19-3304

Loreley v. Wells Fargo

In the

United States Court of Appeals

FOR THE SECOND CIRCUIT

AUGUST TERM 2020

No. 19-3304

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.*

On Appeal from the United States District Court

for the Southern District of New York

ARGUED: APRIL 7, 2021

DECIDED: SEPTEMBER 13, 2021

* The Clerk of Court is directed to amend the caption as set forth above.
2

Before: CALABRESI and MENASHI, Circuit Judges, and KOELTL,

District Judge.†

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 

† Judge John G. Koeltl of the United States District Court for the Southern 

District of New York, sitting by designation.
3

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 nonparty 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 DefendantsAppellees.
4

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 
5

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.
6

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-ininterest 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 creditdefault 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 
7

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 avoid losses from another, canceled CDO deal.1 In April 2007, 

Loreley bought notes of various Longshore tranches with a total face 

value of $59.1 million. These notes went into default by February 

2008. 

II

In April 2012, Loreley filed suit in state court alleging state law 

claims for fraud, rescission, conspiracy, aiding and abetting, 

fraudulent conveyance, and unjust enrichment. See Am. Compl., 

Loreley Fin. (Jersey) No. 3 Ltd. v. Wells Fargo Sec., LLC, 412 F. Supp. 3d 

392 (S.D.N.Y. 2019) (No. 12-CV-3723), ECF No. 84. The suit was later 

1 A warehouse is a bank account that acquires collateral in anticipation of 

doing some type of securitization—in this case, creating collateralized debt 

obligations. If a securitization deal falls through, the bank continues to keep 

warehouse assets on its books and bears the market risk—gains and 

losses—on those assets. 
8

removed to federal court pursuant to the Edge Act. See 12 U.S.C. § 632; 

28 U.S.C. § 1441(a). 

In March 2013, the district court (Sullivan, J.) dismissed the 

complaint with prejudice. Among other things, the district court held 

that Loreley had failed to meet the heightened pleading standard set 

forth in Federal Rule of Civil Procedure 9(b) for its fraud claims, and 

the district court also dismissed its related claims of aiding and 

abetting fraud, conspiracy to defraud, and rescission based on fraud. 

Loreley Fin. (Jersey) No. 3 Ltd. v. Wells Fargo Sec., LLC, No. 12-CV-3723, 

2013 WL 1294668, at *7-15 (S.D.N.Y. Mar. 28, 2013). Loreley appealed.

This court disagreed with the district court. As for the fraud 

claim relating to Octans and Sagittarius, we held that “[i]t is not for 

us to say at this stage whether Plaintiffs’ account of Magnetar’s role 

and of Defendants’ sleights of hand regarding that role is true, nor is 

it for us to say whether, at a later stage, a judge or jury might find that 

such misrepresentations were immaterial to sophisticated investors 

like Plaintiffs.” Loreley I, 797 F.3d at 174-75. With regard to the fraud 

claim relating to Longshore, this court held that Loreley had pleaded 

sufficient facts to survive the defendants’ motion to dismiss but that 

“the complaint could be more detailed as to the timeline and 

valuation of the securities in question.” Id. at 180. Our court also noted

that because Loreley’s losses on all three CDOs coincided with the 

financial crisis, there would need to be further inquiry at “later phases 

of this lawsuit” with respect to whether Loreley’s claims would fail if 

“the CDOs would have collapsed regardless [of the alleged fraud], 

due to the larger crash in the MBS market.” Id. at 188. Accordingly, 

we reversed in part, vacated in part, and remanded the case back to 

the district court.
9

III

After remand, Loreley amended its complaint and removed the 

non-fraud claims, and the district court dismissed its conspiracy 

claim. Discovery was thereafter conducted between 2016 and 2018. 

A

Discovery revealed the following details about asset selection 

for Octans and Sagittarius. 

Collateral manager Harding selected assets for Octans. 

Harding’s founder, Wing Chau, testified that Harding would “source 

the CDO CDS exposure to the market,” Harding’s analysts would 

review those securities, and “to the extent that [the assets] met 

[Harding’s] criteria and spread requirements, [Harding] would 

execute those transactions.” App’x 579. Chau testified that “all the 

securities that went into the Octans” warehouse or CDO were “fully 

vetted by my analysts and myself.” App’x 580. Harding analyzed

each security to ensure that it met stringent eligibility criteria. 

Sometimes that analysis was formalized in a document sent to 

potential investors, including Loreley’s investment advisor, IKB. 

Collateral manager SAI selected assets for Sagittarius. SAI’s 

James Burke testified that a team of analysts, organized with respect 

to each financial product, would consider each asset, model various 

scenarios, scrutinize the originator and the servicer of the assets, and 

generally “look at everything possible” before accepting the asset for 

placement in Sagittarius. App’x 508. He further testified that every 

asset that was accepted for Sagittarius was vetted by his team and that 

he accepted assets only with which he was comfortable from a credit 

perspective. 
10

Magnetar, a hedge fund that purchased the equity tranches in 

a number of CDOs including Octans and Sagittarius, was also 

involved in suggesting assets for Octans and Sagittarius. As the 

equity tranche investor in these CDOs, Magnetar had considerable 

negotiating leverage with the banks. Magnetar’s senior vice 

president, James Prusko, testified that Magnetar made “very clear 

that the CDO had to have certain structural features and certain 

economic terms that would make it attractive” for Magnetar to buy 

into the equity tranches. Confidential App’x 53. These structural 

features included suspending or eliminating certain cash-flow 

triggers—including tests such as the overcollateralization and interest 

coverage tests—that would have diverted cash flows from equity 

investors to more senior note holders if the value of a CDO’s collateral 

fell below a certain level or if interest payments declined by a

specified amount. This ensured that cash would continue to flow to 

Magnetar through its equity positions (positions that are usually 

subordinated to senior notes) even if returns to the more senior notes

slowed or stopped altogether.

Simultaneously, Magnetar bought protection against defaults 

in the senior notes of both Octans and Sagittarius by taking short-side 

positions in credit default swaps on the same CDOs in which 

Magnetar held long equity positions. Prusko testified that Magnetar’s 

goal on a portfolio-wide basis was to be “$2 of ... shorts on [the senior 

notes] against every $1 of long equity exposure.” App’x 3125. This 

strategy achieved a return of about $1 billion when the financial 

markets collapsed. 

At Octans’s inception, Prusko asked Wachovia and Harding to 

“discuss CDO exposure as I will source the CDO CDS.” App’x 1970.

Wachovia personnel considered Magnetar a “huge acc[oun]t,” App’x
11

4132, believed that Magnetar was “single-handedly driving the 

market” for CDOs in 2007, App’x 3260, and characterized Magnetar 

as “the darling of Wall Street, the popular girl that everyone wanted 

to take to the prom,” App’x 3145. Chau also testified that he knew 

Magnetar was hedging its position in Octans’s equity tranche by 

buying protection on the senior tranches of Octans and on the senior 

tranches of other CDOs in which it owned equity. He noted that 

hedge funds, as part of their hedging strategy, generally purchase 

hedging instruments that correlate with the underlying assets. Chau 

testified that he “knew that [Magnetar] would hedge” in the same or 

a similar way. App’x 3051. However, Chau maintained in his 

testimony that “all the securities that went into the Octans II

warehouse or CDO [were] fully vetted by my analysts and myself”

and that those securities “met all the investment criteria.” App’x 580.

Chau repeatedly denied that any asset had been accepted for Octans 

that had not been vetted and approved by his team.

Unlike Chau, Burke testified that he “had no reason to suspect”

that Magnetar was taking short positions against the CDOs in which 

Magnetar had long positions in the equity tranches; he affirmed that 

he was “shocked” when he learned of Magnetar’s strategy because he 

had “[n]ever heard of anyone doing that.” App’x 2994. Burke testified 

that he did not allow Prusko to source assets for Sagittarius. On at 

least one occasion, Burke informed Prusko that he “would not accept 

assignment of ... trades,” App’x 1632, and complained to Wachovia 

that “Prusko is under the impression that he can source credit risk ... 

for this deal at whatever levels he wants. I specifically [do] not want 

this to occur,” App’x 1635. Although Burke characterized Prusko as 

an “extremely important client,” App’x 3580, he testified that 

Magnetar did not have the authority to select assets for Sagittarius. 
12

Burke even rejected on principle assets that Magnetar suggested, but 

he later relented and accepted the assets because he felt “okay with 

the credit risk.” App’x 511-12.

B

Discovery revealed the following details about asset selection 

for Longshore. 

SAI was the collateral manager for Longshore. Beginning in 

February 2007, Wachovia noted “market volatility” and “feared 

contagion and/or disappearance of liquidity in [the] CDO market”

and sought to unload its inventory and to accelerate pending deals.

App’x 3439. Wachovia identified Longshore as one of the “[d]eals of 

focus” that Wachovia wanted to accelerate before liquidity 

“disappear[ed].” App’x 3439.

Wachovia sought to transfer assets into Longshore from the 

warehouse of a canceled CDO deal at the original prices rather than 

at the then-current market prices. When Burke learned that Wachovia 

would be transferring assets to Longshore from the canceled CDO’s 

warehouse—the “Grand Avenue” warehouse, managed by a 

collateral manager named TCW—he informed Wachovia by email:

I am VERY sensitive to where SAI might take down bonds from 

the TCW warehouse. I do not want anymone [sic] in the market 

to think we were stuffed with bonds at above-market prices. So 

– if TCW is still doing a deal, SAI should only take whatever 

bonds it wants at MARKET prices.

App’x 1972. Subsequently, Burke wrote to Dash Robinson, a director 

in Wachovia’s Asset Repackaging Group, stating that “[t]he marks 

you provided for the bonds to be transferred over to [Longshore] ... 
13

are not defensible” and that “the difference between your marks and 

the trading system (on the cash bonds alone) is over $1 mm” and the 

“difference on the CDS will be much larger.” App’x 4206.2

On March 13, 2007, Wachovia’s chief compliance officer, David 

Hunt, defended the asset transfer at the above-market prices by 

explaining that SAI’s “fiduciary responsibility extends to each of its 

clients” and requires SAI to obtain the “best execution” possible. 

App’x 3450. Burke responded by suggesting that the full list of assets 

and the prices at which those assets were transferred be disclosed to 

prospective investors before Longshore was priced and before 

prospective investors committed. He was concerned that investors 

would object if they committed to Longshore and subsequently 

learned that Longshore had accepted $300 million of collateral at 

above-market prices. That same day, Burke emailed his wife that “I’m 

having a very bad day. I’m being asked/told to do something that I 

believe is improper/unethical.” App’x 4952.

Over Burke’s objection, the Grand Avenue assets were 

transferred to Longshore at the original purchase prices rather than at 

the current market prices. Burke’s team “review[ed] all the bonds in 

the warehouse” and told him “exactly which bonds they were 

comfortable with from a credit perspective.” App’x 529. Burke 

testified that only those bonds that met the eligibility criteria from a 

risk perspective were taken into Longshore. SAI ultimately accepted

all but two bonds for Longshore. 

2 “Marks” refers to the assets’ “mark to market,” which is the value of each 

asset at the market price at the time of each inventory. Mark to market, 

Wolters Kluwer Bouvier Law Dictionary (2012).
14

However, Burke “made it very clear that these were not assets 

that [he] had purchased into [Longshore’s] warehouse, and if [he was] 

going to take those assets into [the] warehouse today, [he] would 

want them to happen at the current market price.” App’x 3009. Burke 

believed the “marks” were inaccurate and “should have been marked 

lower.” App’x 3020. He also testified that he “made it very clear” that 

all investors were to have information about the purchases and was 

told that they in fact received that information. App’x 3021.

Wachovia advised IKB of a slight decline in the value of the 

Longshore assets since those assets were acquired—specifically, that

“the current weighted average price of the Longshore 3 portfolio is 

just under 99” and that there were mark-to-market losses for the deal 

on closing. App’x 1296, 1299. IKB subsequently requested the current 

marks of the Longshore portfolio. Wachovia sent a spreadsheet that 

did not contain the current market prices of the transferred assets and 

from which the current marks may have been deleted. However,

emails between Wachovia’s Robinson and IKB appear to indicate that 

a spreadsheet containing the current marks may have been sent to IKB 

on or around March 4, 2007.

C

Offering materials for Octans, Sagittarius, and Longshore were 

distributed to potential investors, including IKB. For Octans, the 

materials included term sheets, a marketing book, and an offering 

circular. Octans’s offering memorandum identified Harding as the 

collateral manager and explained that the “performance of the 

portfolio ... depends heavily on the skills of the Collateral Manager 

in analyzing and selecting the Collateral Debt Securities.” App’x 5020.

It also specified that Octans is a “complex instrument[] ... involv[ing] 
15

a high degree of risk and [is] intended for sale only to sophisticated 

investors who are capable of understanding and assuming the risks 

involved.” App’x 2178.

Wachovia also provided term sheets, a marketing book, and an 

offering memorandum for Sagittarius. The term sheet noted that 

SAI’s relationship with Wachovia provided “[a] key market 

advantage for SAI” because SAI could “leverage off of the resources 

and infrastructure of Wachovia, while maintaining strict separation 

from the trading and sales side of the broker/dealer.” App’x 2551.

SAI’s investment approach was described as “maximiz[ing] returns 

and minimiz[ing] losses through rigorous upfront credit and 

structural analysis as well as ongoing monitoring of asset quality and 

performance.” App’x 2551. Just like the offering memorandum for 

Octans, the offering memorandum for Sagittarius stated that 

Sagittarius’s performance would be “highly dependent” on SAI’s 

financial and managerial expertise, App’x 2585, and that Sagittarius 

is a “complex instrument[] ... intended for sale only to sophisticated 

investors who are capable of understanding and assuming the risks 

involved,” App’x 395. The offering memorandum also cautioned that 

any investor in Sagittarius should have the knowledge and 

experience to evaluate the merits and risks of this investment and 

should exercise independent judgment in its decision to invest in 

Sagittarius.

Finally, Wachovia provided term sheets, a marketing book, and 

an offering memorandum for Longshore, all of which made similar 

representations as those in the offering materials for Octans and 

Sagittarius. Longshore’s marketing book also promoted SAI’s 

relationship with Wachovia, explaining that the relationship gave SAI

“vast resources and infrastructure” while “maintaining strict 
16

separation from the broker/dealer.” App’x 2696. Just as in Octans’s

and Sagittarius’s offering materials, the memorandum explained the 

importance of the collateral manager’s skills in analyzing, selecting,

and managing collateral and explained that Longshore’s performance 

would be “highly dependent” on SAI’s expertise. App’x 2796. The 

circular also warned potential investors that even though SAI was a 

subsidiary of Wachovia, SAI may nevertheless engage in securities 

transactions with Wachovia that might result in conflicts of interest. 

In those circumstances, the circular guaranteed that SAI would 

acquire collateral “on an arm’s-length basis” and “at fair market 

prices” but could take advantage of other benefits of the relationship 

such as “obtaining favorable commissions.” App’x 4013.

D

Discovery also revealed IKB’s prominent role in Loreley’s 

decision to invest in the CDOs. IKB was a German banking company

that created the Loreley entities and served as the investment advisor

for those entities’ investment into Octans, Sagittarius, and Longshore. 

These investments were part of a larger investment program called 

the Rhineland Program. IKB advised Loreley, but it did not invest 

directly on Loreley’s behalf because it did “not have authority to act 

for or represent” Loreley or the authority to “incur any obligation or 

liability on behalf of” Loreley. App’x 1571.

IKB assessed potential investments for the Rhineland Program 

to ensure those investments met IKB’s criteria. A potential investment 

would go through several levels of review. When approached with an

investment opportunity, IKB would commence due diligence. This

process included analyzing the CDO’s risk, evaluating the investment

in terms of its financial structure, and vetting the experience and 
17

expertise of the collateral manager. IKB’s chief investment officer and 

the investment committee would then “sign off” on the investment 

proposal before it was given to Loreley. App’x 743. SAI’s James Burke 

testified that IKB “conducted the most thorough due diligences of any 

investor [he] had ever met with.” App’x 507.

Consistent with its general practice, IKB conducted a risk 

analysis on Octans. IKB noted that because of “increasing pressure 

from equity investors,” Octans did not have overcollateralization and 

interest coverage tests and “[i]n return the rating agencies demanded 

a thicker equity tranche and therefore a higher subordination for the 

rated notes.” App’x 1097-98. However, IKB noted that Octans did 

have a net loss test, effective five years after the closing date, that 

triggered cash diversion from subordinate tranches if the loss in the 

portfolio “correspond[ed] to the amount of the nominal volume of the 

preferred shares.” App’x 1097. The net loss test and relatively high 

subordination were “demanded by the rating agencies to balance out 

the weaker structure,” which IKB saw as a “positive.” App’x 1098.

IKB performed various stress tests on the Octans portfolio and 

concluded that the portfolio withstood the “IKB worst case scenario.”

App’x 1099. IKB also “emphasized positively” the “experience and 

long-time collaboration of the key persons of the [Harding] team.”

App’x 1098. IKB had more than one in-person meeting with 

representatives from Harding during which it performed “on-site due 

diligence” and vetted the collateral manager. App’x 1098.

IKB then created an investment proposal for IKB’s Investment 

Advisory Board. In this proposal, IKB noted Wing Chau’s experience 

and the experience of Harding’s senior managers, who had spent over 

twelve years in structured finance and related fixed income sectors. 
18

App’x 1014. IKB explained the various stress tests it had performed 

and concluded that in a worst-case scenario, the portfolio loss would 

be only about 3.68 percent. App’x 1024. IKB based its final 

recommendation on four factors: the “quality of the Manager,” the 

results of the stress tests, the structural features of the portfolio, and

other “credit enhancement[s].” App’x 1028. IKB ultimately 

recommended that Loreley invest in Octans and provided its 

investment proposal to IKB’s Advisory Board. IKB’s internal risk 

analysis was not included.

IKB also created an investment proposal recommending 

investment in Sagittarius. IKB favorably described SAI’s “rather 

conservative investment approach,” about which IKB had learned 

during its meetings with “James Burke and key staff of his team.”

App’x 1039, 1043. IKB performed various stress tests and other risk 

analysis and noted that “there are very rare issues which can be 

categorized as being totally clean from a risk perspective at this point 

in time.” App’x 1042. IKB also observed that “uncertainty exists 

around the question” of whether the portfolio’s conservative asset 

selection and structural enhancements would be “sufficient to 

completely immunize [the] bonds in a further deteriorating 

environment against defaults.” App’x 1042. As with Octans, IKB 

identified the absence of overcollateralization and interest coverage 

tests but noted that the CDO’s structural features showed “adequate 

protection for the Noteholders despite the innovative financing 

structure.” App’x 1045. IKB explained that the “[e]quity investor 

[was] the driving force” behind the structure and therefore “any 

beneficial change to this was not negotiable,” but “real shortfalls will 

be unlikely due to the structure of the transaction’s liabilities.” App’x 

1046. IKB also observed that “systemic deterioration is expected” and 
19

that the unproven depth of the synthetic market could limit SAI’s 

ability to react proactively to unfavorable market events. App’x 1047.

Finally, IKB commended SAI’s “close relationship to Wachovia,”

noting the flexibility that the relationship provided SAI. App’x 1043.

IKB characterized SAI as an “above average Manager,” with a 

“prudent” management style, that was “uncomfortable with ... above 

average risk characteristics in the pools they ... consider for 

investments.” App’x 1043.

Based on these considerations, IKB recommended investment 

in Sagittarius. In making its recommendation, IKB highlighted two 

major factors: the “high quality of the manager” and the structure of 

the transaction. App’x 1048. IKB conveyed the recommendation to 

Loreley through a letter that accompanied IKB’s investment proposal.

IKB additionally created an investment proposal for 

Longshore. IKB recommended investment into Longshore based on 

the “good quality of the underlying portfolio” as well as SAI’s good 

judgment, strict eligibility criteria, and tight overcollateralization test 

levels that would divert cash flows into senior tranches if the portfolio 

collateral deteriorated. App’x 1213. IKB based its evaluation on 

several in-person meetings between members of IKB and key 

members of SAI, including Burke. Just as IKB noted in the investment 

proposal for Sagittarius, IKB favorably described SAI’s “close 

relationship to Wachovia” and the flexibility it gave SAI to react to 

market developments. App’x 1218. IKB also emphasized SAI’s 

conservative approach to choosing collateral and characterized SAI as 

an “above average Manager.” App’x 1218. IKB observed that SAI’s 

conservative asset selection process was in part based on SAI’s 

concern about reduced liquidity in the credit markets. IKB identified 

no weaknesses in the investment into Longshore. IKB’s final 
20

investment proposal did not include Burke’s disclosure regarding the 

slight decline in the value of the Longshore assets from collateral 

taken from the canceled Grand Avenue CDO. IKB’s investment 

proposal recommended investment into Longshore and was 

approved by IKB’s Investment Committee before it was given to 

Loreley.

Loreley based its investment decisions solely on these 

investment proposals. Loreley did not receive any other materials—

including any of the offering materials—prior to investing into

Octans, Sagittarius, and Longshore. Loreley also did not 

independently confirm whether the investments conformed to IKB’s 

investment criteria.

IV

On September 17, 2019, the district court (Crotty, J.) granted 

summary judgment to the defendants on several independent 

grounds. Loreley Fin. (Jersey) No. 3 Ltd. v. Wells Fargo Sec., LLC (Loreley 

II), 412 F. Supp. 3d 392 (S.D.N.Y. 2019). The district court held that 

Loreley had failed to provide clear and convincing evidence that 

(1) Loreley had detrimentally relied on the defendants’

representations, id. at 409, 411, or (2) the defendants had made any 

material misrepresentations or omissions concerning the collateral 

managers’ independence or Magnetar’s role in the Octans and 

Sagittarius deals, id. at 407-08.3

3 Because we affirm the district court on these grounds, we need not decide 

other questions that the district court considered, such as whether Loreley 

established loss causation. See Loreley II, 412 F. Supp. 3d at 412.
21

The district court held that Loreley failed to establish the 

reliance element of fraud because the defendants’ purported 

misstatements in the offering materials were “not ultimately 

transmitted to Plaintiffs in IKB’s written investment proposals.” Id. at 

411. The district court also held that even if Loreley had relied on the 

defendants’ representations pertaining to Octans and Sagittarius, 

those representations were true and not misleading. Id. at 410. The 

district court also concluded that there was no material omission 

regarding Magnetar’s role in those deals because Magnetar’s role was 

known to IKB, which decided not to make further inquiries about 

Magnetar’s strategy. Id. at 409. Having dismissed Loreley’s claims of 

fraud, the district court dismissed its related claims—conspiracy to 

defraud, aiding and abetting fraud, and rescission based on fraud. Id.

at 412.

Loreley timely appealed.

STANDARD OF REVIEW

We review a district court’s grant of summary judgment de novo

and will affirm if “the movant shows that there is no genuine dispute 

as to any material fact” and the “movant is entitled to judgment as a 

matter of law.” Lehman XS Trust, Series 2006-GP2 v. GreenPoint Mortg. 

Funding, Inc., 916 F.3d 116, 123 (2d Cir. 2019) (quoting Fed. R. Civ. P. 

56(a)). We consider the record in the light most favorable to the nonmovant, Jackson v. Fed. Exp., 766 F.3d 189, 192 (2d Cir. 2014), and we 

resolve all ambiguities and draw all factual inferences in favor of the 

non-movant “if there is a ‘genuine’ dispute as to those facts.” Scott v. 

Harris, 550 U.S. 372, 380 (2007) (citing Fed. R. Civ. P. 56(c)). A fact is 

material if it “might affect the outcome of the suit under the governing 

law.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). 
22

DISCUSSION

On appeal, Loreley argues that the district court erred in 

granting summary judgment to the defendants on Loreley’s fraud 

claim. We disagree and affirm the judgment of the district court.

Loreley has failed to establish by clear and convincing evidence that 

it reasonably relied on the defendants’ representations or, for the 

Octans and Sagittarius deals, that the defendants materially 

misrepresented or concealed the collateral managers’ independence 

or Magnetar’s role in asset selection and investment strategy. 

I

Under New York law, the five elements of fraud are “(1) a 

material misrepresentation or omission of fact (2) made by [a]

defendant with knowledge of its falsity (3) and intent to defraud; 

(4) reasonable reliance on the part of the plaintiff; and (5) resulting 

damage to the plaintiff.” Crigger v. Fahnestock & Co., 443 F.3d 230, 234 

(2d Cir. 2006); Pasternack, 27 N.Y.3d at 827. Each element “must be 

shown by clear and convincing evidence.” Banque Arabe et 

Internationale D’Investissement v. Maryland Nat’l Bank, 57 F.3d 146, 153 

(2d Cir. 1995). At the summary judgment stage, a plaintiff must offer 

enough evidence to allow a reasonable jury to find by clear and 

convincing evidence that each of the elements is met. Merrill Lynch & 

Co. v. Allegheny Energy, Inc., 500 F.3d 171, 181 (2d Cir. 2007) (citing 

Crigger, 443 F.3d at 234, and Jo Ann Homes at Bellmore, Inc. v. Dworetz, 

25 N.Y.2d 112, 119 (1969)); see also Banque Franco-Hellenique de 

Commerce Int’l et Maritime, S.A. v. Christophides, 106 F.3d 22, 25 n.2 (2d 

Cir. 1997). “Clear and convincing evidence is evidence that satisfies 

the factfinder that it is highly probable that what is claimed actually 

happened and it is evidence that is neither equivocal nor open to 
23

opposing presumptions.” Seon v. N.Y. State Dep’t of Motor Vehicles, 74 

N.Y.S.3d 20, 25 (N.Y. App. Div. 1st Dep’t 2018) (alteration omitted) 

(quoting In re Gail R., 891 N.Y.S.2d 411, 414 (N.Y. App. Div. 2d Dep’t 

2009)), rev’d on other grounds, 35 N.Y.3d 1032 (2020).

Loreley’s claim for fraud fails because Loreley has not

established reliance. Loreley has not identified any evidence, much 

less clear and convincing evidence, that it received any 

communications from the defendants. Misrepresentations that were 

not communicated to a plaintiff cannot form the basis of a plaintiff’s 

reasonable reliance. Pasternack, 27 N.Y.3d at 829. It remains 

undisputed in this appeal that the defendants did not communicate 

directly with Loreley. Compare Loreley II, 412 F. Supp. 3d at 410, with 

Appellants’ Br. 50-55. It is also undisputed that Loreley’s investment 

decisions were based solely on IKB’s advice and proprietary 

investment proposals. IKB did not give Loreley the offering materials 

that were created and distributed by the defendants or even IKB’s 

internal risk analyses that IKB had conducted during its due 

diligence. Because Loreley cannot show that the defendants’ 

purported misrepresentations actually reached Loreley, it cannot 

show that it relied on these purported misrepresentations.

To avoid this problem, Loreley argues that it reasonably relied 

on the defendants’ indirect communications because IKB 

“summarized” the defendants’ alleged misrepresentations for 

Loreley. Appellants’ Br. 49. This theory of reliance is not viable under

New York law. The reliance element of fraud cannot be based on 

indirect communications through a third party unless the third party 

acted as a mere conduit in passing on the misrepresentations to a 

plaintiff. Pasternack, 27 N.Y.3d at 828-29.
24

Here, the record does not create a disputed issue of material 

fact as to whether IKB acted as a mere conduit. Reliance on an 

intermediate third party can form the basis of a claim for fraud when

the third party acts as a scrivener by transcribing and distributing a 

defendant’s representations without filtering or modification. 

Pasternack, 27 N.Y.3d at 828 (citing Eaton Cole & Burnham Co. v. Avery, 

83 N.Y. 31, 35 (1880), and Bruff v. Mali, 36 N.Y. 200, 206 (1867)). Such 

a theory of third-party reliance is limited. When the defendants’

misrepresentations are “filtered through” a third party’s “own 

process of evaluation” or the third party plays “a significant role in 

choosing what information it wanted to receive and, in addition, what 

it deemed worthy of communicating,” the third party has not acted 

as a mere conduit and the theory is not viable. Sec. Investor Prot. Corp. 

v. BDO Seidman, 95 N.Y.2d 702, 710-11 (2001).

That is the case here. The defendants’ representations were 

“filtered through” IKB’s “own process of evaluation”; IKB played “a 

significant role in choosing what information it wanted to receive 

and, in addition, what it deemed worthy of communicating.” Id. IKB 

did not simply transmit the defendants’representations regarding the 

expertise and independence of the collateral managers. Rather, IKB 

vetted the managers, often meeting with the collateral managers in

person, and drew its own conclusions about the strengths and 

weaknesses of the managers’ investment philosophies. For example, 

IKB examined SAI’s conservative investment philosophy and

concluded that its approach would aid Sagittarius’s and Longshore’s

future performance. IKB was also aware of abnormal structural 

features built into Octans and Sagittarius at Magnetar’s insistence and 

factored those features into its analysis. Ultimately, IKB concluded 

that the features would be balanced by other, protective structural 
25

features such as the net loss test. Moreover, despite the concerning 

structural features, IKB’s stress tests revealed that shortfalls would be 

“unlikely.” App’x 1046; see also App’x 1098.

IKB’s filtering and evaluation process was extensive. IKB’s due 

diligence involved conducting its own risk analyses, performing

stress tests, and exercising independent judgment in determining the 

benefits and risks of investment in the CDOs. IKB’s vetting process 

involved a multi-level review of the investment opportunities. IKB 

independently analyzed the risk, conducted stress tests, and created

detailed investment proposals spanning hundreds of pages. Each 

proposal received approval from the chief investment officer and the 

investment committee before being presented to Loreley. In order to 

conduct its due diligence, IKB requested further information, as 

evidenced by the email exchanges between IKB and the defendants.

IKB also met in person with the collateral managers for the purpose 

of vetting the collateral managers and collecting other information 

about the investment opportunities. 

IKB played “a significant role in choosing what information it 

wanted to receive and, in addition, what it deemed worthy of 

communicating.” BDO Seidman, 95 N.Y.2d at 710. Loreley did not 

receive offering materials created by the defendants. Loreley did not 

receive IKB’s risk reports beyond what was summarized in IKB’s 

proposals. In one instance, although the defendants’ offering 

materials stated that Longshore assets would be acquired at fair 

market value, that representation was not included in IKB’s written 

investment proposal—the only document provided to Loreley in 

support of IKB’s recommendation. When SAI later informed IKB of 

the slight decline in the value of the Longshore assets from collateral 

taken from the canceled CDO, IKB requested and received further 
26

information from the defendants. IKB, however, decided not to relay 

this information to Loreley because the information did not affect 

IKB’s recommendation.

In fact, contrary to Loreley’s argument, the evidence here 

indicates that the defendants did not intend for their representations 

to be passed to Loreley without filtering and modification.4 Rather, 

the defendants expected that IKB would conduct its own due 

diligence on the deals. The offering materials caution that investing

in the CDOs is appropriate only for investors with the expertise to 

assess complex instruments and encouraged prospective investors to 

conduct due diligence and to exercise independent judgment. The 

offering materials provided to prospective investors, including IKB, 

included hundreds of pages detailing valuations of the structured 

notes, risk analyses on various aspects of each CDO’s portfolio, and 

4 The district court relied on In re LIBOR-Based Fin. Instruments Antitrust 

Litig., No. 11-MDL-2262, 2015 WL 6243526, at *63 (S.D.N.Y. Oct. 20, 2015),

for the proposition that “for Plaintiffs to have reasonably relied on 

statements communicated through a third party, Defendants must have 

intended for the misrepresentations to be communicated by the third party, 

IKB, to Plaintiffs.” Loreley II, 412 F. Supp. 3d at 411-12. Under New York 

law, however, reliance on communications from a third party cannot form 

the basis of a fraud claim, regardless of the defendant’s intent, unless the 

third party was a mere conduit. Pasternack, 27 N.Y.3d at 828-29; see also id.

at 834-35 (Fahey, J., dissenting) (disagreeing with the majority that reliance 

cannot be established through evidence that a third party relied on the 

alleged misrepresentation even when the misrepresentation was made with 

the intent of influencing the plaintiff and causing injury). Even if intent 

were relevant, the evidence in this record is neither clear nor convincing 

that the defendants intended for IKB to transmit its representations to 

Loreley without substantial filtering, evaluation, and modification; rather, 

the evidence indicates that the defendants knew IKB was conducting due 

diligence and that it would not act as a mere conduit.
27

complex contractual conditions triggered by various stress scenarios. 

See, e.g., App’x 2194-97. These materials called for the application of 

expertise and analysis. Additionally, IKB was known to be a

sophisticated investment advisor. As noted above, according to SAI’s 

Burke, IKB “conducted the most thorough due diligences of any 

investor [he] had ever met.” App’x 507.

For these reasons, Loreley has not established reliance by clear 

and convincing evidence.

II

Loreley also fails to show by clear and convincing evidence that 

defendants misrepresented that the collateral managers would 
28

exercise independence 5 in selecting assets for Octans and 

Sagittarius.6

Loreley argues that the defendants ceded control of asset 

selection to Magnetar. Yet even if Magnetar exerted pressure over the 

asset selection process, the evidence does not show that either 

Harding or SAI allowed Magnetar to control the process. Both Chau 

and Burke testified that each security considered for Octans and 

Sagittarius was vetted by their teams and accepted only if the security 

5 The defendants correctly note that the offering materials did not expressly 

represent that the collateral managers would exercise independence. 

Appellees’ Br. 39-41. The only express representation in the offering 

materials regarding independence is Wachovia’s representation that SAI 

would acquire collateral “on an arm’s-length basis” and “at fair market 

prices,” App’x 4013, in transactions with Wachovia. This representation 

does not implicate the defendants’ relationship to Magnetar. However, to 

the extent that the offering materials emphasized that the collateral 

managers’ expertise would be important to the CDOs’ performance, and 

those statements implied that the managers would exercise independent 

judgment in asset selection, the fact that a third party with possibly adverse 

economic interests was dictating asset selection would be inconsistent with 

that representation and material to an investor’s decision to invest. See 

Moore v. PaineWebber, Inc., 189 F.3d 165, 170 (2d Cir. 1999) (noting that a 

material fact is one “significant to a reasonable person considering whether 

to enter into the transaction”).

6 We cannot reach the same conclusion with respect to Longshore because 

Loreley has offered sufficient evidence—including that the then-current 

marks of the Longshore portfolio may have been withheld from IKB—for a 

factfinder to find by clear and convincing evidence that Wachovia and SAI 

misrepresented that assets for Longshore would be acquired in arm’slength transactions. As explained above, however, because those 

misrepresentations were never communicated to Loreley, Loreley’s fraud 

claim pertaining to Longshore fails for lack of reliance.
29

met the CDOs’ stringent eligibility criteria.7 In fact, Burke and Prusko 

appear to have had a tense relationship because Burke insisted on 

maintaining his independence during this process. Burke would not 

allow Prusko to originate assets for Sagittarius. On one occasion, 

Burke informed Prusko that he “would not accept assignment of ... 

trades,” App’x 1632, and complained to Wachovia that “Prusko is 

under the impression that he can source credit risk ... for this deal at 

whatever levels he wants. I specifically [do] not want this to occur,”

App’x 1635. Burke maintained that Magnetar did not have the 

authority to select bonds for Sagittarius, and he even rejected on 

principle several bonds suggested by Magnetar, later relenting 

because those bonds met Burke’s risk criteria.

Moreover, Magnetar’s role in structuring both deals was 

known to IKB. IKB’s investment proposals for both Octans and 

Sagittarius observed that an “[e]quity investor [was] the driving 

force” for the deal, App’x 1046, and that several abnormal structural 

features had been added to Octans and Sagittarius “[o]n the basis of 

the increasing pressure from equity investors,” App’x 1098. IKB 

accounted for Magnetar’s demands in its analysis. IKB’s investment 

proposals for both Octans and Sagittarius noted that these abnormal 

structural features created risks—even though IKB determined that 

the risks did not outweigh the benefits of investment.

7 Chau could not remember the specific characteristics and selection 

process for each bond that was vetted and accepted for Octans by his team, 

but that alone does not establish “that it is highly probable” that Chau did 

not exercise independent judgment when selecting assets for Octans. In re 

Gail R., 891 N.Y.S.2d at 414; Seon, 74 N.Y.S.3d at 25.
30

The defendants did not have a duty to disclose Magnetar’s

investment strategy beyond what was already known about 

Magnetar’s involvement in the deals. To establish a material 

omission, Loreley must proffer clear and convincing evidence 

establishing that the defendants had a duty to disclose the material 

information. See Banque Arabe, 57 F.3d at 153. “[A] duty to disclose 

may arise in two situations: first, where the parties enjoy a fiduciary 

relationship, and second, where one party possesses superior 

knowledge, not readily available to the other, and knows that the 

other is acting on the basis of mistaken knowledge.” Lerner v. Fleet 

Bank, N.A., 459 F.3d 273, 292 (2d Cir. 2006); see Mariano v. CVI Invs. 

Inc., 809 F. App’x 23, 27 (2d Cir. 2020). It is undisputed that Loreley 

cannot establish material concealment under the former theory

because the parties were not in a fiduciary relationship.

Loreley also cannot establish material concealment under the 

latter theory because “the [undisclosed] information” was of the kind 

“that could have been discovered ... through the ‘exercise of ordinary 

intelligence.’” Mariano, 809 F. App’x at 27 (quoting Jana L. v. W. 129th 

St. Realty Corp., 802 N.Y.S.2d 132, 135 (N.Y. App. Div. 1st Dep’t 2005)).

Magnetar’s role was known to IKB.8 Despite knowing that an equity

investor was exerting “pressure” to include certain structural features 

that increased the risk of investing in the CDOs—and indication that 

the investor at least had mixed motives—IKB did not inquire further 

about the identity or strategies of that investor. It would not have been 

8 At oral argument, the defendants’ counsel emphasized that “IKB had 

direct contact with Magnetar in other contexts, knew Magnetar was 

investing in CDOs in the equity tranches ... but never inquired further.”

Oral Argument Audio Recording at 27:03-27:13; Transcript of Oral 

Argument at 20. Loreley did not dispute that characterization on rebuttal.
31

difficult for a sophisticated investment advisor such as IKB—which 

conducted thorough due diligence and which had extensive access to 

relevant information—to have made that inquiry. IKB’s failure to ask 

Wachovia about other investors’ identities or strategies precludes 

finding that the defendants had a duty of disclosure based on superior 

knowledge.9

Loreley has therefore failed to establish a material 

misrepresentation or omission with respect to Octans and Sagittarius.

CONCLUSION

For the foregoing reasons, we conclude that Loreley has failed 

to offer clear and convincing evidence supporting its claim of fraud. 

Because we hold that Loreley has failed to establish a fraud claim, we 

also conclude that Loreley has failed to establish its related claims of 

conspiracy to defraud, aiding and abetting fraud, and rescission 

9 Additionally, the record does not indicate that SAI even possessed 

superior knowledge of Magnetar’s strategies. Burke testified that he was 

not aware that Magnetar was taking short positions against the CDOs in 

which Magnetar had long positions in the equity tranches; he affirmed that 

he was “shocked” when he learned of Magnetar’s strategy. App’x 2994. 

Chau appears to have been aware of Magnetar’s strategy, but he had no 

reason to believe that IKB was acting “on the basis of mistaken knowledge.” 

Lerner, 459 F.3d at 292. Chau did not consider Magnetar’s strategy 

remarkable but testified that hedge funds generally purchase hedging 

instruments that correlate to the underlying assets. Because “[h]edge funds 

hedge,” Chau testified that he “knew that [Magnetar] would hedge” and 

did not consider it remarkable that Magnetar had done so. App’x 3051.
32

based on fraud. Because summary judgment was appropriate on 

these claims, we AFFIRM the judgment of the district court.10

10 We do not address whether the district court erred by excluding an 

untimely expert report submitted by Loreley. The report concerned loss 

causation and therefore does not change the disposition of this appeal.