Pa. Pub. Sch. Emp'rs Ret. Sys. v. Morgan Stanley & Co.

• Court: U.S. Court of Appeals — Second Circuit
• Writing for the Court: WINTER, Circuit Judge
• Citation: Pa. Pub. Sch. Emp'rs Ret. Sys. v. Morgan Stanley & Co., 772 F.3d 111 (2nd Cir. 2014)
• Decision Date: 31 October 2014
• Docket Number: Docket Nos. 13–2095–cvL,13–2286–cvXAP,13–2283–cvXAP,13–2287–cvXAP.
• Parties: Commonwealth of PENNSYLVANIA PUBLIC SCHOOL EMPLOYEES' RETIREMENT SYSTEM, together and on behalf of all others similarly situated, Commerzbank AG, together and on behalf of all others similarly situated, Plaintiffs–Appellants–Cross–Appellees, Abu Dhabi Commercial Bank, individually and on behalf of all others similarly situated, King County, Washington, together and on behalf of all others similarly situated, Sei Investments Company, together and on behalf of all others similarly situated, The Bank of N.T. Butterfield & Son Limited, SFT Collective Investment Fund, Deutsche Postbank AG, Global Investment Services Limited, Gulf International Bank B.S.C., National Agricultural Cooperative Federation, together and on behalf of all others similarly situated, State Board of Administration of Florida, together and on behalf of all others similarly situated, Bank Sinopac, together and on behalf of all others similarly situated, Bank Hapoalim B.M., together and on behalf of all others similarly situated, KBL European Private Bankers S.A., Plaintiffs, v. MORGAN STANLEY & CO., INCORPORATED, Morgan Stanley & Co. International Limited, Moody's Investor Service, Inc., Moody's Investor Service, Ltd., The Mcgraw–Hill Companies, Inc., Standard & Poor's Rating Services, Defendants–Appellees–Cross–Appellants, Cheyne Capital Management Limited, Cheyne Capital Management (UK) LLP, Cheyne Capital International Limited, The Bank of New York Mellon, formerly known as The Bank of New York, QSR Management Limited, Defendants.

772 F.3d 111

Commonwealth of PENNSYLVANIA PUBLIC SCHOOL EMPLOYEES' RETIREMENT SYSTEM, together and on behalf of all others similarly situated, Commerzbank AG, together and on behalf of all others similarly situated, Plaintiffs–Appellants–Cross–AppelleesAbu Dhabi Commercial Bank, individually and on behalf of all others similarly situated, King County, Washington, together and on behalf of all others similarly situated, Sei Investments Company, together and on behalf of all others similarly situated, The Bank of N.T. Butterfield & Son Limited, SFT Collective Investment Fund, Deutsche Postbank AG, Global Investment Services Limited, Gulf International Bank B.S.C., National Agricultural Cooperative Federation, together and on behalf of all others similarly situated, State Board of Administration of Florida, together and on behalf of all others similarly situated, Bank Sinopac, together and on behalf of all others similarly situated, Bank Hapoalim B.M., together and on behalf of all others similarly situated, KBL European Private Bankers S.A., Plaintiffs

v. MORGAN STANLEY & CO., INCORPORATED, Morgan Stanley & Co. International Limited, Moody's Investor Service, Inc., Moody's Investor Service, Ltd., The Mcgraw–Hill Companies, Inc., Standard & Poor's Rating Services, Defendants–Appellees–Cross–AppellantsCheyne Capital Management Limited, Cheyne Capital Management (UK) LLP, Cheyne Capital International Limited, The Bank of New York Mellon, formerly known as The Bank of New York, QSR Management Limited, Defendants.

Docket Nos. 13–2095–cvL

13–2283–cvXAP

13–2286–cvXAP

13–2287–cvXAP.

United States Court of Appeals, Second Circuit.

Argued June 20, 2014.

Decided Oct. 31, 2014.

Amended Nov. 12, 2014.

Luke O. Brooks (Joseph D. Daley & Daniel S. Drosman, San Diego, CA) Robbins Geller Rudman & Dowd LLP, San Francisco, CA, for Plaintiffs–Appellants–Cross–Appellees.

James P. Rouhandeh (Antonio J. Perez–Marques, Paul S. Mishkin, Jessica L. Turner, on the joint brief) Davis Polk & Wardwell LLP, New York, NY, for Defendants–Appellees–Cross–Appellants Morgan Stanley & Co. Inc. and Morgan Stanley & Co. Int'l Ltd.

Dean Ringel, Jason M. Hall, Roxana Labatt, Cahill Gordon & Reindel LLP, New York, NY, on the joint brief, for Defendants–Appellees–Cross–Appellants Standard & Poor's Ratings Services and The McGraw–Hill Companies, Inc.

Joshua M. Rubins, James J. Coster, Mario Aieta, James I. Doty, Satterlee Stephens Burke & Burke LLP, New York, NY; Mark A. Perry, Gibson, Dunn & Crutcher LLP, Washington, DC, on the joint brief, for Defendants–Appellees–Cross–Appellants Moody's Investors Service, Inc. and Moody's Investors Service Ltd.

Before: WINTER, LEVAL, and LYNCH, Circuit Judges.

Opinion

WINTER, Circuit Judge:

The Commonwealth of Pennsylvania Public School Employees' Retirement System (“PSERS”) and Commerzbank AG (“Commerzbank”) appeal from Judge Scheindlin's order of final judgment. See Fed.R.Civ.P. 54(b). That judgment encompassed several previous orders that, as relevant to this appeal: (i) denied class certification under Fed.R.Civ.P. 23 based on appellants' failure to establish numerosity and predominance of common issues; (ii) dismissed Commerzbank's claim for lack of standing; and (iii) dismissed PSERS's claim because its presence as a party would destroy complete diversity, the sole basis of subject matter jurisdiction. We affirm the denial of class certification and dismissal of PSERS. However, we hold that it was not a permissible exercise of discretion for the district court to limit Commerzbank's ability to establish its standing. We certify to the New York Court of Appeals the question of whether a reasonable trier of fact could find that Commerzbank had acquired from a third party that had purchased securities a fraud claim against Morgan Stanley & Co. (“Morgan Stanley”). We also certify the question whether, if Commerzbank has standing, a reasonable trier of fact could hold Morgan Stanley liable for fraud based on the present record.

BACKGROUND

a) The Cheyne SIV

We view all disputed facts and inferences fairly drawn from those facts in the light most favorable to appellants. Salamon v. Our Lady of Victory Hosp., 514 F.3d 217, 226 (2d Cir.2008).

The present dispute arose out of the collapse of the Cheyne SIV, a structured investment vehicle (“SIV”) that was managed by Cheyne Capital (“Cheyne”) (a defendant but not a party to this appeal) and structured by appellee Morgan Stanley. Cheyne SIV was launched in 2005 and issued several classes of notes amounting to several billion dollars, before its demise in 2007. The notes had different maturities, return rates, and risk profiles. Because of the complexity of the SIV, the notes could be purchased only by sophisticated institutional investors. Three specific notes are at issue: senior commercial paper notes, senior medium term notes, and mezzanine capital notes. All of them were given high ratings (the senior notes received higher ratings) by the ratings agencies named as defendants: Standard & Poor's Ratings Services and the McGraw–Hill Companies, Inc. (“S & P”); and Moody's Investors Service, Inc. and its subsidiary Moody's Investors Service Ltd.

Morgan Stanley included those ratings in selling documents distributed to potential investors. According to appellants, the ratings were unreliable because they were based on outdated models and data. The ratings agencies are alleged to have known of this unreliability. It is also alleged that the use of unreliable models was caused by Morgan Stanley's demand for high ratings. Thus, according to the complaint, the Cheyne SIV as a whole received a triple-A rating despite being loaded with very risky assets, including a significant profile of subprime residential mortgage-backed securities. As is well known, the housing market collapsed in the summer of 2007. The SIV collapsed with it and declared bankruptcy in the fall of 2007.

b) Procedural History

Following Cheyne's collapse, this lawsuit was filed as a putative class action by Abu Dhabi Commercial Bank (“ADCB”) on August 25, 2008. ADCB's complaint alleged common law fraud under New York law and based federal subject matter jurisdiction on diversity of citizenship under 28 U.S.C. § 1332(a). Two additional plaintiffs later joined. They eventually moved for class certification on the common law fraud claims seeking to represent a class of all investors in the Cheyne SIV who purchased notes during a class period from October 2004 to October 2007. The district court denied that motion, holding that plaintiffs failed to establish numerosity and the predominance of common issues. Interlocutory review was denied. Plaintiffs' counsel were then allowed to contact other investors, which led to the addition of twelve new plaintiffs, including Commerzbank and PSERS.

In January 2012, appellants filed the complaint operative for purposes of this appeal. Appellees responded with motions to dismiss and for summary judgment on the fraud-related claims shortly thereafter. In their motion for summary judgment, appellees raised, inter alia, the issues before us on appeal: whether Commerzbank had acquired from the original purchaser of some of the notes the purchaser's fraud claim against Morgan Stanley, and whether Morgan Stanley had made actionable misrepresentations.

In responding to the motion for summary judgment, all fifteen plaintiffs, including appellants, were limited by the district court to a single three-page “reliance declaration” necessary to establish the reliance of each plaintiff on the alleged misstatements as required to support a valid fraud claim under New York law. With regard to Commerzbank's claim, that declaration stated that Commerzbank had acquired Dresdner Bank AG (“Dresdner”) through a merger in 2009, and that Dresdner had earlier purchased Cheyne SIV notes from Allianz Dresdner Daily Asset Fund (“DAF”), the original purchaser, at par—face value—after which DAF was “wound down.” The declaration further stated that, under German law, “all of Dresdner's assets, liabilities, rights and obligations passed automatically by operation of law to Commerzbank.”

On August 17, 2012, the district court granted appellees' motion for summary judgment in part. As relevant to this appeal, the court held that Commerzbank had failed to establish standing to sue under New York law. It held that, for a subsequent holder of a note to have standing to sue entities involved in the issuance of the note for torts committed in the issuance, the prior holder of a note must assign its tort claims at the time of transfer, and that a simple transfer of the note did not assign those claims. The court determined that Commerzbank's statement in the reliance declaration had not shown that Dresdner acquired DAF's tort claims through the transfer and merger. Commerzbank's claims were, therefore, dismissed. The court did not reach appellees' argument that DAF had not reasonably relied on the Cheyne SIV credit ratings.

The district court also dismissed claims against Morgan Stanley for fraud on the grounds that the only misstatements alleged were made by the ratings agencies themselves and that these were not attributable to Morgan Stanley. Therefore, the court reasoned, Morgan Stanley could not be held liable for fraud based on third-party misstatements under New York law.

Commerzbank moved for reconsideration of the dismissal of its fraud claims. Attached to the motion was a new declaration (“Williams declaration”) that explained the transfer of rights from DAF to Dresdner to Commerzbank. Ten days later, Commerzbank also filed a Fed.R.Civ.P. 17(a)(3) “ratification” of its claim and another declaration (“Shlissel declaration”). These documents were a far more thorough explanation of how DAF was unable, and could not have intended, to retain any interest in the notes, including a right to sue. The court refused to consider the two documents because they were untimely and denied reconsideration.

In November 2012, appellees discovered...