaintiff knew of and relied on when bringing suit, or matters of which judicial notice may be taken." Naughright v. Weiss, __ F. Supp. 2d __, 2012 WL 760185, *4 (S.D.N.Y. Mar. 8, 2012). Intesa Sanpaolo, About Us, http://www.bancaintesa.us/about/index.asp (last visited July 18, 2012). 3 4 Case 1:12-cv-02683-RWS Document 38 Filed 07/20/12 Page 12 of 32 reselling the Class A-1 Pyxis Notes to investors, CA-CIB retained these notes and entered into a CDS with Intesa whereby Intesa "provided protection" (i.e., took a long position) on $180 million of Class A-1 Notes. (Compl. ? 1.)4 Intesa neglects to mention that it simultaneously entered into a second swap, pursuant to which Intesa bought protection (i.e., took a short position) on Class B Pyxis Notes.5 This is the type of position Intesa characterizes as "betting against the credit quality" of Pyxis. (Compl. ? 2.) The swaps were governed by an ISDA Master Agreement and the Schedule thereto. (See Kuck Decl. Ex. B.) The Master Agreement states that "[t]he parties intend that they are legally bound by the terms of each Transaction from the moment they agree to those terms (whether orally or otherwise). A Confirmation shall be entered into as soon as practicable . . . ." (Id. at ? 9(e)(ii); see also id., Schedule at Part 5(a).) According to the Amended Complaint, the parties reached "an understanding that they would enter into a CDS" in September 2006, in advance of the Pyxis closing. (Compl. ? 67.) The Confirmation for the Pyxis A-1 swap was sent in April 2007, reflecting a trade date and an effective date of October 3, 2006, the date Pyxis closed. (See Compl. ? 67; Kuck Decl. Ex. C.) D. The Amended Complaint Relies Heavily on General News Reports and Anecdotal Accounts Rather Than Facts Relating to Pyxis Lacking specific allegations to support its claims, Intesa relies heavily on news reports that in turn rely on anonymous sources to speculate about Magnetar's general trading 4 Through this transaction, Intesa obtained the economic benefits of ownership (i.e., ongoing payments) without expending $180 million to purchase the notes. (See Compl. ? 61.) Intesa was, however, liable up to the $180 million notional amount of the notes upon the occurrence of certain adverse events. (See id.) This short position is reflected in documents that Intesa refers to in the Complaint. (See Kuck Decl. Ex. D (email attaching the Term Sheet, referenced at Compl. ?? 63, 139, 169, and reflecting the September 2006 "understanding" referenced at Compl. ? 67); see also Compl. ? 84 ("[CA-CIB] sent Intesa 'spread' valuations for the Pyxis Class A-1 and Class B notes.").) On a motion to dismiss, the Court may consider documents "possessed by or known to the plaintiff and upon which it relied in bringing the suit." ATSI Commc'ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 98 (2d Cir. 2007); see also Naughright, 2012 WL 760185, *4. 5 5 Case 1:12-cv-02683-RWS Document 38 Filed 07/20/12 Page 13 of 32 strategy, none of which even suggests that CA-CIB and Putnam were involved in executing this alleged strategy in connection with Pyxis. Indeed, while Intesa alleges that CA-CIB and Putnam were involved in a broad, overarching conspiracy to further Magnetar's purported strategy (see, e.g., Compl. ? 136), the article from the website ProPublica on which Intesa relies for this theory lists 28 CDOs in which Magnetar allegedly invested, only 5 of which involved CA-CIB, only 2 of which were managed by Putnam, and only 1 of which (Pyxis) involved both CA-CIB and Putnam. (See Kuck Decl. Ex. E, at Timeline.) In a further attempt to tar CA-CIB, Intesa makes the specious assertion that this transaction was "materially identical" to the widely reported case involving Goldman Sachs, a hedge fund run by John Paulson, and the ABACUS CDO. (Compl. ? 2.) However, this assertion is demonstrably false. In the ABACUS case, Goldman Sachs is alleged to have affirmatively misrepresented that the hedge fund was purchasing the equity in the transaction and thus had an interest in the CDO's success, when in fact the hedge fund was taking only a short position on the transaction and therefore would only profit if the CDO failed. See SEC v. Goldman Sachs & Co., 790 F. Supp. 2d 147, 154 (S.D.N.Y. 2011).6 In stark contrast, Intesa alleges here that Magnetar made substantial long investments in Pyxis and cites scant e-mails indicating that Magnetar (like Intesa itself) may also have taken some short positions related to Pyxis. From there, Intesa cites general and anonymous reports of Magnetar's trading strategy to speculate that Magnetar's short position must have been larger than its long position, but it offers no factual allegations whatsoever as to 6 Similarly, Intesa seeks to analogize to the SEC's settlement with J.P. Morgan (see Compl. ?? 3, 110-14) and the investor suit against Merrill Lynch (see id. ?? 115-19). However, as Intesa acknowledges (see id. at ? 110), in the J.P. Morgan case, the SEC alleged that J.P. Morgan knew Magnetar had shorted $600 million (over half) of the notional value of the portfolio and had a long position of only $8.9 million, and nevertheless allowed Magnetar to influence collateral selection. Likewise, in the Merrill Lynch case, the investor alleged that Merrill Lynch knew that Magnetar's short position was more than ten times the size of its long position. (See id. at ? 118.) There has been no such allegation in this case. 6 Case 1:12-cv-02683-RWS Document 38 Filed 07/20/12 Page 14 of 32 the relative size of Magnetar's positions on Pyxis. (See, e.g., Compl. ? 48.) While the Amended Complaint is replete with allegations about complaints relating to other banks and CDOs (see Compl. ?? 2-3, 108-27), such allegations do not support Intesa's claim. See Janbay v. Canadian Solar, Inc., No. 10 Civ. 4430, 2012 WL 1080306, *5 (S.D.N.Y. Mar. 30, 2012) ("Allegations contained in the complaint of an unrelated matter . . . cannot establish the particularized facts necessary to support this securities fraud claim."). E. The Dispositive Decision in Prior Litigation The allegations in Intesa's Amended Complaint, while defective, are not new. In 2010, an investor in Pyxis sued CA-CIB and Putnam in New York Supreme Court. The theory of that complaint as to Pyxis is identical to Intesa's claims in this action; namely, that Putnam "abdicated its role as asset manager of Pyxis, as part of an over-arching fraudulent scheme orchestrated by [CA-CIB] and an aggressive hedge fund, Magnetar" which in turn took short positions against Pyxis's assets. Loreley Fin., slip op. at 6. Indeed, the plaintiffs heavily relied not only on the very same ProPublica article and other media sources that form the heart of Intesa's Amended Complaint, but they also submitted to the court the same Pyxis-related e-mails that Intesa quotes in the Amended Complaint.7 On June 9, 2011, Justice Schweitzer granted Putnam's motion to dismiss for failure to plead fraud with particularity, noting that the plaintiffs had relied on general allegations "based on anecdotal print reports citing unidentified or confidential sources," and concluded that "[t]his will not carry the day." Loreley Fin., slip op. at 9, 10. He singled out the plaintiffs' heavy reliance on the same ProPublica article as an example of "the deficient nature of the complaint." Id. at 10. His reasoning is equally applicable here. 7 See Affirm. of Stephen M. Plotnick in Opp'n to Defs.' Mots. to Dismiss, Loreley Fin. (Jersey) No. 7 Ltd. v. Cr?dit Agricole Corp. & Inv. Bank, No. 650673/2010 (Apr. 28, 2011) (Dkt. No. 50). 7 Case 1:12-cv-02683-RWS Document 38 Filed 07/20/12 Page 15 of 32 In an attempt to blunt the impact of Justice Schweitzer's decision, Intesa repeatedly asserts, on "information and belief," that after the Putnam's motion was granted but before CA-CIB's motion to dismiss was decided, the Loreley defendants paid "an undisclosed amount" to settle the case. (See Compl. ?? 3, 100.) In fact, the public record reflects that the Loreley case was discontinued as part of a global settlement of several actions, including an action that CA-CIB had previously initiated as plaintiff in England. (See Kuck Decl. Ex. P.) In any event, Intesa's attempts to insinuate some sort of admission is improper under the wellestablished law that settlements cannot "be used to establish liability against a party in other suits arising out of the same occurrence." Sun Oil Co. v. Govostes, 474 F.2d 1048, 1049 (2d Cir. 1973) (per curiam). ARGUMENT I. INTESA FAILS TO PLEAD THE BASIC ELEMENTS OF FRAUD A. Well-Established Heightened Pleading Standards Apply to Intesa's Claims In Bell Atlantic Corp. v. Twombly, the Supreme Court held that to survive a motion to dismiss, a plaintiff must allege facts that "raise a right to relief above the speculative level." 550 U.S. 544, 555 (2007). Thus, "a complaint must plead 'enough facts to state a claim to relief that is plausible on its face.'" Ruotolo v. City of N.Y., 514 F.3d 184, 188 (2d Cir. 2008) (quoting Twombly, 550 U.S. at 570). A claim is plausible "when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (emphasis added). The "mere possibility of misconduct" is insufficient to survive a motion to dismiss. Id. at 679. Also, because Intesa's claims sound in fraud, they are subject to the heightened pleading requirements of Rule 9(b) and the Private Securities Litigation Reform Act of 1995 ("PSLRA"), which are intended to "safeguard[] a defendant's reputation from 'improvident' 8 Case 1:12-cv-02683-RWS Document 38 Filed 07/20/12 Page 16 of 32 charges and protect[] against strike suits." Footbridge Ltd. v. Countrywide Home Loans, Inc., No. 09 Civ. 4050, 2010 WL 3790810, *7 (S.D.N.Y. Sept. 28, 2010); see also ATSI Commc'ns, 493 F.3d at 99. Here, Intesa has failed to plead facts to make out the most basic elements of a fraud claim,8 let alone with the requisite particularity. B. Intesa Cannot Satisfy These Pleading Standards by Relying on News Reports About Other CDO Arrangers and Other Transactions As the Second Circuit has made clear, speculation in the business press is not sufficient to support a fraud claim. See Campo v. Sears Holdings Corp., 371 F. App'x 212, 215 (2d Cir. 2010); see also Stern v. Leucadia Nat'l Corp., 844 F.2d 997, 1004 (2d Cir. 1988) ("It is not enough to quote press speculation about defendants' motives and press reports of other occasions . . . ."); In re Flag Telecom Holdings, Ltd. Sec. Litig., 308 F. Supp. 2d 249, 262 (S.D.N.Y. 2004) (plaintiff's reliance on news articles discussing similar transactions entered into by defendant's rivals to artificially inflate revenues amounted to "guilt by association" and "more is required to plead securities fraud"). Where news articles are cited in a complaint, they "still must indicate particularized facts about Defendants' conduct in order to support the Plaintiffs' claims." Miller v. Lazard, Ltd., 473 F. Supp. 2d 571, 586 (S.D.N.Y. 2007). Here, as in the prior Pyxis litigation, Intesa alleges that its basis for this case was an article published by ProPublica on April 9, 2010. (See Compl. ? 136.) However, as Justice Schweitzer recognized in dismissing the prior complaint, ProPublica's article based on anonymous reports is insufficient to make out a fraud claim: 8 To state a claim for securities fraud under Section 10(b), the plaintiff must adequately plead: "'(1) a material misrepresentation or omission by the defendant; (2) scienter; (3) a connection between the misrepresentation or omission and the purchase or sale of a security; (4) reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss causation.'" Ashland Inc. v. Morgan Stanley & Co., 652 F.3d 333, 337 (2d Cir. 2011) (citation omitted). Under New York law, "[t]o make out a prima facie case of fraud, the complaint must contain allegations of a representation of material fact, falsity, scienter, reliance and injury." Small v. Lorillard Tobacco Co., 94 N.Y.2d 43, 57 (1999). 9 Case 1:12-cv-02683-RWS Document 38 Filed 07/20/12 Page 17 of 32 ProPublica . . . relies on anonymous sources to describe Magnetar's CDO trading strategy. Although that article broadly discusses more than 28 CDOs in which Magnetar allegedly invested, it makes no particularized allegations about Pyxis 2006-1 or about Putnam itself. Loreley's assertion that Magnetar colluded with the arranger and collateral manager of Pyxis 2006-1 to cherry-pick unsuitable collateral for that CDO is simply speculation. Loreley Fin., slip op. at 10. Similarly, none of the other articles cited by Intesa discuss Pyxis or CA-CIB. Rather, they discuss SEC investigations of other arrangers, collateral managers and rating agencies in respect of other CDO transactions.9 Like Justice Schweitzer, numerous federal courts have rejected complaints based on generalized allegations of wrongdoing in connection with the financial crisis that are not tied to the particular securities at issue. See, e.g., Footbridge, 2010 WL 3790810, at *14 (dismissing complaint based on "Countrywide's overall commercial practices"); id. at *13, *21; see also N. J. Carpenters Health Fund v. NovaStar Mortg., Inc., No. 08 Civ. 5310, 2012 WL 1076143, *5 (S.D.N.Y. Mar. 29, 2012) (dismissal under Rule 8(a) because "Plaintiff does not provide details that would tie its claim of loosened underwriting guidelines to the specific loans" underlying the transaction at issue); Emps.' Ret. Sys. of the Gov't of V.I. v. Morgan Stanley & Co., 814 F. Supp. 2d 344, 351-52 (S.D.N.Y. 2011) (dismissing fraud claims alleging that banks collaborated with rating agencies to produce false ratings where the allegations did not pertain to the CDO at issue). Without a sufficient factual basis to support its allegations that Magnetar had a net short position in Pyxis, that Pyxis was designed to further Magnetar's purported trading strategy to the detriment of other investors, and that Magnetar selected inferior assets that did not meet the eligibility criteria for the Pyxis CDO, Intesa's allegations are insufficient and the Amended Complaint must be dismissed. 9 See Compl. ? 3 (discussing suit settled by J.P. Morgan, and citing articles that discuss Merrill Lynch and the Norma CDO, Japanese bank Mizuho and the Tigris CDO, the Delphinus CDO arranged by Mizuho, a description of Magnetar's strategy by a former Goldman Sachs banker, and an alleged Magnetar e-mail exchange with collateral manager other than Putnam). See Kuck Decl. Ex. F for articles. 10 Case 1:12-cv-02683-RWS Document 38 Filed 07/20/12 Page 18 of 32 C. Intesa Fails to Allege Any Misstatement by CA-CIB To satisfy the particularity requirement of Rule 9(b) and the PSLRA, a complaint must: "'(1) specify the statements that the plaintiff contends were fraudulent, (2) identify the speaker, (3) state where and when the statements were made, and (4) explain why the statements were fraudulent.'" Rombach v. Chang, 355 F.3d 164, 170 (2d Cir. 2004) (citation omitted). Allegations that are "conclusory or unsupported by factual assertions are insufficient." ATSI Commc'ns, 493 F.3d at 99. Plaintiffs cannot simply claim that statements "were false and misleading; they must demonstrate with specificity why and how that is so." Rombach, 355 F.3d at 174. Intesa has entirely failed to do so. (See Compl. ?? 70-131.) 1. Intesa Fails to Allege Any Actionable Pre-Closing Misrepresentation Intesa generally alleges that it exchanged e-mails, documents and oral communications with CA-CIB prior to the Pyxis closing in October 2006 (see, e.g., Compl. ?? 62, 63, 71-77, 80-81, 102, 139), but none of those allegations are specific enough to state a claim. Intesa does not describe any oral statement or e-mail from CA-CIB to Intesa with any particularity, let alone the "who, what, when, where and how" necessary to support a fraud claim. It identifies only a few documents it received - a Pitchbook, a Term Sheet, a target portfolio and preliminary spreadsheets listing warehoused assets (see Compl. ?? 63, 81, 102, 107)10 - and it does not allege any misstatement in the Master Agreement and Schedule governing the CDS or the Confirmation memorializing the terms of the trade. Indeed, in the transaction documents, Intesa represented it was not relying on any pre-closing representation by CA-CIB.11 This 10 11 Intesa also refers to a "launch e-mail" but does not allege misstatements in that e-mail. (See Compl. ?? 72-73.) As set out in the Confirmation (Kuck Aff. Ex. C, at 1), Intesa agreed to be bound by the 2003 ISDA Credit Derivatives Definitions (Kuck Aff. Ex. O), in which the Buyer (CA-CIB) and the Seller (Intesa) agree that each party is deemed not to have made any representations with respect to Pyxis as of the Trade Date - i.e., the October 3, 2006 closing date - on which the other party is relying. (Kuck Aff. Ex. O, at ? 9.1.) 11 Case 1:12-cv-02683-RWS Document 38 Filed 07/20/12 Page 19 of 32 disclaimer defeats Intesa's claims as a matter of law. See MBIA Ins. Corp. v. Merrill Lynch, 81 A.D.3d 419, 419 (1st Dep't 2011). Additionally, the Pyxis Pitchbook, Term Sheet and spreadsheets each specifically informed readers that they contained preliminary information and that a final Offering Memorandum "would supersede this information in its entirety." (Kuck Decl. Exs. D, G, I.) The Pitchbook cautioned that "[a]ny decision to invest . . . should be made after reviewing the Offering Memorandum, conducting such investigations as the investor deems necessary and consulting the investor's own legal, accounting, and tax advisors in order to make an independent determination of the suitability and consequences of an investment," and explained that investors could request "any additional information they may consider necessary or desirable in making an informed investment decision." (Id. Ex. G, at 2.)12 The Term Sheet and spreadsheets bore similar disclaimers (see id. Exs. D, H, I), and the "target" portfolio was preliminary by definition. The Offering Memorandum likewise warned that "neither [the Pitchbook] nor any information contained therein may be relied upon in connection with a prospective investment in the Offered Securities" and that no person was "authorized" to give any representations aside from those in the Offering Memorandum. (Id. Ex. A, at ii, 50.) Consequently, as a matter of law, no investor could reasonably rely on the Pitchbook, Term Sheet, "target" portfolios or other statements outside of the Offering Memorandum. See, e.g., Banco Espirito Santo de Investimento, S.A. v. Citibank, N.A., No. 03 Civ. 1537, 2003 WL 23018888, *2, *14 (S.D.N.Y. Dec. 22, 2003) (investor could not reasonably rely on marketing materials referring to an 12 It also clearly warned readers that (i) it contained information prepared "solely for informational purposes" and did not constitute an offer to buy or sell any security; (ii) any offer of securities would be made only pursuant to a definitive final offering memorandum which would contain additional information and which would supersede the information in the Pitchbook; (iii) CA-CIB was not making "any representation or warranty, express or implied, as to the accuracy or completeness of the information" contained in the Pitchbook; (iv) the Pitchbook did not "contain all of the information that may be required to evaluate the securities that may be issued" and any investor "should conduct its own independent analysis of the data referred to" in the Pitchbook; and (v) CA-CIB disclaimed any and all liability as to the information in the Pitchbook. (Kuck Decl. Ex. G, at 2.) 12 Case 1:12-cv-02683-RWS Document 38 Filed 07/20/12 Page 20 of 32 offering memorandum which all stated that the marketing materials could not be relied upon), aff'd, 110 F. App'x 191 (2d Cir. 2004); In re Dean Witter Managed Futures Ltd. P'ship Litig., 282 A.D.2d 271, 271 (1st Dep't 2001) (relying on brokers' statements rather than the prospectus was "unjustifiable as a matter of law"). The Offering Memorandum itself stated that it had been prepared by the CoIssuers and did not contain any representations by CA-CIB. (Kuck Decl. Ex. A, at ii-iii.)13 Similarly, the sections of the Pitchbook and Offering Memorandum describing the collateral manager's role each stated that "[a]ll information in this section has been supplied herein by [the collateral manager]," and CA-CIB expressly disclaimed responsibility for these sections. (Id. Ex. G, at 21; id. Ex. A, at 187; Compl. ? 64.) These explicit disclaimers are fatal to Intesa's claims against CA-CIB. See Emps.' Ret. Sys. of the Gov't of the V.I., 814 F. Supp. 2d at 353 (dismissing claim against CDO arranger, stating, "[b]ecause the Offering Memorandum was not a statement by [the arranger], it cannot, as Plaintiff alleges, constitute a materially false statement by [the arranger] to Plaintiff"); see also Banco Espirito Santo, 2003 WL 23018888, *4-5 & nn.1-2, *14. 2. Intesa Fails to Allege Any Misrepresentation Regarding Putnam's Role or Qualifications Intesa cites a number of statements in the Pitchbook and Offering Memorandum regarding Putnam's qualifications and alleges that CA-CIB and Putnam "emphasized that Putnam would act diligently, independently and in good faith in the interests of Intesa in selecting the assets for the Pyxis portfolio." (Compl. ?? 71-80.) However, Intesa has not pointed to a single 13 The Offering Memorandum stated that the "Co-Issuers accept responsibility for the information contained in this document," and investors were told that they could only look to the Co-Issuers of the notes, which would be without material assets other than the collateral, to satisfy the notes. (See Kuck Decl. Ex. A, at ii-iii.) The Offering Memorandum repeatedly cautioned investors to rely on their own judgment to invest in the CDOs: "IN MAKING AN INVESTMENT DECISION, INVESTORS MUST RELY ON THEIR OWN EXAMINATION OF THE CO-ISSUERS AND THE TERMS OF THE OFFERING, INCLUDING THE MERITS AND RISKS INVOLVED." (See id. at iii; see also id. Ex. D, Term Sheet at 7.) 13 Case 1:12-cv-02683-RWS Document 38 Filed 07/20/12 Page 21 of 32 asset that was included in the Pyxis portfolio without the exercise of Putnam's independent judgment. (See Compl. ?? 7-8, 51.) 3. Intesa Has No Claim Based on the Composition of the Portfolio Although Intesa complains that the final portfolio differed from the "target" portfolio (see Compl. ? 107), conspicuously absent is any allegation that Intesa made any effort to obtain the "final" portfolio, or the portfolio as it existed at closing, which it easily could have compared with the "target" portfolio. In this respect, this case is very similar to HSH Nordbank AG v. UBS AG, 95 A.D. 3d 185 (1st Dep't 2012), where the court held that the purchaser of CDO notes could not bring fraud claims for failing to disclose information that the purchaser never requested. See id. at 197-98. Dismissing the fraud claims, the court observed that "nowhere does the amended complaint allege that HSH, in the course of the 'several months of due diligence' it allegedly conducted, ever asked UBS - which, after all was acting as a salesman, not as HSH's advisor - to produce any alternative analysis of the transaction in its possession." Id.; see also In re Merrill Lynch Auction Rate Sec. Litig., __ F. Supp. 2d __, 2012 WL 523553, *1718 (S.D.N.Y. Feb. 15, 2012); Graham Packaging Co. v. Owens-Ill., Inc., 67 A.D.3d 465, 465 (1st Dep't 2009). Likewise, as a sophisticated party, Intesa had "'a duty to exercise ordinary diligence and conduct an independent appraisal of the risk,'" HSH Nordbank, 95 A.D.3d at 195, and it plainly had the ability to do so. (See Compl. ? 65 (Intesa "performed rigorous due diligence . . . focusing on an analysis of . . . the assets included in the CDO's portfolio"); ?? 68, 129-30 (describing analysis Intesa performed after suffering losses.)) Finally, while Intesa makes spurious allegations about the quality of the portfolio, the Amended Complaint fails to allege that any asset in the portfolio did not comply with the detailed eligibility criteria spanning 40 pages of the Offering Memorandum. (See Kuck Decl. Ex. 14 Case 1:12-cv-02683-RWS Document 38 Filed 07/20/12 Page 22 of 32 A, at 115-55.) Thus, Intesa has no cause to complain about the portfolio's composition.14 4. Intesa Fails to Allege Any Misrepresentation As to the Identity of Any Short Counterparty To the extent Intesa complains that it was unaware of the identity of short counterparties, or that parties wished to "bet[] against" the Pyxis collateral, hybrid CDOs such as Pyxis, holding large amounts of synthetic assets, by definition require a CDO to include assets that the short counterparty is willing to "bet against." (Compl. ?? 54, 56.) As Justice Schweitzer noted in the prior Pyxis litigation: In sum, the arranger was charged with dealing with both sides of a trade. It had to assemble an asset pool attractive to a purchaser of the CDO's securities while, at the same time, attractive to a short-holder wi th respect to the sam e asset pool. The process was transparent. It was the nature of the structure. It is uncontroverted that the plaintiff here who invested in th e hybrid or synthetic C DO arranged by [CACIB], and referenced in this motion to dismiss, was fully aware of this reality. Loreley Fin., slip op. at 4-5. The Offering Memorandum also made clear that investors would have extremely limited information as to the identities of the parties taking short positions on the assets in the portfolio and even disclosed that CA-CIB and Putnam could take short positions on the Pyxis notes and the underlying assets. (Kuck Decl. Ex. A, at 35-36, 48- 49, App. A at 28; Compl. ? 55.) Intesa cannot sufficiently plead a fraud claim where it was on notice that it lacked certain 14 Intesa instead attempts to create new criteria not listed in the Offering Memorandum. For example, Intesa attempts to create a new requirement regarding the inclusion of securities in the Pyxis portfolio that they also were constituents of publicly-traded ABX Indices. (See Compl. ?? 82, 106.) While the Offering Memorandum does specify restrictions on the amount of synthetic securities that directly reference the indices (Kuck Decl. Ex. A, at 118, 124), the Offering Memorandum did not prohibit the inclusion of particular securities simply because they also were individual components of an index. Similarly, although Intesa cites investments by Pyxis in (i) other CDOs in which Magnetar invested and (ii) assets in which those other CDOs also invested (Compl. ?? 101-03), Intesa does not allege that the inclusion of these assets violates any of the eligibility criteria in the Offering Memorandum. And to the extent Intesa complains that Magnetar CDOs were added to the portfolio post-closing (see Compl. ?? 38, 102), this has no bearing on claims against CA-CIB, which completed its role as an arranger at closing, particularly given that the Offering Memorandum made clear under "Risk Factors" that "a significant portion of the Collateral will be acquired by the Issuer after the Closing Date, and, accordingly, the financial performance of the Issuer may be affected by the price and availability of Collateral to be purchased." (Kuck Decl. Ex. A, at 28.) 15 Case 1:12-cv-02683-RWS Document 38 Filed 07/20/12 Page 23 of 32 information and proceeded anyway. See Permasteelisa, S.p.A. v. Lincolnshire Mgmt., Inc., 16 A.D.3d 352, 352 (1st Dep't 2005); Graham Packaging, 67 A.D.3d at 465. 5. CA-CIB Did Not Misrepresent the Market Value of Any Pyxis Notes Finally, Intesa alleges that after Pyxis closed, CA-CIB provided it with "market valuations" of the Class A-1 Notes (on which it took a long position) and the Class B Notes (on which it took a short position), which CA-CIB allegedly "represented that it generated . . . based on its knowledge of the market from its trading desk for RMBS and CDO securities." (Compl. ?? 83-84 (emphasis added).) But Intesa never alleges that these valuations did not represent good faith market valuations of the notes based on information available to CA-CIB's trading desk at the time. Instead, Intesa invokes an apples-to-oranges comparison by claiming that the valuations did not reflect the securities' purported "intrinsic" value, which Intesa claims to have derived years after the fact from complicated modeling of "properties comparable to" those underlying Pyxis's assets. (Compl. ?? 68, 129-30.) Given that CA-CIB did not purport to provide the "intrinsic" value of the securities, Intesa's allegations fail to support any claim that this information constituted a misrepresentation. See Epirus Capital Mgmt., LLC v. Citigroup Inc., No. 09 Civ. 2594, 2010 WL 1779348, *6 (S.D.N.Y. Apr. 29, 2010) (CDO investors' claims amounted to a "simpl[e] disagree[ment] with defendants' valuation methods, which does not equate to alleging fraud"). Moreover, Intesa's claims are foreclosed by the document conveying the valuations. Contrary to Intesa's claim that "[t]he valuations that [CA-CIB] provided to Intesa purported to represent the price at which protection on the notes could be purchased" (Compl. ? 85), the document clearly stated that the information provided "does not reflect the price at which a sale of the relevant securities could actually be effected" and "does not represent the price at which [CA-CIB] would be willing to purchase, sell, enter into, . . . or settle any securities 16 Case 1:12-cv-02683-RWS Document 38 Filed 07/20/12 Page 24 of 32 or transactions." (Kuck Decl. Ex. J.) The document also stated clearly that: ? "The Indication is not necessarily indicative of values carried on [CA-CIB's] books and records. You should not rely upon this information to predict future value or for the maintenance of your own books and records . . . ." "You should obtain your own independent professional advice and/or valuation before acting on the enclosed Indication." The indication was based on "information provided by you, certain methodologies, market data and assumptions selected by [CA-CIB]. [CA-CIB] did not verify the accuracy of such information and [CA-CIB] makes no representation or warranty as to the accuracy, reliability, completeness or reasonableness of such methods, market data or assumptions. Use of different methods, market data and/or assumptions may yield substantially different results." CA-CIB is "not responsible for any loss or damage arising out of any person's use of or reliance upon the Indication." (Id.) ? ? ? In light of these statements, Intesa could not possibly have believed CA-CIB was providing a representation as to the "intrinsic" value of the notes, whatever that may mean. Notably, Intesa apparently waited until it suffered losses to perform its own "intrinsic" valuation, despite knowing in early 2007 that there already was deterioration in the subprime market (see Compl. ?? 68, 86); it cannot now blame CA-CIB for its failure to do so earlier. Also, where (as here) there is no allegation of an objective standard to assess value,15 estimations of value are subjective opinions, actionable only where plaintiffs allege with the requisite particularity that defendants either did not believe the opinion when given or that they misrepresented how the opinion was formed. See Fait v. Regions Fin. Corp., 655 F.3d 105, 111-12 (2d Cir. 2011). Intesa has alleged neither. Relatedly, Intesa attempts to bootstrap its after-the-fact "intrinsic" valuation into a claim that "the subordination had largely been eaten away by losses" at closing and that as a result, "on 'day one,' Intesa's position in the Pyxis Swap contained embedded losses of over $70 15 Indeed, the Offering Memorandum prominently warned that there was no actual market for the securities issued by the CDO, thus market value was inherently a matter of opinion. (See Kuck Decl. Ex. A, at 23.) 17 Case 1:12-cv-02683-RWS Document 38 Filed 07/20/12 Page 25 of 32 million." (Compl. ? 68.) Intesa's claim that the transaction lacked sufficient subordination misconstrues the Offering Memorandum, which describes "subordination" solely as to the order of payments: "No payment of interest on and . . . no payments of principal of any Class of Notes will be made until all accrued and unpaid interest on the Notes of each Class that is Senior to such Class and that remain outstanding has been paid in full." (Kuck Decl. Ex. A, at 24.)16 Nowhere does Intesa allege that more junior notes were paid ahead of the Class A-1 Notes. Nor does Intesa allege that the Class A-1 Notes absorbed losses before more junior notes.17 D. The Allegations in the Amended Complaint Defeat Any Assertion of Scienter The Second Circuit has "'repeatedly required plaintiffs to plead the factual basis which gives rise to a strong inference of fraudulent intent.'" Landesbank Baden-Wurttemberg v. Goldman, Sachs & Co., No. 11-4443, 2012 WL 1352590, *1 (2d Cir. Apr. 19, 2012) (citation omitted); see also Teamsters Local 445 Freight Div. Pension Fund v. Dynex Capital Inc., 531 F.3d 190, 194 (2d Cir. 2008) (affirming dismissal of fraud claims involving the sale of ABS, noting that "[w]hile we normally draw reasonable inferences in the non-movant's favor on a motion to dismiss, [the PSLRA] . . . establishes a more stringent rule for inferences involving scienter"). In order to plead a strong inference of fraudulent intent, a plaintiff must allege particularized facts "(1) showing that the defendants had both motive and opportunity to commit the fraud or (2) constituting strong circumstantial evidence of conscious misbehavior or 16 The Offering Memorandum also warned that: "The Collateral is subject to credit, liquidity and interest rate risk . . . . The amount and nature of the collateral . . . have been established to withstand certain assumed deficiencies in payment . . . . If any deficiencies exceed such assumed levels, however, payment of the Notes and the distributions on the Preference Shares could be adversely affected." (Kuck Decl. Ex. A, at 28.) In Footbridge, 2010 WL 3790810, the court rejected similar allegations that plaintiffs "believed that the subordination structure would protect them from losses, but that this was an incorrect perception because 'the collateral underlying the Securitizations was extremely risky and low quality.'" Id. at *11 (citation omitted). The court found that plaintiffs had not pled fraud because they did "not allege that defendants made inaccurate representations about the structure of the Securitizations." Id.; see also MBIA Ins. Corp. v. Merrill Lynch, Pierce, Fenner & Smith Inc., No. 601324/2010, 2010 WL 2347014, at *2, 5 (Sup. Ct. N.Y. Cnty. Apr. 9, 2010), aff'd, 81 A.D.3d 419 (1st Dep't 2011). 17 18 Case 1:12-cv-02683-RWS Document 38 Filed 07/20/12 Page 26 of 32 recklessness." ATSI Commc'ns, 493 F.3d at 99. Here, Intesa has failed to allege facts showing any motive. Thus, "'the strength of the circumstantial allegations must be correspondingly greater'" to plead conscious misbehavior or recklessness, a standard Intesa has plainly failed to meet. See Campo, 371 F. App'x at 216 (citation omitted). 1. Intesa Fails to Plead Motive and Even Contradicts It As to motive, Intesa's theory - that in order to grow its CDO business, CA-CIB conspired with Magnetar and Putnam to create a CDO that would fail - is both legally deficient and contradicted by Intesa's own allegations. As a matter of law, courts routinely dismiss such generalized allegations of profit-seeking as insufficient to establish the requisite fraudulent intent because such motives could be attributed to almost any business. See, e.g., Landesbank, 2012 WL 1352590, *2; Alki Partners, L.P. v. Windhorst, No. 11-1071-CV, 2012 WL 933979, *2 (2d Cir. Mar. 21, 2012); Chill v. Gen. Elec. Co., 101 F.3d 263, 267-68 (2d Cir. 1996); Cohen v. Stevanovich, 722 F. Supp. 2d 416, 429 (S.D.N.Y. 2010); Footbridge, 2010 WL 3790810, *20. Moreover, Intesa's motive allegations are defeated by other allegations in the Amended Complaint. Intesa cites a "Strategic Development Plan" by CA-CIB's parent company and hypothesizes that because it allegedly "set an ambitious goal to become one of the world's top five companies in structured credit securitizations" (Compl. ?? 40-41), CA-CIB must have entered into a scheme with Magnetar in which CA-CIB defrauded other investors in order to obtain investments from Magnetar. However, Intesa also alleges that, by mid-2006, CA-CIB was already "a prolific underwriter of CDOs collateralized by RMBS, underwriting over $75 billion in structured credit transactions" (Compl. ? 39), only $6 billion of which allegedly involved Magnetar. (Compl. ? 49.) Furthermore, the Strategic Development Plan also reveals that CA-CIB's parent was Intesa's largest shareholder (Kuck Decl. Ex. K, at 92, 94), and underscores CA-CIB's desire 19 Case 1:12-cv-02683-RWS Document 38 Filed 07/20/12 Page 27 of 32 to further develop business with Intesa. (Id. at 71.) It would have been irrational for CA-CIB to attempt to become an industry leader by arranging CDOs designed to lose money, or for it to defraud a company in which its parent had a substantial investment and with which it sought to do increased business. As courts have repeatedly held, a fraud claim cannot be maintained where the alleged motive would be "clearly self-defeating, if not irrational." Dooner v. Keefe, Bruyette & Woods, Inc., No. 00 Civ. 572, 2003 WL 135706, *3 (S.D.N.Y. Jan. 17, 2003); see also Miller, 473 F. Supp. 2d at 589. 2. Intesa Fails to Plead Conscious Misbehavior Because Intesa has failed to plead evidence of motive, it "must allege a degree of scienter 'approaching a knowledgeable participation in the fraud or a deliberate and conscious disregard of facts' and 'must detail specific contemporaneous data or information known to the defendants that was inconsistent with the representation in question.'" Janbay, 2012 WL 1080306, *11 (citation omitted); see also Dynex Capital, 531 F.3d at 196; Cohen, 722 F. Supp. 2d at 428-29. It has failed to do so. Indeed, Intesa has not alleged any particularized facts to show that CA-CIB knew or should have known the facts that it allegedly failed to disclose. See Janbay, 2012 WL 1080306, *3; In re Aegon N.V. Sec. Litig., No. 03 Civ. 0603, 2004 WL 1415973, *16 (S.D.N.Y. June 23, 2004). Intesa contends that Pyxis was "built to fail" (Compl. ? 89), but refers only to the type of collateral selected (see Compl. ?? 101-07), without alleging any violations of the CDO's collateral eligibility requirements or explaining how CA-CIB should have known the collateral was allegedly inferior. In addition, Intesa claims the parties engaged in a broad conspiracy to further Magnetar's purported trading strategy (Compl. ?? 44-51; 167-73), but the ProPublica article on which it relies indicates that Pyxis is the only CDO involving Magnetar, CA-CIB and Putnam (see Kuck Decl. Ex. E). And if there was a "correlation" between assets 20 Case 1:12-cv-02683-RWS Document 38 Filed 07/20/12 Page 28 of 32 selected by Putnam for Pyxis and the assets held by other Constellation CDOs (see Compl. ? 105), Intesa fails to allege how CA-CIB would have known of the contents of portfolios of the 23 Constellation CDOs that it did not arrange, and Intesa's complaint that Magnetar CDOs were included post-closing in Pyxis ignores that CA-CIB was not involved with the portfolio postclosing. (See Compl. ?? 38, 102.) 18 Moreover, nothing in the e-mails added in the Amended Complaint - all of which were before Justice Schweitzer in the prior Pyxis litigation - suggests any conscious misbehavior. Mischaracterizing one e-mail, Intesa claims that CA-CIB and Magnetar were attempting to "keep their involvement secret from investors" by having DB appear as the only equity investor on certain documents. (See Compl. ? 92). Not only is there nothing in the e-mail indicating that this private agreement was to be provided to other investors, but Intesa also omits to mention that when CA-CIB asked Magnetar whether it was suggesting that the documents be structured in this way, Magnetar responded, "No, not at all." (See Kuck Decl. Ex. Q.) Likewise, Intesa cites a draft agreement that included a term that would have given Magnetar a purported "veto right" over assets selected for the portfolio (see Compl. ? 92), but nowhere does Intesa allege that (a) an agreement including this term was ever signed; (b) the alleged veto right was ever exercised; or (c) if it was exercised, it was exercised for any purpose other than to attempt to build the strongest possible portfolio for Pyxis. Finally, while Intesa contends that the e-mails suggest that CA-CIB knew Putman had abdicated its responsibilities as collateral manager (Compl. ?? 90-96), in one e-mail chain that Intesa quotes at length, Magnetar actually writes to Putnam, "We will buy CDO CDS on names of your choosing" (id. ? 93), confirming that Putnam was selecting the 18 Intesa includes a colorful quote from a CA-CIB bank analyst taken entirely out of context (see Compl. ? 53), but this allegation is entirely misleading because the bank analyst had no involvement whatsoever in CA-CIB's structured finance business and was speaking generally about "financial creativity" - not with respect to CDOs specifically or to CA-CIB's particular practices - and with the benefit of hindsight long after the financial markets had crashed. (See Kuck Decl. Ex. L, The Financial Crisis Inquiry Report, January 2011, at 6.) 21 Case 1:12-cv-02683-RWS Document 38 Filed 07/20/12 Page 29 of 32 assets which would be sourced synthetically. At best, the e-mails may be read to suggest that Magnetar insisted on reviewing the assets Putnam selected before they were purchased, a request that is entirely consistent with Magnetar's role as a pre-committed equity purchaser, which would be subject to the first loss if the portfolio assets performed poorly. Intesa's selective quotation from a handful of e-mails falls well short of the heightened pleading requirement for scienter. E. Intesa Fails to Plead Facts Showing Loss Causation Intesa also fails to plead facts showing "a causal connection between the material misrepresentation and the loss." Dura Pharms., Inc. v. Broudo, 544 U.S. 336, 342 (2005). Intesa's alleged loss coincided with a mortgage industry-wide meltdown and the resulting decline in the value of mortgage-backed securities. Indeed, Intesa admits that by the time Pyxis closed in October 2006, "default rates on subprime mortgages [had begun] to rise" and the market further deteriorated in early 2007. (Compl. ?? 42, 86.) As the Second Circuit has explained: [W]hen the plain tiff's loss coin cides with a m arketwide phenomenon causing comparable losses to other inv estors, the pro spect that the plain tiff's loss was caused by the fraud decreases, and a p laintiff's claim fails when it has no t adequately ple[ ]d facts which, if prove n, would show that its loss was caused by the alleged misstatements as opposed to intervening events. Lentell v. Merrill Lynch & Co., 396 F.3d 161, 174 (2d Cir. 2005) (quotation marks omitted): see also Footbridge, 2010 WL 3790810, *22. To avoid dismissal, Intesa must "allege[ ] facts that would allow a factfinder to ascribe some rough proportion of the whole loss to [defendants'] misstatements." Lattanzio v. Deloitte & Touche LLP, 476 F.3d 147, 158 (2d Cir. 2007). While Intesa claims that its damages flow from entering into the transaction (Compl. ?? 146, 171), it fails to draw a causal connection between the alleged misstatements and its alleged damages, or to differentiate between losses caused by the market-wide meltdown and losses allegedly caused by misrepresentations. Indeed, Intesa alleges that more than 45% of the $75 billion in CDOs that CA-CIB arranged had defaulted by December 2008, and that CA-CIB 22 Case 1:12-cv-02683-RWS Document 38 Filed 07/20/12 Page 30 of 32 "led the league tables of CDO downgrades" even though less than 10% of the CA-CIB CDOs allegedly involved Magnetar. (Compl. ?? 5, 53.) These allegations of a general failure of CDOs arranged by CA-CIB indicate that losses were caused by broader factors not specific to the Pyxis CDO, or even to the small portion of CA-CIB's CDOs in which Magnetar invested. In these circumstances, Intesa has failed to sufficiently plead loss causation. II. INTESA'S FEDERAL SECURITIES CLAIM IS TIME-BARRED Intesa's Section 10(b) claim is untimely under the applicable statutes of repose and limitations. The five year statute of repose, see 28 U.S.C. ? 1658(b), "begins to run from the time that the allegedly fraudulent representations were made." Boudinot v. Shrader, No. 09 Civ. 10163, 2012 WL 489215, *4 (S.D.N.Y. Feb. 15, 2012); see also McCann v. Hy-Vee, Inc., 663 F.3d 926, 930 (7th Cir. 2011) (Posner, J.); In re Exxon Mobil Corp. Sec. Litig., 500 F.3d 189, 200 (3d Cir. 2007). Where, as here, the Amended Complaint purports to allege multiple misrepresentations, the repose period "begins when the last alleged misrepresentation was made." Teamsters Local 445 Freight Div. Pension Fund v. Bombardier Inc., No. 05 Civ. 1898, 2005 WL 2148919, *5, *11 (S.D.N.Y. Sept. 6, 2005) (collecting cases); In re Beacon Assocs. Litig., No. 09 Civ. 777, 2012 WL 1123728, *5 (S.D.N.Y. Apr. 4, 2012). Accordingly, in order for Intesa's claims to be timely, the last misrepresentation alleged in the Amended Complaint must have been made on or after April 6, 2007 (i.e., five years prior to the filing of the Complaint on April 6, 2012). However, the last misrepresentation alleged in the Amended Complaint relates to the market valuations purportedly provided to Intesa in March 2007, more than five years before the commencement of this action. Further, Intesa's Section 10(b) claim is independently barred by the two year statute of limitations. See 28 U.S.C ? 1658(b). Intesa filed this lawsuit on April 6, 2012, and for its claim to be timely, Intesa must not have learned of the facts on which it brought its case until 23 Case 1:12-cv-02683-RWS Document 38 Filed 07/20/12 Page 31 of 32 after April 6, 2010. Facts are considered discovered for statute of limitations purposes when "a reasonably diligent plaintiff would have sufficient information about that fact to adequately plead it in a complaint." Pontiac Gen. Emps., Ret. Sys. v. MBIA, Inc., 637 F.3d 169, 175 (2d Cir. 2011). Intesa claims that it first learned of the "critical facts" necessary to bring its fraud claim on April 9, 2010, when ProPublica published an article that "disclosed for the first time" that (i) "Magnetar had been involved in the creation of Pyxis;" (ii) Magnetar put together its first Constellation CDO, Orion, with CA-CIB; and (iii) Jim Prusko of Magnetar previously worked at Putnam and he played a central role in marketing CDOs for Magnetar. (Compl. ? 104 (emphasis added)). However, all of these facts were widely publicly available long before the ProPublica article, and the statute of limitations therefore also bars the claim. (See, e.g., Kuck Decl. Exs. M, N (collecting articles published long before April 6, 2010 discussing each of these facts).)19 III. INTESA'S CDS IS A FOREIGN TRANSACTION The Supreme Court made clear in Morrison v. National Australia Bank Ltd., 130 S. Ct. 2884 (2010), that Section 10(b) applies only to "transactions in securities listed on domestic exchanges, and domestic transactions in other securities." Id. at 2884. In the CDS context, this requires analysis of the economic reality of the transaction; a CDS is "the functional equivalent of trading the underlying" securities, and if those securities are listed on a foreign exchange, Section 10(b) does not apply. Elliott Assocs. v. Porsche Automobil Holdings SE, 759 F. Supp. 2d 469, 476 (S.D.N.Y. 2010), appeal docketed, No. 11-416 (2d Cir. Jan. 28, 2011).20 19 A court may take judicial notice of news articles, websites and other public sources to establish that information has been publicly disseminated. See Staehr v. Hartford Financial Services Group, Inc., 547 F.3d 406, 424-26 (2d Cir. 2008); Finn v. Smith Barney, No. 11-1270-CV, 2012 WL 1003656, *1, & n.1 (2d Cir. Mar. 27, 2012). The Second Circuit addressed Morrison in Absolute Activist Value Master Fund Ltd. v. Ficeto, 677 F.3d 60 (2d Cir. 2012), but focused on the purchase of penny stocks and did not address the entirely different context of swap agreements. In any event, even under the standard set forth in Absolute Activist, Intesa's bald legal conclusion that it became "irrevocably committed to the contract" in New York cannot survive a motion to dismiss. See id. at 70 (stating that "transactions took place in the United States" is insufficient). 20 24 Case 1:12-cv-02683-RWS Document 38 Filed 07/20/12 Page 32 of 32 Here, because the Pyxis notes underlying Intesa's CDS were listed on the Cayman Islands Stock Exchange (See Kuck Decl. Ex. A, at 21-22), the 10b-5 claim should be dismissed. IV. INTESA HAS NOT PLED A CONSPIRACY CAUSE OF ACTION Intesa's failure to plead fraud also requires dismissal of its conspiracy claim because New York does not recognize civil conspiracy as an independent tort. See, e.g., Kirch v. Liberty Media Corp., 449 F.3d 388, 401 (2d Cir. 2006). V. THE REQUEST FOR PUNITIVE DAMAGES MUST BE STRICKEN Finally, Intesa's request for punitive damages should be stricken because Intesa has not alleged the tortious conduct "aimed at the public generally" that evinces "'a high degree of moral turpitude' and demonstrating 'such wanton dishonesty as to imply a criminal indifference to civil obligations.'" Rocanova v. Equitable Life Assurance Soc'y, 83 N.Y.2d 603, 613 (1994); see HSH Nordbank AG, 941 N.Y.S.2d at 76; CIFG Assurance N. Am., Inc. v. Goldman, Sachs & Co., No. 652286/2011, 2012 WL 1562718, *16 (N.Y. Sup. Ct. May 9, 2012). CONCLUSION For the foregoing reasons, CA-CIB respectfully requests that the Amended Complaint be dismissed in its entirety with prejudice. Dated: July 20, 2012 New York, New York Respectfully submitted, By: /s/ Lea Haber Kuck Lea Haber Kuck (lea.kuck@skadden.com) Gregory A. Litt (greg.litt@skadden.com) SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP Four Times Square New York, New York 10036 (212) 735-3000 Attorneys for Cr?dit Agricole Corporate and Investment Bank and Cr?dit Agricole Securities (USA) Inc. 25