Opinion ID: 2820087
Heading Depth: 3
Heading Rank: 4

Heading: Longshore

Text: The alleged fraud with respect to Longshore differs in kind and, therefore, requires separate treatment. The thrust of Plaintiffs’ claim is that Wachovia used this non-constellation CDO to dispose of devalued assets on Wachovia’s books, including 32 13‐1476‐cv Loreley Financing (Jersey) No. 3 v. Wells Fargo Securities, LLC assets from a canceled CDO deal, and that Wachovia did so by transferring the assets at their original cost basis, without accounting for their true (sinking) value. Although the complaint does not allege precisely when the toxic assets were transferred or at precisely what diminished value, it does assert (1) that in transferring these assets, Wachovia was aware of “impending changes to the ratings methodologies” that would result in major downgrades to the assets’ value, J.A. at 137, and (2) that the Longshore Offering Memorandum misrepresented that SAI, as the collateral manager, would “cause any acquisition or sale” of assets “to be conducted on an arm’s length basis” or— if carried out with SAI or an affiliate—to be done at least “on terms as favorable to [Longshore] as would be the case” in a transaction between unrelated parties, id. at 136. The issue is whether these allegations suffice to raise a plausible inference of a material misrepresentation by Wachovia and SAI as well as a strong inference of scienter. While the question is a close one, we find the complaint sufficient to support the requisite inferences as to Wachovia. As to SAI, however, the complaint fails to plead a fraudulent misrepresentation with the particularity required by Rule 9(b) and, hence, also fails to allege scienter. Cf. supra Sections I.B.2 & I.C.
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.
In contrast to the allegations regarding Wachovia’s role, Plaintiffs’ claims regarding SAI’s role are less detailed and fail to satisfy the particularity required by Rule 9(b). Indeed, although the Longshore scheme differs in kind from the constellation CDOs scheme, as to SAI, the complaint suffers from the same infirmity that we found earlier when dealing with the constellation CDOs—namely, that Plaintiffs have alleged neither a fraudulent misrepresentation by SAI nor, a fortiori, scienter on SAI’s part. In the case of Longshore, the plausibly fraudulent statement in the offering documents is that SAI, as the collateral manager, would “cause any acquisition or sale” of assets “to be conducted on an arm’s length basis,” or at least “on terms as favorable to [Longshore] as would be the case” in a transaction between unrelated parties.” Id. at 136. That statement is clearly attributable to Wachovia, as the author of the offering documents. But as we noted before in the case of the constellation CDOs, the problem here is that Plaintiffs have not adequately pleaded any such misrepresentation by SAI. Cf. supra Section I.B.2. And Plaintiffs’ allegations regarding the close relationship between SAI and Wachovia lack particulars from which it would be reasonable to infer that SAI itself misled investors about its role in the acquisition of assets by Longshore.12 It is true that SAI bore responsibility for some information contained in certain sections of the 12 Longshore offering documents. See J.A. at 309, 317‐18, 325‐28. But Plaintiffs identify—and our own examination reveals—no statement in those sections to the effect that SAI would ensure that all transactions were conducted as if between unrelated parties. 37 13‐1476‐cv Loreley Financing (Jersey) No. 3 v. Wells Fargo Securities, LLC Absent facts plausibly indicating a misrepresentation by SAI, the complaint necessarily lacks allegations giving rise to a strong inference of scienter on SAI’s part. Cf. supra Section I.C. Hence, as to SAI, the complaint fails to state a claim in connection with either the constellation CDOs or Longshore. To proceed against SAI, Plaintiffs must replead their claim with sufficient particularity to give rise to the requisite inferences of misrepresentation and scienter.