Opinion ID: 2820087
Heading Depth: 4
Heading Rank: 1

Heading: Wachovia

Text: The SEC itself investigated the underlying charge of fraud by Wachovia in connection with the transfer into Longshore of assets from the canceled CDO. In its final order, the SEC set forth findings that Plaintiffs, in turn, recite in their complaint. See J.A. 138-39. Hence, a threshold question in our de novo review is what weight, if any, to give the quoted findings, which—as the district court correctly observed—were not admitted 33 13‐1476‐cv Loreley Financing (Jersey) No. 3 v. Wells Fargo Securities, LLC by Wells Fargo (Wachovia’s successor in interest) when it settled the matter with the SEC. Wells Fargo, 2013 WL 1294668, at . Citing our decision in Lipsky v. Commonwealth United Corp., 551 F.2d 887 (2d Cir. 1976), Defendants maintain that because the SEC order is inadmissible to prove fraud,11 it should likewise be disregarded in deciding the sufficiency of the fraud allegations under Rule 12(b)(6). In response Plaintiffs argue that Lipsky does not categorically bar courts from considering the content of such orders at the pleading stage, regardless of their admissibility. And they argue this while not disputing that the assertions of fact in question, having been neither admitted nor denied, represent only allegations of wrongdoing, with precisely no collateral estoppel effect. See Lipsky, 551 F.2d at 893-94 (“[C]onsent decrees . . . are not true adjudications of the underlying issues.”); U.S. S.E.C. v. Citigroup Global Markets Inc., 827 F. Supp. 2d 328, 333 (S.D.N.Y. 2011) (“As a matter of law, an allegation that is neither admitted nor denied is simply that, an allegation.”), vacated and remanded on other grounds, 752 F.3d 285 (2d Cir. 2014). Whatever cognizance of secondhand allegations courts may take at the pleading stage, it seems to us clear that the portions of the SEC order quoted in the complaint are in the nature of allegations “upon information and belief,” which cannot ordinarily 11 Although we have consistently held SEC orders like the one at issue here inadmissible to prove the facts of liability, our cases have not been uniform in explaining this result in terms of the Federal Rules of Evidence. Compare Lipsky, 551 F.2d at 893 (stating that such orders, like criminal nolo contendere pleas, are excluded under Rule 410), with United States v. Gilbert, 668 F.2d 94, 97 (2d Cir. 1981) (reasoning that because consent decrees are akin to the settlement of civil claims, their exclusion as proof of liability is actually governed by Rule 408, which explicitly permits use for other purposes), and Brady v. Wal‐Mart Stores, Inc., 531 F.3d 127, 136 (2d Cir. 2008) (“A consent decree may properly be admitted to demonstrate that a defendant was aware of its legal obligations.”). 34 13‐1476‐cv Loreley Financing (Jersey) No. 3 v. Wells Fargo Securities, LLC form the basis of a fraud claim “except as to matters peculiarly within the opposing party’s knowledge.” Luce, 802 F.2d at 54 n.1 (citation and internal quotation marks omitted). Even as to the latter, a fraud plaintiff must generally state the facts upon which her belief is founded. Id. While a complaint that merely recites others’ allegations may therefore be insufficient, we are satisfied that in this case Plaintiffs do also allege non-conclusory facts and that these additional factual pleadings are sufficient to render unproblematic any implied reliance on the SEC findings. In particular, the complaint asserts that: (1) Wachovia had been preparing two CDO deals in February 2007, one of which became Longshore while the other was canceled; (2) because Wachovia was the warehouse provider for both deals, assets from the canceled CDO remained on its books; (3) based on superior insider knowledge, “Wachovia was aware of significant problems in the []MBS sector,” J.A. at 137; (4) despite Defendants’ representations that all acquisitions for Longshore would be carried out in arm’s length-type transactions, the assets from the canceled CDO deal “were sold to Longshore for $4.6 million over their thencurrent market value,” id. at 137-38; and (5) this decline in value would otherwise have been borne by Wachovia. These allegations—albeit clearly overlapping with the SEC order—are made directly by Plaintiffs, and were signed by Plaintiffs’ counsel subject to the requirements of Rule 11. 35 13‐1476‐cv Loreley Financing (Jersey) No. 3 v. Wells Fargo Securities, LLC See Fed. R. Civ. P. 11(b)(3). Taken together, they are, in our view, adequate to survive a motion to dismiss. Defendants object that the complaint requires the court to infer their knowledge of a decline in the value of the specific assets transferred into Longshore from broader conditions in the market. That inference, however, seems to us reasonable under the circumstances and, thus, is fair to draw in Plaintiffs’ favor at the Rule 12(b)(6) stage. See Nielsen, 746 F.3d at 62. This is not a case in which a securities fraud plaintiff alleges a mere downturn in the market, asking the court to infer defendant’s knowledge of the poor performance of a given company. Plaintiffs pleaded scienter by asserting that Wachovia was aware of a high probability that at the time the assets were transferred into Longshore, the original acquisition cost no longer represented those assets’ fair market value. The basis for that alleged knowledge is not vague; it is Wachovia’s status as a major participant in the MBS market, a participant who was, consequently, aware of a broad drop in value in the very class of securities to which the transferred assets belonged. In sum, while the complaint could be more detailed as to the timeline and valuation of the securities in question, there is enough particularity to withstand Defendants’ Rule 12(b)(6) motion. Plaintiffs’ direct allegations (1) that Wachovia knew the MBS market well, and knew that it was in decline over the “months” in question, J.A. at 137, and (2) that Wachovia nevertheless transferred assets on its books at their original cost basis while telling investors that SAI would ensure that the transactions 36 13‐1476‐cv Loreley Financing (Jersey) No. 3 v. Wells Fargo Securities, LLC were conducted as if between unrelated parties, suffice to raise a plausible inference of material misrepresentation by Wachovia as well as a strong inference of scienter.