Loreley Fin. (Jersey) No. 3 v. Wells Fargo Sec.
| Decision Date | 28 March 2013 |
| Docket Number | 12 Civ. 3723(RJS) |
| Parties | LORELEY FINANCING (JERSEY) NO. 3 LIMITED, et al., Plaintiffs, v. WELLS FARGO SECURITIES, LLC, et al., Defendants. |
| Court | U.S. District Court — Southern District of New York |
Alexander D. Pencu, Austin D. Kim, and James M. Ringer of Meister, Seelig & Fein, LLP, New York, NY, Marc E Kasowitz, David M. Max, and Sheron Korpus of Kasowitz Benson, Torres & Friedman, LLP, New York, N Y, for Plaintiffs.
Jayant W. Tam be, Alexander P. McBride, and Howard Frederick Sidman of Jones Day, New York, NY, David C. Bohan and William M Regan of Katten Muchin Rosenman, LLP, 575 Madison Ave, New York, NY, for The Wells Fargo Defendants and Defendants SAl, Octans, and Longshore.
Steven F. Molo and Benoit Quarmby of MoloLamken, LLP, New York, N Y, Joseph J. Frank, Kelly Marie Falls, and Matthew L. Craner of Orrick, Herrington & Sutcliffe, LLP, New York, NY, for Defendant Harding Advisory LLC.
Plaintiffs[1] bring this action against Defendants[2] for claims arising out of a series of investments in three collateralized debt obligations (“CDOs”). In particular, Plaintiffs allege (1) common law fraud; (2) conspiracy to defraud; (3) aiding and abetting fraud; (4) fraudulent conveyance; and (5) unjust enrichment by all Defendants. Plaintiffs also seek (6) rescission as against WFB. Defendants[3] now move to dismiss the Complaint on the grounds that (1) Plaintiffs lack personal jurisdiction over WFSIL; (2) Plaintiffs' fraud claims are timebarred; and (3) Plaintiffs fail to allege facts that plausibly support the elements of their claims. For the reasons set forth below, the Court dismisses Plaintiffs' claims in their entirety.
This case arises out of the collapse of the U.S. housing market and the resulting shock wave that resounded through the financial services industry, which had staked its fortunes on the promise of ever appreciating real estate assets. In particular, Plaintiffs' claims involve allegations of fraud and unjust enrichment in relation to their investments in CDOs—investment vehicles that bundle a variety of revenue-generating assets and then sell pieces of the expected revenue to investors in the form of debt and equity securities. (Compl. ¶¶ 30-31; Mem. at 5-6.)
Generally, a sponsoring bank will create and structure a CDO. (Compl.¶ 30.) In preparation for the CDO's launch, the bank will purchase investment assets, such as mortgage-backed securities (“MBS”)[5] or credit default swap (“CDS”) contracts,[6] and it will hold or “warehouse” those assets until the CDO is ready to launch. (Compl.¶ 32.) Simultaneously, the bank will sell portions of the anticipated CDO to investors on the premise that the CDO will eventually use the investors' dollars to purchase the assets held by the bank, and then the CDO will funnel the income from those assets back to the investors. (Compl. ¶¶ 30-32; Mem. at 5-6.) In a managed CDO, a collateral manager selects the assets that will ultimately go into the CDO. (Compl. ¶¶ 35-36; Mem. at 6.)
When a sponsoring bank creates and structures a CDO, it generally divides the securities-for-sale into several classes—or “tranches”—from which investors may select their desired risk profile. (Compl.¶ 30.) Generally, a senior tranche will consist of notes that receive preferred access to the income that is generated from the assets that the CDO purchases, while notes from junior tranches receive lower priority; after all note holders have been paid, the equity tranche receives what is left. (Compl. ¶¶ 31, 51 n. 5; Mem. at 6.) Because the equity tranche bears the most risk of loss in the event that a CDO does not succeed, it is often the most difficult piece to sell. (Compl. ¶¶ 31, 51 n. 5.)
Plaintiffs are five special purpose financial companies incorporated under the laws of the Bailiwick of Jersey. (Compl.¶¶ 9-13.) At various times, various Plaintiffs invested in the three Defendant CDOs—Octans, Sagittarius, and Longshore. (Id.) These Defendant CDOs are Cayman Islands limited liability companies, which were created and marketed by Wachovia Capital Markets, Wachovia Securities International Ltd., and Wachovia Bank, N.A.—all of which are predecessors in interest to the Wells Fargo Defendants. (See Id. ¶¶ 14-22.) Specifically, Wachovia Capital Markets was the initial purchaser of the notes issued by the CDO Defendants and was succeeded by Defendant WFS. (See Id. ¶ 20.) Wachovia Securities International Ltd. served as the agent of Wachovia Capital Markets for international sales and was succeeded by WFSIL. (See Id. ¶ 21.) Wachovia Bank, N.A. was the initial CDS counterparty for the CDOs and was succeeded by WFB. (See Id. ¶ 22.)
In creating these CDOs, Wachovia[7] employed collateral managers to select and manage the assets that would comprise the CDOs. (Id. ¶ 34.) Harding, a limited liability company (“LLC”) incorporated in Delaware, served as collateral manager for Octans (id. ¶ 23); and SAI, another Delaware LLC that was a wholly-owned subsidiary of Wachovia, served as collateral manager for both Sagittarius and Longshore (id. ¶ 24).
According to the Complaint, Wachovia did not market the CDOs directly to Plaintiffs but instead marketed them to Plaintiffs' investment advisor, IKB Duetsche Industriesbank AG, and its former affiliate, IKB Credit Asset Management GmbH (collectively, “IKB”). IKB is not a party in this action.
Another non-party, Magnetar Capital LLC (“Magnetar”) invested in Octans and Sagittarius by purchasing the equity tranche of those CDOs. According to the Complaint, Magnetar's equity positions—which effectively amounted to bets that the CDOs would succeed—were simultaneously offset or “hedged” by short positions—specifically, CDS contracts that would pay off if the CDOs failed. (Id. ¶¶ 2-3, 52-54, 67, 72, 108). Thus, according to the Complaint, in the event of either success or failure of the CDOs, Magnetar was positioned to benefit. (Id. ¶ 147 ().)
Overall, Plaintiffs allege that, because the Defendant CDOs purchased assets from the sponsoring bank through non-arm'slength deals, at above-market prices, the CDOs did not receive fair consideration for their payments and were rendered insolvent. (See Id. at ¶¶ 232-237 (Octans); 140, 238-243 (Sagittarius); 244-249 (Longshore).) The specific allegations as to each CDO follow below.
The activities at issue in this case began in the summer of 2006. According to the Complaint, in July of that year, Magnetar agreed to purchase the equity portion of Octans. (See Id. ¶ 109.) In August and September 2006, Wachovia provided IKB with term sheets, a marketing book, and the offering circular for Octans,[8] representing that Harding would select and monitor the collateral for the CDO. (Id. ¶¶ 84-90.) On October 12, 2006, Plaintiff LFJ 5 invested in the CDO, which became operational the same day.
Although Harding was designated to serve as the collateral manager for Octans, Plaintiffs allege that Magnetar interfered with Harding's selection of collateral. (Id. ¶¶ 88-89, 91, 96-101.) For example, on August 8, 2006, as the assets for Octans were being purchased and the notes were being sold to investors, Plaintiffs allege that a Magnetar official e-mailed Wachovia and Harding saying:
(Id. ¶ 99.) Plaintiffs also allege an exchange of three e- mails between Magnetar and Harding on September 12, 2006:
(Id. ¶¶ 96-97.)
In addition to exchanging e-mails with Wachovia and Harding, Magnetar requested a structure that would not divert collateralasset cash flow away from subordinated notes (id. ¶ 110), and it proposed a “sourcing fee” that it would receive for proposing assets that were ultimately incorporated into the deal (id. ¶ 111). Ultimately, the cash flow structure and sourcing fees were disclosed in the Octans offering circular. (Mem. at 17; Opp. at 17.)
Plaintiffs do not make clear whether or when Magnetar invested in the Sagittarius CDO, but they imply that Magnetar was an equity investor. (See Compl. ¶ 146.) Plaintiffs allege that beginning in November 2006, Wachovia approached IKB about investing in Sagittarius, for which SAI would serve as collateral manager. (See Id. ¶ 123.) From December 2006 through February 2007, Wachovia provided IKB with several iterations of the term sheet for Sagittarius, as well as a marketing book and offering circular, all of which represented that SAI would select and monitor the collateral for the CDO. The offering circular also represented that all collateral assets would be purchased in arm's length transactions for fair market value. (See Id. ¶ 131.) In March 2007, Plaintiffs LFJ 15 and LFJ 28 purchased Sagittarius notes from Wachovia. (See Id. ¶ 154.)
Although Sagittarius was a managed CDO, with SAI designated to select and manage the collateral (see Compl. ¶¶ 127-128) Plaintiffs allege that Magnetar interfered with asset...
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