Opinion ID: 2793872
Heading Depth: 3
Heading Rank: 1

Heading: Sufficiency of Loss Causation Allegations

Text: A claim for common law fraud is subject to the particularity pleading requirements of Federal Rule of Civil Procedure 9(b), “which requires that the plaintiff (1) detail the statements (or omissions) that the plaintiff contends are fraudulent, (2) identify the ‐20‐ FIN. GUAR. INS. CO. V. PUTNAM ADVISORY CO. speaker, (3) state where and when the statements (or omissions) were made, and (4) explain why the statements (or omissions) are fraudulent.” Eternity Global Master Fund Ltd. v. Morgan Guar. Trust Co. of N.Y., 375 F.3d 168, 187 (2d Cir. 2004) (internal quotation marks omitted). The District Court did not apply the heightened pleading standards of Rule 9(b) to FGIC’s loss causation allegations, but on appeal, Putnam argues that Rule 9(b) should apply. We have not yet resolved whether allegations as to loss causation must be pleaded with the specificity required by Rule 9(b). Acticon AG v. China N. E. Petrol. Holdings Ltd., 692 F.3d 34, 37–38 (2d Cir. 2012); see Dura Pharm., Inc. v. Broudo, 544 U.S. 336, 346 (2005) (assuming, but not deciding, that loss causation allegations are governed by ordinary notice pleading standards). We need not decide the question today because we find that FGIC’s loss causation allegations are sufficient even under the heightened pleading standards of Rule 9(b). FGIC has alleged ‐21‐ FIN. GUAR. INS. CO. V. PUTNAM ADVISORY CO. particular facts that, when considered as a whole, plausibly allege that Putnam’s alleged misrepresentations and omissions caused at least some of the economic harm it suffered. These allegations include that:  Had Putnam selected the Pyxis collateral itself, as it represented it would do, and had it not acquiesced in Magnetar’s control of collateral selection, Pyxis would not have defaulted as quickly as it did, and may well not have defaulted at all. At a minimum, any losses incurred by Pyxis would have been substantially smaller than they were. Thus, FGIC’s liability for losses incurred by Pyxis would either not have been incurred at all, or would have been substantially smaller.  The purpose of Magnetar’s control of the collateral selection process was to ensure that the assets selected for inclusion in the Pyxis portfolio would be likely to default.  Many of the assets selected for the Pyxis portfolio by Magnetar, on their face, were more liable to default than the assets Putnam would have selected had it acted independently. For example, Putnam’s original target portfolio for Pyxis included $145 million of prime RMBS. At Magnetar’s direction, Putnam replaced these assets in the final portfolio with $145 million of subprime RMBS.  The Magnetar‐selected assets in the Pyxis portfolio defaulted more quickly than other assets in the Pyxis portfolio. Based on a preliminary analysis of the ‐22‐ FIN. GUAR. INS. CO. V. PUTNAM ADVISORY CO. performance of assets in the Pyxis portfolio for which FGIC has evidence that Magnetar directed selection, all Magnetar‐selected assets had defaulted by March 2009, and their average life before default was just 1.5 years. By contrast, the average life before default of the Pyxis collateral for which FGIC does not have direct evidence of Magnetar’s control was 1.85 years.  In general, Magnetar’s CDOs defaulted in greater numbers, and defaulted much more quickly, than comparable CDOs. As of April 2012, all 18 of Magnetar’s 2006‐vintage mezzanine CDOs had defaulted while only 72% of 2006‐ vintage non‐Magnetar mezzanine CDOs had defaulted. As of December 2008, when Pyxis defaulted, 94% of Magnetar’s 2006‐vintage mezzanine CDOs had defaulted, while only 40% of 2006‐vintage non‐Magnetar mezzanine CDOs had done so.  Over $95 million of the Magnetar‐selected assets defaulted before the financial crisis took hold. The default of these assets substantially contributed to Pyxis’s collapse and to FGIC’s losses under the Pyxis Guaranty. At this preliminary stage, accepting all factual allegations as true and drawing all reasonable inferences in FGIC’s favor, the SAC alleges a causal connection between Putnam’s fraudulent misrepresentations and FGIC’s losses under the Pyxis Guaranty such that FGIC “would have been spared all or an ascertainable ‐23‐ FIN. GUAR. INS. CO. V. PUTNAM ADVISORY CO. portion of that loss absent the fraud.” Lentell, 396 F.3d at 175. The District Court found the SAC’s allegations deficient in part because the “pool of assets alleged to be controlled by Magnetar represented roughly 11% of the $1.5 billion collateral pool, and the SAC does not allege how the selection of safer assets in this 11% pool would have prevented a default.” FGIC, 2014 WL 1678912, at . The District Court also determined that FGIC’s allegations did not allow for an inference of loss causation because “[e]ven if the Magnetar‐selected assets in the Pyxis portfolio defaulted more quickly than other assets, there is nothing in the SAC that alleges that this . . . was sufficient to cause Pyxis to default ahead of any market‐wide downturn or isolates Pyxis’ default in any reasonable manner from the market downturn.” Id. In so concluding, however, the District Court misapplied the standard on a motion to dismiss. The purpose of the loss causation element is to require a plaintiff “to provide a defendant with some ‐24‐ FIN. GUAR. INS. CO. V. PUTNAM ADVISORY CO. indication of the loss and the causal connection that the plaintiff has in mind,” not to make a conclusive proof of that causal link. Dura, 544 U.S. at 347; see id. (explaining that the requirement is not intended to “impose a great burden” on a plaintiff). At this stage of the proceedings, FGIC is not required to establish that the collateral it has identified as selected by Magnetar was the exclusive cause of its losses; rather, it need only allege sufficient facts to raise a reasonable inference that Magnetar’s overall involvement caused an ascertainable portion of its loss. In addition, the assets identified in the SAC are only those that, without the benefit of discovery, FGIC claims to have evidence that Magnetar selected. FGIC alleges that Magnetar exercised control over the entire collateral selection process. See, e.g., SAC ¶ 4; J.A. 186. Nor is FGIC required to allege that its losses were caused solely by Putnam’s misrepresentations to satisfy its but‐for pleading ‐25‐ FIN. GUAR. INS. CO. V. PUTNAM ADVISORY CO. obligations.2 “Of course, if the loss was caused by an intervening event [here, the market downturn] . . . the chain of causation will not have been established. But such is a matter of proof at trial and not to be decided on a Rule 12(b)(6) motion to dismiss.” Emergent Capital, 343 F.3d at 197. At this preliminary stage, accepting all factual allegations in the SAC as true and drawing all reasonable inferences in FGIC’s favor, FGIC has plausibly alleged that Putnam’s misrepresentations caused at least some of its losses. 2 That Pyxis defaulted around the time of a global financial crisis was central to the District Court’s loss causation analysis. Certainly, when a “plaintiff’s loss coincides with a marketwide phenomenon causing comparable losses to other investors, the prospect that the plaintiff’s loss was caused by the fraud” is lessened. See Lentell, 396 F.3d at 174. We observe that there may be circumstances under which a marketwide economic collapse is itself caused by the conduct alleged to have caused a plaintiff’s loss, although the link between any particular defendant’s alleged misconduct and the downturn may be difficult to establish. See, e.g., Fin. Crisis Inquiry Comm’n, The Financial Crisis Inquiry Report 190–95 (2011) (concluding that the role of synthetic CDOs and distorted incentives of CDO managers and hedge funds “contributed significantly” to the financial crisis); Permanent Subcomm. on Investigations of the S. Comm. on Homeland Sec. & Govt’l Affairs, 112th Cong., Wall Street and the Financial Crisis: Anatomy of a Financial Collapse (2011). Because the SAC does not contain factual allegations to this effect, we take no view as to whether such circumstances are presented here. ‐26‐ FIN. GUAR. INS. CO. V. PUTNAM ADVISORY CO.