Source: https://www.capitalmarketslitigation.com/page/2/
Timestamp: 2019-04-26 00:17:41+00:00

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On Wednesday, April 12, Justice Ramos of the Commercial Division of the New York Supreme Court dismissed with prejudice four lawsuits filed by Royal Park Investments SA/NV (“Royal Park”). The lawsuits alleged fraud and negligent misrepresentation with respect to residential mortgage-backed securities (“RMBS”) sold to Fortis NV/SA (“Fortis”) – formerly an independent Belgian bank that was sold off to BNP Paribas during the financial crisis – between 2005 and 2007. The claims sought damages totaling $3.7 billion from four of the world’s largest banks: Morgan Stanley, Credit Suisse, Deutsche Bank, and UBS.
In 2009, Fortis and its affiliates transferred “all right, title and interest in and to” their RMBS holdings to Royal Park through the use of a portfolio transfer agreement (“PTA”), which did not expressly address the right to assert legal causes of action. The four defendant banks moved to dismiss the complaints, contending that the representations made in the RMBS transaction documents were only made to the original purchaser (Fortis) and, under both New York and Belgian law, no transfer of the rights to sue for breaches of such representations had been made in the PTA, as the transfer of such rights must be explicit.
Justice Ramos agreed and – after determining New York law should be applied to the dispute – found that the only rights that had been explicitly transferred under the PTA were contractual rights unrelated to the right to assert legal causes of action, with no express assignment of the right to bring the common law misrepresentation claims.
The cases are Royal Park Investments SA/NV v. Morgan Stanley et al., index number 653695/2013, Royal Park Investments SA/NV v. Deutsche Bank AG et al., index number 652732/2013, Royal Park Investments SA/NV v. Credit Suisse AG et al., index number 653335/2013, and Royal Park Investments SA/NV v. UBS AG et al., index number 653901/2013, in the Supreme Court of the State of New York, County of New York.
Investment advisor TCW Asset Management Company (“TCW”) scored a major victory last week when an appellate court dismissed a $128 million RMBS fraud suit that was filed against it by two Australian-based Cayman Island hedge funds: Basis Pac-Rim Opportunity Fund (Master) and Basis Yield Alpha Fund (Master) (together, “Basis”). Basis sued TCW for alleged fraud in selecting RMBS assets for, and recommending an investment in, a $400 million investment vehicle called Dutch Hill II.
On March 2, a five-judge panel of the First Department Appellate Division in New York reversed Justice Kornreich’s October 19, 2015, denial of TCW’s motion for summary judgment. The panel found that Basis failed to present evidence of loss causation, i.e., that TCW’s alleged fraud caused Basis’ loss. Once TCW made a showing that Basis’ loss was not due to any misrepresentations or omissions by TCW and that Dutch Hill II would have collapsed regardless as a result of the market crash, the burden shifted back to Basis to raise an issue of fact on loss causation. The appellate panel’s decision turned on Basis’ “complete failure” to show that its loss was caused directly by TCW’s alleged fraud, and not by intervening economic forces such as the housing market crash.
RMBS fraud plaintiffs should heed the warning of the appeals court: in the event of a market collapse coincident with loss, investors must demonstrate loss causation by showing that misstatements rather than macroeconomic forces ultimately caused the loss.
The case is Basis Pac-Rim Opportunity Fund (Master) v. TCW Asset Management Co., docket number 654033/12, in the Supreme Court of the state of New York, Appellate Division, First Department.
Attorneys for Deutsche Bank National Trust Co. argued recently to a First Department panel that several of the RMBS putback claims that it was pursuing as trustee against Morgan Stanley should be revived after they were dismissed in April for being untimely. The claims were originally commenced when the Federal Housing Finance Agency filed summonses with notice on the final day before the expiration of the statute of limitations. However, Deutsche Bank, as trustee, subsequently filed the complaints for the claims. The trial court threw out the claims, finding that certificate holders lacked standing to sue and that the trustee could not benefit from tolling agreements entered into by Morgan Stanley and certain other certificate holders.
At the recent argument, Deutsche Bank’s attorney argued that the certificate holders were not barred from filing the summonses with notice and that the trustee could benefit from them, because they were filed derivatively. In addition, he argued that Deutsche Bank was a third-party beneficiary of the tolling agreements at issue because the agreements applied to representatives of the certificate holders and that Deutsche Bank, as trustee, was a representative. Morgan Stanley’s attorney argued that “merely purporting” to file derivatively did not allow the certificate holders to sidestep contractual provisions that deprived them of standing to sue. He also argued that Deutsche Bank’s reliance on the word “representative” in the tolling agreements was misplaced because, read in its entirety, the provision at issue did not apply to the trustee, and the trustee represents the whole group of certificate holders, not any individual one.
The panel did not render a decision at the hearing.
On December 7, New York Supreme Court Justice Eileen Bransten dismissed a $500 million lawsuit against UBS AG (“UBS”) brought by Ace Decade Holdings Limited (“Ace Decade”), a British Virgin Islands company, for lack of personal jurisdiction and forum non conveniens. Ace Decade alleged that UBS fraudulently induced it to invest in shares of a company publicly traded in Hong Kong through a UBS-affiliated intermediary in Hong Kong, an affiliation that UBS concealed. Ace Decade’s investment allegedly resulted in a loss of more than $500 million.
In its motion to dismiss, UBS argued that under Daimler AG v. Bauman, 134 S. Ct. 746, 754 (2014), UBS is not subject to general jurisdiction in New York because UBS is incorporated in and has its principal place of business in Switzerland. Furthermore, UBS argued that New York lacked specific jurisdiction because the transactions giving rise to Ace Decade’s claims occurred in Hong Kong, not New York. Lastly, UBS argued that New York was not a convenient forum for several reasons, including the fact that trying the case in New York would impose undue hardship on UBS because almost all relevant witnesses and documents were abroad.
Justice Bransten agreed with UBS and held that the Court lacked personal jurisdiction. She stated that “the record makes clear that the ‘original critical events’ associated with the [i]nvestment occurred in Hong Kong.” The fact that Ace Decade moved to New York after entering into all relevant agreements and committing to make an investment was not a sufficient basis for jurisdiction. The Court also concluded that even if it could properly exercise jurisdiction, the action would be dismissed based on forum non conveniens because all relevant documents and witnesses are located in Hong Kong.
On November 29, a five-judge panel of New York’s Appellate Division affirmed the dismissal of CIFG Assurance North America, Inc.’s (“CIFG”) claims against Bear Stearns & Co. (now known as J.P. Morgan Securities LLC (“J.P. Morgan”)) based on alleged material misrepresentations in connection with an insurance contract. However, the panel found that CIFG’s claims should not have been dismissed with prejudice because CIFG should have been given an opportunity to replead.
The complaint alleged that Bear Stearns & Co. (“Bear Stearns”) made material misrepresentations that induced CIFG to provide financial guaranty insurance in connection with two collateralized debt obligations (“CDOs”). According to CIFG, Bear Stearns created the CDOs to rid itself of toxic, high-risk residential mortgage-backed securities (“RMBS”) that it was carrying on its books. CIFG alleged that Bear Stearns needed a third party to insure the CDOs’ senior tranches to make them marketable to investors. Bear Stearns approached CIFG to provide financial guaranty insurance on certain senior notes issued by the CDOs and made material misrepresentations to induce CIFG to do so. Specifically, Bear Stearns allegedly represented to CIFG that the CDOs’ assets would be selected by independent and reputable collateral managers when, in reality, Bear Stearns allegedly paid off the managers to allow itself to choose the collateral and load the CDOs with the toxic RMBS from its own books. CIFG also claimed that Bear Stearns held a number of short positions against the CDOs’ portfolios and profited substantially therefrom. Due to the large volume of toxic RMBS in the portfolios, both CDOs collapsed within a year of closing, which forced CIFG to pay over $100 million to discharge its liabilities under the insurance. CIFG alleges that it would have never issued the insurance had it known that the collateral managers would be taking direction from Bear Stearns.
In affirming the dismissal, the Appellate Division found that the “complaint contains insufficient information about the insurance policies CIFG was allegedly fraudulently induced to issue, and the circumstances under which those policies were issued.” Furthermore, the Appellate Division found that the complaint failed to include any detail as to how Bear Stearns “solicited” the insurance from CIFG and was void of any information about the underlying CDO transaction. Lastly, the panel noted that “the complaint merely states that CIFG paid over $100 million to discharge its liabilities under the insurance, but does not identify to whom those payments were made, or the events that triggered the payments.” Based on all of these deficiencies, the panel held that CIFG’s misrepresentation claim did “not clearly inform defendant as to the complained-of incidents, and it was properly dismissed.” Nonetheless, the Appellate Division held that CIFG should be given an opportunity to replead and rejected J.P. Morgan’s argument to dismiss the claim as time-barred.
The case is captioned CIFG Assurance North America Inc. v. J.P. Morgan Securities LLC, index number 654074/2012, in the New York Supreme Court, Appellate Division, First Department.
Earlier last month, the Appellate Division, First Department, reversed a trial court’s dismissal of investment fund Phoenix Light’s $700 million residential mortgage-backed securities (RMBS) fraud suits against Credit Suisse and Morgan Stanley. In a brief opinion, the appellate court held that Phoenix Light’s allegations that it relied on defendants’ misrepresentations and omissions in their respective RMBS offering materials were sufficient to state a fraud claim.
Justice Ramos of the Supreme Court of the State of New York, Commercial Division, had previously granted the defendants’ motions to dismiss Phoenix Light’s common law fraud, fraudulent inducement, and aiding and abetting fraud claims. In so holding, Justice Ramos relied on the fact that Phoenix Light never alleged that it requested mortgage loan files or due diligence reports from the defendants to conduct independent analysis of the loans underlying the RMBS. Phoenix Light argued that such requests to the defendants would have been futile, but the trial court held that a sophisticated investor should have done so.
The Appellate Division disagreed, relying on its prior decision in IKB International S.A. v. Morgan Stanley, 142 A.D.3d 447 (1st Dept. 2016), among other authority. In IKB’s case against Morgan Stanley, the First Department concluded that even if the plaintiff bank had demanded loan files from Morgan Stanley, the defendant would not have provided said files. Thus, IKB’s allegations of justifiable reliance were sufficient as pleaded. Further, in the Phoenix Light opinion, the court noted that RMBS plaintiffs are not required to plead that they received representations and warranties made directly by defendants concerning the underlying loans, merely that such representations and warranties were made to the defendants by third parties with the relevant information. As such, Phoenix Light’s pleaded reliance on the defendants’ offering materials was sufficient.
The cases are captioned Phoenix Light SF Ltd. et al. v. Credit Suisse AG et al., index number 653123/2013, and Phoenix Light SF Ltd. et al. v. Morgan Stanley et al., index number 652986/2013.
The investigation, launched by the Securities and Exchange Commission (“SEC”) in 2013, probed whether JPMorgan violated the FCPA by giving jobs and internships to the friends and relatives of clients and government officials in the Asia-Pacific region, particularly in China, to win lucrative business deals. The investigation found that, between 2006 and 2013, JPMorgan hired hundreds of (typically unqualified) interns and employees at the behest of government officials and clients in Asia, and generated $100 million in revenues.
The $264 million settlement will be split among three U.S. government regulatory agencies: $130 million to the SEC; $72 million to the Department of Justice (“DOJ”); and $61.9 million to the Federal Reserve. By cooperating with the investigation, JPMorgan avoided criminal prosecution by the DOJ and entered into a three-year “non-prosecution” agreement requiring the bank to implement enhanced internal compliance programs. After the investigation, JPMorgan fired six employees who engaged in misconduct or failed to identify the problem. It also disciplined 23 additional employees who failed to detect the prohibited practices or acted at the direction of supervisors. The bank also penalized current and former employees $18.3 million for their actions.
In addition to investigating JPMorgan, government regulators reportedly contacted other big banks, including HSBC, Goldman Sachs, Deutsche Bank, Citigroup, and Morgan Stanley. The global banking community was put on edge by the investigation, as hiring well-connected people for financial jobs has been common in China.
On November 4, the New York State Department of Financial Services (“DFS”) and the Agricultural Bank of China agreed to a Consent Order requiring the bank to pay a $215 million penalty and to install an independent monitor to review the bank’s program for compliance with anti-money laundering laws (“AML”), including the Bank Secrecy Act (“BSA”).
The Agricultural Bank of China’s New York Branch (the “Branch”) conducts U.S. dollar clearing in large volumes through foreign correspondent accounts. Since U.S. dollar clearing – a process by which U.S. dollar-denominated transactions are settled between counterparties through a U.S. bank – is a high-risk business line that creates an opportunity for bad actors to launder money or facilitate terrorist transactions, transaction monitoring systems are particularly important for entities that engage in this type of activity.
According to the Consent Order, despite warnings by DFS in 2014 that the Branch’s transaction monitoring systems were inadequate for a greater volume of clearing activity, the Branch substantially increased its clearing activity without implementing stronger monitoring systems. Furthermore, when the Chief Compliance Officer (“CCO”) raised concerns in 2014 about potentially suspicious activity, Branch management failed to properly address these concerns and curtailed the CCO’s independence and ability to carry out vital compliance responsibilities.
The Consent Order states that during its 2015 investigation, DFS discovered an “‘unmanageable’ backlog of nearly 700 alerts of potential suspicious transactions” at the Branch that had not yet been investigated. Additionally, DFS uncovered several alarming transaction patterns, including unusually large round-dollar transfers between Chinese and Russian companies and potentially suspicious dollar-denominated payments from trading companies located in the Middle East.
With all the news surrounding the SEC’s headline-grabbing prosecution of Lynn Tilton and her firm, Patriarch Partners LLC, it is easy to miss the insurance coverage element of the case. It is no secret that in recent years, and particularly following the enactment of the Dodd-Frank Act in 2010, the SEC has dedicated more resources to investigating and targeting, among others, private equity firms, hedge funds, and mutual funds. Responding to an SEC subpoena or investigation can be extremely expensive and disruptive. Importantly, in some instances, these costs may be covered by a company’s liability insurance policies.
Patriarch Partners is seeking coverage from AXIS Insurance (“AXIS”) for an SEC subpoena and subsequent enforcement action. Patriarch Partners LLC v. AXIS Insurance Company, No. 1:16-cv-02277-VEC (S.D.N.Y. filed March 29, 2016). AXIS has denied coverage and is seeking a court ruling that there is no coverage because (1) Patriarch allegedly did not disclose in a warranty for the AXIS policy that it had received an informal request for documents from the SEC; (2) the claim was barred by a prior acts exclusion; and (3) the SEC claims at issue constituted a “claim” made prior to the policy period.
In short, AXIS is arguing that, because the SEC allegedly requested certain documents from Patriarch and started an inquiry prior to the policy period, no coverage is available for the SEC’s subsequent claims. Notably, although AXIS is contesting its coverage obligation, the primary insurer and the lower-layer excess carriers agreed to fund Patriarch’s defense and already have exhausted their limits.
Be careful in completing applications and executing warranties. In purchasing insurance, policyholders are often required to complete applications or execute warranties. Insureds, of course, must be honest in these applications and warranties because, as the Patriarch case demonstrates, insurance companies may attempt to avoid their coverage obligation based on purported misrepresentations. But, as the Patriarch case also shows, responding to insurance applications is often easier said than done. For example, to challenge coverage, AXIS is relying on a warranty by Patriarch stating that it was not “aware of any facts or circumstances that would reasonably be expected to result in a Claim” covered by the AXIS policy. At the time Patriarch executed its warranty, however, its representation likely was accurate: it likely did not know that a limited investigation by the SEC would result in a claim leading to more than $20 million in fees. Nevertheless, Patriarch now faces an obstacle to coverage that could have been avoided.
How the term “Claim” is defined. Most management liability insurance policies are written on a claims-made basis, which means that they are triggered by claims made during the policy term. The definition of “Claim,” however, varies significantly from policy form to policy form. In virtually all policies, the definition of “Claim” will include civil lawsuits, but, as reflected in the Patriarch case, it may also include a subpoena, an order of investigation, or an SEC Form 1662. Policies also generally tie the definition of “Claim” to instances where there are allegations of “wrongful acts.” The definition of “Claim” can have broad consequences for coverage and will affect the policyholder’s notice obligations, which policy period(s) is triggered, and how exclusions are applied.
Understand the ramifications of prior acts and prior litigation exclusions. The vast majority of D&O policies contain prior acts or prior litigation exclusions that bar coverage for claims arising out of acts, or “related” lawsuits, that took place prior to the policy period. The language of these exclusions again differs from policy to policy. Where possible, seek a narrower and clearer exclusion, so that there is little doubt regarding what is excluded. For example, in the Patriarch case, the policy contains a somewhat expansive exclusion barring coverage for claims “based upon, arising out of or attributable to any demand, suit or other proceeding pending” against Patriarch on or prior to July 31, 2011, “or any fact, circumstance or situation underlying or alleged therein.” AXIS still will be required to show that this exclusion clearly and unambiguously bars coverage for the claim at issue, but this type of language gives insurers too much room to try to contest coverage.
There is no way to guarantee that all SEC claims will be covered, but by being proactive and anticipating key issues, you will put your firm in the best possible position to obtain coverage and manage this critical risk. We will be monitoring the Patriarch case as it develops.
* Joseph Saka is a member of Lowenstein Sandler’s Insurance Recovery Group. Zachary Rosenbaum, Chair of the Capital Markets Litigation Group, contributed to this post.
On October 21, the China Securities Regulatory Commission (“CSRC”) opened an investigation into six Chinese companies for alleged fraud relating to initial public offerings (“IPOs”). The six companies under investigation are (1) Longbao Ginseng & Antler Co. (“Longbao”), a biotechnology and pharmaceutical company; (2) Guangdong Guangzhou Daily Media Co., an advertising firm; (3) Ingenious Ene-Carbon New Materials Co., a graphite supplier; (4) Infotomic Co., a property developer; (5) P2P Financial Information Service Co., a real estate developer; and (6) Shenzhen Ecobeauty Co., a natural gas equipment manufacturer. One of the six companies, Longbao, is currently preparing an IPO, while the remaining five have already gone public.
These six cases mark the start of a relatively new campaign by the CSRC intended to detect and punish IPO fraud. The commission announced that it will be investigating all parties involved in the IPOs, including the lawyers, underwriters, and auditors. It also announced that penalties could include delisting the companies’ stocks, issuing financial penalties, and even imposing criminal charges and fines.
The alleged fraudulent acts for the six companies under investigation include false representations made in IPO prospectuses and inflation of company revenue and net income, designed to induce market speculation and artificially boost company stock prices following an IPO. While foreign investors are barred from being shareholders in domestic Chinese companies, IPO fraud is an enormous area of concern affecting Chinese investors, who stand to lose millions, with China only recently starting to seriously crack down on this type of market fraud.
This past June, China for the first time expelled a company for committing IPO fraud from one of its several stock markets, the Shenzhen Stock exchange, after an investigation revealed that Dandong Xintai Electric fabricated financial data in its IPO application. The underwriter of the IPO was also ordered to pay 550 million yuan ($82.2 million) to compensate investors and an additional penalty of 57.3 million yuan ($8.5 million).

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