Opinion ID: 2820087
Heading Depth: 3
Heading Rank: 2

Heading: Plaintiffs’ Loss Pleadings

Text: Here, Plaintiffs clearly allege transaction causation, i.e., that they would not have invested in the three CDOs but for Defendants’ misrepresentations.19 They also allege that the CDOs were all in some way designed to fail and did fail. Specifically, Plaintiffs assert that contrary to the picture painted in the offering documents of purportedly independent collateral managers selecting high-quality assets for the benefit of long 19 As with loss causation, transaction causation was not discussed by the district court, but Defendants argue that failure to plead it is similarly fatal here. We do not address this element separately because (1) Plaintiffs’ pleadings as to transaction causation seem to us plainly adequate on their face, and (2) the possible defense that any such reliance was unreasonable as a matter of law is premature based solely on the complaint and incorporated documents. In general, the reasonableness of a plaintiff’s reliance is a “nettlesome” and “fact‐intensive” question, Schlaifer Nance & Co. v. Estate of Warhol, 119 F.3d 91, 98 (2d Cir. 1997), which we, like our Circuit’s many district courts, will not lightly dispose of at the motion‐to‐dismiss stage. See, e.g., Bayerische Landesbank, New York Branch v. Barclays Capital, Inc., 902 F. Supp. 2d 471, 474 (S.D.N.Y. 2012) (“Whether or not reliance on alleged misrepresentations is reasonable in the context of a particular case is intensely fact‐specific and generally considered inappropriate for determination on a motion to dismiss.” (internal quotation marks omitted)); Robinson v. Deutsche Bank Tr. Co. Americas, 572 F. Supp. 2d 319, 322‐23 (S.D.N.Y. 2008) (citing several cases to the same effect). Defendants argue, however, that Plaintiffs’ reliance was unreasonable as a matter of law because of disclaimers in the offering circulars and the fact that Plaintiffs were sophisticated investors. Yet the offering circulars’ disclaimers are so general that we cannot be confident they bear on the misrepresentations alleged in the complaint, much less that they render Plaintiffs’ fraud claim implausible under Rule 12(b)(6). See Caiola v. Citibank, N.A., New York, 295 F.3d 312, 330 (2d Cir. 2002) (“[A] valid disclaimer provision must contain explicit disclaimers of the particular representations that form the basis of the fraud claim.” (internal quotation marks omitted) (emphasis added)); cf. Citigroup Global Markets, 987 N.Y.S.2d at 304‐06. Nor is it obvious that ordinary due diligence by sophisticated investors would uncover the sort of scheme at issue, which is alleged to have involved deliberate concealment of facts known only to Magnetar and Defendants. Cf. Steinhardt Grp. Inc. v. Citicorp, 708 N.Y.S.2d 91, 93 (1st Dep’t). Lack of reasonable reliance may ultimately prove to be a successful defense. It does not, however, warrant dismissal at the pleading stage in this case. 46 13‐1476‐cv Loreley Financing (Jersey) No. 3 v. Wells Fargo Securities, LLC investors, toxic assets were purposefully chosen for each CDO—in the case of the constellation CDOs, in order to advance Magnetar’s long-short strategy; in the case of Longshore, in order to offload these assets from Wachovia’s own books. Defendants contend, however, that the subsequent market crash was of such dramatic proportions that Plaintiffs’ losses would have occurred at the same time and to the same extent regardless of the alleged fraud. If Defendants are right, and the alleged fraud in no way increased the chance of Plaintiffs’ ultimate losses, then loss causation is lacking. Fraud claims under New York law being an area in which loss causation is required, see Greentech Research LLC v. Wissman, 961 N.Y.S.2d 406, 407 (1st Dep’t 2013), Plaintiffs must ultimately prove it; that is, they bear the burden of convincing the finder of facts that this element was present. But the question at this preliminary stage is whether the pleadings suffice to withstand Defendants’ Rule 12(b)(6) challenge. We conclude that they do. Assuming both that loss causation must be pleaded in fraud actions brought under state common law, as in federal securities fraud actions, and that the two pleading requirements are similar, we note that Plaintiffs’ burden is not a heavy one. See Dura, 544 U.S. at 347. The complaint must simply give Defendants “some indication” of the actual loss suffered and of a plausible causal link between that loss and the alleged misrepresentations. Id.; see Fin. Guar., 783 F.3d at 404. What sort of pleading is sufficient will depend on the factual circumstances of the case. See Lentell, 396 F.3d at 174 (“Loss causation is a fact-based inquiry and the degree of difficulty in pleading will be affected by circumstances. . . .”). In the federal 47 13‐1476‐cv Loreley Financing (Jersey) No. 3 v. Wells Fargo Securities, LLC securities fraud context, we have held that “when the plaintiff's loss coincides with a marketwide phenomenon causing comparable losses to other investors,” id. (internal quotation marks omitted), the plaintiff may be required to plead facts from which it would be reasonable to infer that the risks which materialized in her loss were risks concealed by the fraud rather than risks evident on the face of the investment disclosures. See id. at 172-78. At the same time, we have observed that where the question, at bottom, is one of intervening events—a consideration properly analyzed under proximate cause—“the chain of causation is a matter of proof at trial and not to be decided on a Rule 12(b)(6) motion to dismiss.” Id. at 174 (citation, ellipsis, and internal quotation marks omitted). We think it possible to distinguish here three broad types of fraud complaints. Our list is not meant to exhaust the possibilities but only to illustrate considerations that a court may deem relevant at different stages of the litigation. To adapt the prior real estate example, assume three houses are destroyed in an earthquake. The first is the one already encountered—the house that Lincoln was falsely said to have owned. This situation is most clearly akin to the tree and speeding trolley car in Berry. The causal connection, if any exists, is not readily apparent. Hence, in assessing the facial plausibility of the claim under Rule 12(b)(6), a court may be unwilling to permit the complainant to proceed without additional facts from which it would be reasonable to 48 13‐1476‐cv Loreley Financing (Jersey) No. 3 v. Wells Fargo Securities, LLC infer that the defendant’s wrongful activity in some way increased the likelihood of the eventual harm.20 The second and third types of fraud involve, in contrast, misrepresentations as to the solidity of the house and thus differ in kind from the first in a way that bears directly on loss causation in the present case. In the second type of fraud complaint, the misrepresentation is that the house was well built. In the third—a further variation of the second—the buyer is told that the house was, in fact, “earthquake proof.” It may turn out that shoddy and well-built houses alike were destroyed in the earthquake. It may even be that the earthquake was so vast as to destroy houses that were “earthquake proof,” as “earthquake proof” is normally defined. Cf. Bastian, 892 F.2d at 685-86 (describing hypothetical loss on investment represented by broker to be “riskfree”). In both such situations, however, it is enough at the pleading stage for the plaintiff to allege the particular misrepresentation and the destruction of the house in an earthquake. Cf. Fisch, supra, at 852 n.223 (“Similarly, it is plausible that companies involved in fraud are especially susceptible to ruinous harm upon the occurrence of adverse economic events. Indeed, many of the companies that collapsed due to the bursting of the dot-com bubble—as opposed to weathering it—were those engaged in financial accounting manipulations and similar practices.”). It then falls to the 20 However one feels about loss causation, a plaintiff must ultimately prove this element to prevail on a fraud claim under New York law. See Wissman, 961 N.Y.S.2d at 407. One may, of course, wish to hold liars liable regardless of whether the type of lie at issue imposed on the plaintiff an increased risk of the harm suffered or would impose on similarly situated others such a risk in the future. To do so, however, would require us to ignore the substantive law of New York and to dispense with one of its common‐law requirements. Cf. supra discussion in Section II.A (giving examples of contractual and statutory contexts in which loss causation is not required). 49 13‐1476‐cv Loreley Financing (Jersey) No. 3 v. Wells Fargo Securities, LLC defendant to proffer facts indicating that a well-built house, or even an earthquakeproof one, would have been destroyed in this earthquake. What we are here describing is the burden of pleading, which has clearly been met by a plaintiff’s allegation of a misrepresentation that goes to how well the house was built, as well as the burden of introducing some counterevidence (onus procedendi), which has shifted to the defendant. Cf. Liriano v. Hobart Corp., 170 F.3d 264, 272 (2d Cir. 1999) (“This shifting of the onus procedendi has long been established in New York.”). The essential point for present purposes is that where a potential causal link is evident, it is not necessary for the plaintiff to plead loss causation in detail to render her fraud claim plausible at the motion-to-dismiss stage. The instant suit lies somewhere between these second and third cases in which the sufficiency of the loss causation pleadings follows from the nature of the fraud alleged and the harm suffered. In that way, this case fundamentally differs from the speeding trolley car and the Lincoln house cases, and the issue of causal link is consequently distinctly easier. Moreover, as the difference between the second and third is a matter of degree, or of the relative strength of causal tendency inferable from the type of fraud and surrounding circumstances, that difference will principally be relevant at later phases of the litigation, e.g., on a motion for summary judgment, in the court’s instruction on causation to the jury, or in a post-trial challenge to the sufficiency of the evidence. Here, while Defendants by no means represented the CDOs to be free of risk, they represented the CDOs to be more than simply “well built,” and far from what 50 13‐1476‐cv Loreley Financing (Jersey) No. 3 v. Wells Fargo Securities, LLC Plaintiffs claim the CDOs actually were: designed to fail. Indeed, according to the complaint, Defendants hid from investors (1) that Magnetar was actively undermining the constellation CDOs by selecting marginal collateral to capitalize on eventual defaults and (2) that Wachovia was dumping into Longshore worsening assets at their original cost to recoup the losses and pass the risk to investors. Whether Plaintiffs can prove these allegations—and whether defendants in turn can proffer evidence that the CDOs would have collapsed regardless, due to the larger crash in the MBS market—are evidentiary matters for later phases of this lawsuit. It is sufficient under Rule 12(b)(6) that the allegations themselves give Defendants “some indication” of the risk concealed by the misrepresentations that plausibly materialized in Plaintiffs’ ultimately worthless multimillion-dollar investment in these CDO notes. Fin. Guar., 783 F.3d at 404 (“The purpose of the loss causation element is to require a plaintiff ‘to provide a defendant with some indication of the loss and the causal connection that the plaintiff has in mind,’ not to make a conclusive proof of that causal link.” (quoting Dura, 544 U.S. at 347)). While Plaintiffs did not plead that the alleged fraud caused their losses independently of the larger financial events of 2007 and 2008, they were not required to do so under our precedents. The requirement, if any, to plead a causal link does not place on Plaintiffs a further pleading obligation to rule out other contributing factors or alternative causal explanations. See id. (“Nor is [the plaintiff] required to allege that its losses were caused solely by [the defendant’s] misrepresentations . . . .”); King Cnty., Wash. v. IKB Deutsche Industriebank AG, 708 F. Supp. 2d 334, 342 (S.D.N.Y. 2010) 51 13‐1476‐cv Loreley Financing (Jersey) No. 3 v. Wells Fargo Securities, LLC (“Neither Dura nor Lentell . . . imposes on plaintiffs the heavy burden of pleading facts sufficient to exclude other non-fraud explanations.” (internal quotation marks omitted)). Plaintiffs must only allege enough facts regarding their loss to support the inference that they “would have been spared all or an ascertainable portion of that loss absent the fraud.” Lentell, 396 F.3d at 175.21 We are satisfied that Plaintiffs have done so in this case.