Loreley Fin. (Jersey) No. 3 v. Wells Fargo Sec., 091321 FED2, 19-3304

Docket Nº19-3304
Opinion JudgeMenashi, Circuit Judge:
Party NameLoreley Financing (Jersey) No. 3 Limited, Loreley Financing (Jersey) No. 5 Limited, Loreley Financing (Jersey) No. 15 Limited, Loreley Financing (Jersey) No. 28 Limited, and Loreley Financing (Jersey) No. 30 Limited, Plaintiffs-Appellants, v. Wells Fargo Securities, LLC, Wells Fargo Bank, N.A., Harding Advisory LLC, and Structured Asset ...
AttorneySheron Korpus, Kasowitz Benson Torres LLP, New York, New York (David M. Max, Kasowitz Benson Torres LLP, New York, New York; James M. Ringer, Meister Seelig & Fein LLP, New York, New York; Stephen M. Plotnick, Alexander Malyshev, Carter Ledyard & Milburn LLP, New York, New York, on the brief), fo...
Judge PanelBefore: Calabresi and Menashi, Circuit Judges, and Koeltl, District Judge.
Case DateSeptember 13, 2021
CourtUnited States Courts of Appeals, United States Court of Appeals (2nd Circuit)

Loreley Financing (Jersey) No. 3 Limited, Loreley Financing (Jersey) No. 5 Limited, Loreley Financing (Jersey) No. 15 Limited, Loreley Financing (Jersey) No. 28 Limited, and Loreley Financing (Jersey) No. 30 Limited, Plaintiffs-Appellants,

v.

Wells Fargo Securities, LLC, Wells Fargo Bank, N.A., Harding Advisory LLC, and Structured Asset Investors, LLC, Defendants-Appellees.[*]

No. 19-3304

United States Court of Appeals, Second Circuit

September 13, 2021

Argued: April 7, 2021

On Appeal from the United States District Court for the Southern District of New York

The plaintiffs invested in three collateralized debt obligations ("CDOs") created and offered by predecessors-in-interest to certain defendants. Assets for the CDOs were selected according to stringent eligibility criteria by collateral managers who are also defendants here. When the financial crisis hit in 2008, the collateral underlying the CDOs defaulted and the CDOs became worthless. The plaintiffs brought suit for fraud, rescission, conspiracy, aiding and abetting, fraudulent conveyance, and unjust enrichment alleging that the defendants had misrepresented that the collateral managers would exercise independence in selecting assets for the CDOs. The district court granted summary judgment to the defendants. On appeal, the plaintiffs claim to have detrimentally relied on the defendants' misrepresentations that the collateral managers would exercise independence in selecting assets for the CDOs.

We disagree. The plaintiffs based their investment decisions solely on the investment proposals their investment advisor developed. The advisor developed these detailed investment proposals based on offering materials the defendants provided and on the advisor's own due diligence, which included conducting its own risk analyses and asset valuations and vetting the collateral managers. The plaintiffs, who did not directly communicate with the defendants, therefore premise their fraud claims on the advisor's reliance on the defendants' representations. Yet New York law does not support this theory of third-party reliance. Accordingly, we hold that the plaintiffs have failed to establish, by clear and convincing evidence, reliance on the defendants' representations.

We also hold that the plaintiffs have failed to establish that the defendants misrepresented or omitted material information for two of the three CDO deals at issue-the Octans II CDO and the Sagittarius CDO I. The defendants' representations that the collateral managers would exercise independence in selecting assets were not misrepresentations at all; the plaintiffs have identified no evidence that the collateral managers ceded control of asset selection to a non-party hedge fund that was also an investor in the CDOs. Moreover, the evidence indicates that the hedge fund's involvement in asset selection was known to the advisor. The defendants did not have a duty to disclose their knowledge of the hedge fund's investment strategy because this information could have been discovered through the exercise of due care. For these reasons, we AFFIRM the judgment of the district court.

Sheron Korpus, Kasowitz Benson Torres LLP, New York, New York (David M. Max, Kasowitz Benson Torres LLP, New York, New York; James M. Ringer, Meister Seelig & Fein LLP, New York, New York; Stephen M. Plotnick, Alexander Malyshev, Carter Ledyard & Milburn LLP, New York, New York, on the brief), for Plaintiffs-Appellants.

Jayant W. Tambe (Laura Washington Sawyer, Rajeev Muttreja, James M. Gross, Amanda L. Dollinger, on the brief), Jones Day, New York, New York, for Defendants-Appellees.

Before: Calabresi and Menashi, Circuit Judges, and Koeltl, District Judge. [†]

Menashi, Circuit Judge:

In 2006 and 2007, Plaintiffs-Appellants Loreley Financing (Jersey) No. 3 Limited, Loreley Financing (Jersey) No. 5 Limited, Loreley Financing (Jersey) No. 15 Limited, Loreley Financing (Jersey) No. 28 Limited, and Loreley Financing (Jersey) No. 30 Limited (collectively, "Loreley")-five special purpose entities formed for the specific purpose of investing in securities known as collateralized debt obligations ("CDOs")-invested in three CDOs created and offered by Wachovia subsidiaries (collectively, "Wachovia") that were the predecessors-in-interest to Defendants-Appellees Wells Fargo Securities, LLC, Wells Fargo Bank, N.A., and Structured Asset Investors, LLC ("SAI"). The collateral managers for these CDOs- Defendants-Appellees Harding Advisory LLC ("Harding") and SAI-selected assets that met the CDOs' eligibility criteria. When the financial crisis hit in 2008, cash flow into the CDOs ceased and the CDOs became worthless. Loreley sued the defendants for fraud, rescission, conspiracy, aiding and abetting, fraudulent conveyance, and unjust enrichment-alleging that the defendants had misrepresented the collateral managers' independence in selecting assets for the CDOs.

Loreley now appeals to this court, for the second time, from a judgment granting summary judgment to the defendants. Loreley claims to have detrimentally relied on the defendants' misrepresentations that the collateral managers would exercise independence in selecting assets for the CDOs. We disagree. Loreley based its investment decisions solely on the investment proposals developed by its investment advisor, IKB Deutsche Industriebank AG and IKB Credit Asset Management GmbH (collectively, "IKB"). IKB developed these detailed investment proposals based on the defendants' offering materials and on IKB's own due diligence, which included conducting its own risk analyses and asset valuations and vetting the collateral managers. For this reason, Loreley-which did not communicate directly with the defendants-bases its fraud claims on IKB's reliance. Yet New York law does not support such a theory of third-party reliance. See Pasternack v. Lab. Corp. of Am. Holdings, 807 F.3d 14 (2d Cir. 2015), certified question answered, 27 N.Y.3d 817, 829 (2016) (holding that misrepresentations that are not communicated to a plaintiff cannot form the basis of a plaintiff's reasonable reliance). Accordingly, we hold that Loreley fails to establish by clear and convincing evidence that it relied on the defendants' representations.

Loreley also fails to establish by clear and convincing evidence that the defendants misrepresented or omitted material information for two of the three CDO deals at issue-the Octans II CDO and the Sagittarius CDO I. The defendants' representations that the collateral managers would exercise independence in selecting assets were not misrepresentations at all; Loreley has identified no evidence that the collateral managers ceded control of asset selection to a non-party hedge fund, Magnetar Capital LLC ("Magnetar"), which was also an investor in the CDOs. Moreover, the evidence indicates that Magnetar's involvement in asset selection was known to IKB. The defendants did not have a duty to disclose their knowledge of Magnetar's strategy because, based on what was already known to IKB and the high level of access IKB had to relevant information to conduct due diligence, this was information that could have been discovered through the exercise of due care.

For these reasons, we affirm the judgment of the district court.

BACKGROUND

This appeal is the second time that this matter has come before this court. We assume some familiarity with the subject matter covered in our earlier opinion. See Loreley Fin. (Jersey) No. 3 Ltd. v. Wells Fargo Sec., LLC

(Loreley I), 797 F.3d 160, 164-69 (2d Cir. 2015).

I

This case concerns three CDOs-Octans II CDO ("Octans"), Sagittarius CDO I ("Sagittarius"), and Longshore CDO Funding 2007-3 ("Longshore")-that were sold to sophisticated investors, including Loreley, by Wachovia subsidiaries, the predecessors-in-interest to Wells Fargo Securities, LLC, Wells Fargo Bank, N.A., and SAI. The CDOs were managed portfolios of assets. The CDOs' assets were selected and managed by collateral managers Harding, an independent company, and SAI, a Wachovia subsidiary at the time. Harding was the collateral manager for Octans, and SAI was the collateral manager for Sagittarius and Longshore.

Loreley alleges that the defendants perpetrated two different fraudulent schemes. Loreley's allegations involve a non-party to this litigation: Magnetar, a hedge fund that invested in the equity tranches of the CDOs and simultaneously invested in the short-side of credit-default swaps ("CDS"), positioning itself against the senior tranches of those same CDOs. Loreley alleges that Magnetar coerced Harding and SAI into accepting poor-quality assets for Octans and Sagittarius. This coercion allegedly contradicted the defendants' representations in their offering materials that the collateral managers would exercise independence when selecting "high quality assets with stable returns" and would "minimize losses through rigorous upfront credit and structural analysis, as well as ongoing monitoring of asset quality and performance." Loreley I, 797 F.3d at 167. Loreley invested $94 million into Octans in October 2006 and $10 million in Sagittarius Class A and B notes in March 2007. Octans and Sagittarius defaulted in May 2008 and October 2007, respectively.

Loreley's fraud allegations regarding the Longshore CDO do not involve Magnetar. As was the case with Octans and Sagittarius, the Longshore offering materials emphasized that the collateral manager, SAI, would exercise independence when selecting assets for Longshore and would acquire assets from Wachovia through arm's-length transactions. Contrary to these representations, Wachovia allegedly pressured SAI to accept assets for Longshore from Wachovia's warehouse at above-market prices so that Wachovia could...

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