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

Heading: Wachovia and Harding

Text: The gravamen of Plaintiffs’ complaint is that, as to the two constellation CDOs, the offering documents (1) misrepresented that SAI and Harding would serve as judicious collateral managers, who would employ certain selection and monitoring procedures, and (2) omitted both Magnetar’s role in selecting the collateral and Magnetar’s adverse position relative to the CDOs. The complaint plausibly suggests that these alleged misrepresentations were made by both Wachovia and Harding. First and foremost, Wachovia (as a group) authored the Octans and Sagittarius offering documents in which the allegedly misleading statements appeared. In addition, Harding itself stated that it “w[ould] be responsible for selecting and monitoring [Octans’] collateral,” with no mention of Magnetar. J.A. at 122. And this statement came from a page of the Octans Offering Circular prepared by Harding, at the top of which Harding claimed “responsibility for the information contained in this section” and expressly represented that it had “not omit[ted] anything likely to affect the import of such information.” Id. at 253. Plaintiffs allege that had they known that the collateral managers would not exercise independent judgment and would instead accede to the desires of a powerful short investor, they would not have invested in either CDO. It is not for us to say at this stage whether Plaintiffs’ account of Magnetar’s role and of Defendants’ sleights of hand regarding that role is true, nor is it for us to say 24 13‐1476‐cv Loreley Financing (Jersey) No. 3 v. Wells Fargo Securities, LLC whether, at a later stage, a judge or jury might find that such misrepresentations were immaterial to sophisticated investors like Plaintiffs. The question properly before us is whether the facts pleaded are sufficiently detailed to satisfy Rule 9(b)—in particular, whether these facts “plausibly support the inference of fraud.” Cohen, 711 F.3d at 360. Our conclusion that they do rests, first, on the numerous alleged exchanges between Magnetar and Defendants. As to Octans, for example, various exchanges in August and September 2006 between Prusko and Chau—senior officers of Magnetar and Harding, respectively—may be read to suggest (1) Magnetar’s considerable influence over the CDO and (2) high-level discussions regarding Magnetar’s long-short strategy. An email from a Wachovia trader to Prusko also refers to “a few trades [Wachovia] did on behalf of Magnetar,” while, in another email, a Harding employee asks Prusko to “let [them] know if [he] plan[s] on shorting any names into any of the [Octans] transactions.” J.A. at 125. Together, such emails plausibly indicate not only a cozy relationship with Magnetar but also specific actions taken by Wachovia and Harding at Magnetar’s direction based on Magnetar’s short positions, such as selecting certain CDSs for inclusion in Octans. Exchanges between Magnetar and Wachovia pertaining to Sagittarius support a similar reading of Magnetar’s undisclosed role with respect to this CDO. For example, Prusko emailed Wachovia’s managing director a request to make SAI more “user friendly.” Id. at 131. In another email to a team of Wachovia employees a few months later, Prusko attached a graph showing higher profits to Magnetar from the CDO’s failure and described Sagittarius as “not a pretty bond.” Id. at 134. 25 13‐1476‐cv Loreley Financing (Jersey) No. 3 v. Wells Fargo Securities, LLC In addition, both Octans and Sagittarius had built-in features conducive to Magnetar’s alleged strategy, and the presence of these features lends further support to Plaintiffs’ account of Magnetar’s role. For example, Plaintiffs allege that Magnetar received sourcing fees for every CDS that it chose for the asset bundle, and that Magnetar also negotiated for favorable waterfall rules, which would permit equity holders like itself to continue receiving payments longer in the face of early signs of default. While at least some of these features were disclosed to investors and may not form a basis for fraud in themselves, they may be read to suggest favoritism towards Magnetar and thereby to put Plaintiffs’ other allegations in context. Construed in the light most favorable to Plaintiffs, the emails regarding Octans and Sagittarius—together with the structural elements advantageous to Magnetar— plausibly support an inference that the offering documents materially misled investors by falsely holding out the skill and rigorous asset selection methods of the respective collateral managers while failing to disclose Magnetar’s antagonistic influence. The district court reached the opposite conclusion by discounting Plaintiffs’ account as “read[ing] too much” into the emails and by proffering benign alternative explanations. Wells Fargo, 2013 WL 1294668, at . In the district court’s view, the emails show Magnetar merely to have been “an active and involved equity investor.” Id. at . The excerpts of the emails quoted in Plaintiffs’ complaint are scarcely unequivocal and may well be susceptible of plausible alternative readings. But it is not our task at this stage to construe the abundant industry jargon here in any definitive fashion. Rule 9(b) requires only that Plaintiffs plead, with particularity, facts from 26 13‐1476‐cv Loreley Financing (Jersey) No. 3 v. Wells Fargo Securities, LLC which it is plausible to infer fraud; it does not require Plaintiffs to plead facts that make fraud more probable than other explanations. Iqbal, 556 U.S. at 678; Twombly, 550 U.S. at 556. Drawing all reasonable inferences favorable to Plaintiffs, we conclude that such emails are sufficiently particular to render Plaintiffs’ account at least plausible. In concluding otherwise, the district court erred by requiring Plaintiffs to show that their reading was superior to the court’s own benign reading, thereby imposing a de facto probability requirement at the pleadings stage.9