1015751_1
To Be Argued by:
Joseph D. Daley
(Time Requested: 30 Minutes)
NO. CTQ-2014-00008
Court of Appeals
of the
State of New York
← ♦ →
COMMONWEALTH OF PENNSYLVANIA PUBLIC SCHOOL EMPLOYEES’ RETIREMENT
SYSTEM, together and on behalf of all others similarly situated, et al.,
Plaintiffs,
COMMERZBANK AG, together and on behalf of all others similarly situated,
Plaintiff-Appellant,
vs.
MORGAN STANLEY & CO., INCORPORATED, et al.,
Defendants.
ON CERTIFIED QUESTIONS FROM THE UNITED STATES COURT
OF APPEALS FOR THE SECOND CIRCUIT
No. 13-2095-cv(L)
REPLY BRIEF FOR PLAINTIFF-APPELLANT
AND SUPPLEMENTAL APPENDIX
ROBBINS GELLER RUDMAN & DOWD LLP
JOSEPH D. DALEY
DANIEL S. DROSMAN
LUKE O. BROOKS
655 West Broadway, Suite 1900
San Diego, CA 92101-3301
Telephone: 619/231-1058
619/231-7423 (fax)
Attorneys for Plaintiff-Appellant Commerzbank AG
TABLE OF CONTENTS
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I. ARGUMENT ................................................................................................... 1
A. The Record Contains Ample Evidence Raising a Triable Issue
of Fact as to the Assignment of Tort Claims When DAF Sold
the Entirety of the Impaired Rated Notes to Dresdner for Their
Full Face Value ..................................................................................... 1
1. As a Threshold Matter, Defendants’ Entire “No-
Assignment” Argument Is Based Upon a False Premise
that Elevates a Simple Confirmation Letter to a Purported
“Contract” Between DAF and Dresdner ..................................... 2
2. Even Indulging Defendants’ Insistence that the Letter Is
the Relevant “Contract,” Its Ambiguity Allows
Consideration of Additional Evidence Raising a Triable
Issue of Fact as to a Valid Assignment ....................................... 5
3. Defendants’ Insistence that the Sale of a Note Never
Includes Related Tort Claims Unless Explicitly Spelled
Out Both Discounts Relevant Law and Misapprehends
Other Authorities that They Claim Represent 100 Years
of Settled Jurisprudence ............................................................ 11
4. Defendants’ Policy Musings Are No Substitute for the
Application of Law to the Record Facts ................................... 18
B. There Exists a Triable Issue of Fact as to Morgan Stanley’s
Liability Under New York Fraud Law ................................................ 21
1. Defendants’ Slavish Focus on the Singular “Making” of a
Misstatement to a Fraud Victim Misses the Mark .................... 22
2. Morgan Stanley’s Liability Under a Fraudulent
“Scheme” Theory Is Readily Apparent .................................... 34
3. Record Facts Fully Support Morgan Stanley’s Liability
for Actionable Omissions ......................................................... 40
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II. CONCLUSION .............................................................................................. 49
TABLE OF AUTHORITIES
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CASES
Allstate Ins. Co. v. Countrywide Fin. Corp.,
824 F. Supp. 2d 1164 (C.D. Cal. 2011) .......................................................passim
Altvater Gessler-J.A. Baczewski Int’l (USA) Inc. v.
Sobieski Destylarnia S.A.,
572 F.3d 86 (2d Cir. 2009) ................................................................................. 45
Banque Arabe Et Internationale D’Investissement
v. Maryland Nat’l Bank,
57 F.3d 146 (2d Cir. 1995) ..................................................................... 12, 13, 17
Bartholet v. Reishauer A.G.,
953 F.2d 1073 (7th Cir. 1992) ............................................................................ 42
Bd. of Educ. v. Farmingdale Classroom Teachers Ass’n,
38 N.Y.2d 397 (1975) ......................................................................................... 32
Bechhoefer v. United States DOJ,
209 F.3d 57 (2d Cir. 2000) ................................................................................. 45
Brandoff v. Empire Blue Cross & Blue Shield,
707 N.Y.S.2d 291 (Civ. Ct. 1999) ...................................................................... 11
Cal. Pub. Emps. Ret. Sys. v. Shearman & Sterling,
95 N.Y.2d 427 (2000) ..................................................................................passim
CPC Int’l Inc. v. McKesson Corp.,
70 N.Y.2d 268 (1987) ..................................................................................passim
Danna v. Malco Realty, Inc.,
857 N.Y.S.2d 688 (2d Dep’t 2008) ................................................... 34, 36, 38, 39
Doomes v. Best Transit Corp.,
17 N.Y.3d 594 (2011) ......................................................................................... 26
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Eurycleia Partners, LP v. Seward & Kissel, LLP,
849 N.Y.S.2d 510 (1st Dep’t 2007) .............................................................passim
Express Indus. & Terminal Corp. v. New York State DOT,
93 N.Y.2d 584 (1999) ....................................................................................... 3, 6
Fla. State Bd. of Admin. v. Green Tree Fin. Corp.,
270 F.3d 645 (8th Cir. 2001) .............................................................................. 49
Fox v. Hirschfeld,
142 N.Y.S. 261 (1st Dep’t 1913) ............................................................ 13, 14, 15
Gingold v. State Farm Ins. Co.,
642 N.Y.S.2d 812 (Civ. Ct. 1996) ...................................................................... 11
Haythe & Curley v. Harkins,
625 N.Y.S.2d 154 (1st Dep’t 1995) .................................................................... 30
In re Refco Inc. Sec. Litig.,
No. 07 MDL 1092 (JSR), 2011 U.S. Dist. LEXIS 33554
(S.D.N.Y. Mar. 28, 2011) ................................................................................... 45
Int’l Design Concepts, LLC v. Saks, Inc.,
486 F. Supp. 2d 229 (S.D.N.Y. 2007) .........................................................passim
Janus Capital Grp., Inc. v. First Derivative Traders,
___ U.S. ___, 131 S. Ct. 2296 (2011) ..................................................... 32, 33, 45
Jones Lang Wootton USA v. LeBoeuf, Lamb, Greene
& MacRae,
674 N.Y.S.2d 280 (1st Dep’t 1998) .................................................................... 31
Kuo Feng Corp. v. Ma,
669 N.Y.S.2d 575 (1st Dep’t 1998) .................................................................... 34
Leon v. Martinez,
84 N.Y.2d 83 (1994) ....................................................................................... 6, 11
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M. O’Neil Supply Co. v. Petroleum Heat & Power Co.,
280 N.Y. 50 (1939) ............................................................................................... 5
Mateo v. Senterfitt,
918 N.Y.S.2d 438 (1st Dep’t 2011) ........................................................ 26, 27, 28
Metro. Life Ins. Co. v. Morgan Stanley,
No. 651360/2012, 2013 N.Y. Misc. LEXIS 3056
(N.Y. Sup. Ct. July 8, 2013) ............................................................. 21, 22, 23, 24
Mount Vernon Fire Ins. Co. v. Creative Hous.,
88 N.Y.2d 347 (1996) ......................................................................................... 26
Newman v. Silver,
713 F.2d 14 (2d Cir. 1983) ..................................................................... 42, 43, 44
On the Level Enters., Inc. v. 49 E. Houston LLC,
964 N.Y.S.2d 85 (1st Dep’t 2013) ...................................................................... 31
Pennsylvania Public School Emps. Ret. Sys. v.
Morgan Stanley & Co.,
772 F.3d 111 (2d Cir. 2014) ....................................................................... 1, 7, 10
Pro Bono Invs., Inc. v. Gerry,
No. 03 Civ. 4347 (JGK), 2008 U.S. Dist. LEXIS 87450
(S.D.N.Y. Oct. 28, 2008) .............................................................................. 12, 13
Prop. Asset Mgmt., Inc. v. Chicago Title Ins. Co.,
173 F.3d 84 (2d Cir. 1999) ................................................................................. 10
Sargiss v. Magarelli,
12 N.Y.3d 527 (2009) ......................................................................................... 36
SEC v. Zandford,
535 U.S. 813 (2002) ............................................................................................ 33
Siegelman v. Cunard White Star, Ltd.,
221 F.2d 189 (2d Cir. 1955) ............................................................................... 42
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Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc.,
552 U.S. 148 (2008) ............................................................................................ 33
Swersky v. Dryer & Traub,
643 N.Y.S.2d 33 (1st Dep’t 1996) .......................................................... 30, 40, 41
Unisys Corp. v. Hercules, Inc.,
638 N.Y.S.2d 461 (1st Dep’t 1996) .................................................................... 31
United States v. Quintieri,
306 F.3d 1217 (2d Cir. 2002) ............................................................................... 8
United States v. Uccio,
940 F.2d 753 (2d Cir. 1991) ................................................................................. 8
Williams v. Sidley Austin Brown & Wood, L.L.P.,
832 N.Y.S.2d 9 (1st Dep’t 2007) ............................................................ 21, 22, 40
Yonkers Racing Corp. v. Catskill Regional Off-Track
Betting Corp.,
552 N.Y.S.2d 670 (2d Dep’t 1990) ....................................................................... 5
STATUTES, RULES AND REGULATIONS
15 U.S.C.
§78j(b) ................................................................................................................. 33
New York State Civil Practice Law and Rules
Rule 3014 ............................................................................................................ 30
Federal Rules of Civil Procedure
Rule 30(b)(6) ................................................................................................. 45, 47
Federal Rule of Evidence
Rule 406 ............................................................................................................ 4, 9
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17 C.F.R.
§240.10b-5 .................................................................................................... 32, 33
§240.10b-5(a) ..................................................................................................... 33
§240.10b-5(c) ...................................................................................................... 33
§240.10b-5(b)................................................................................................ 32, 33
§270.17a-9 ............................................................................................................ 4
SECONDARY AUTHORITIES
60A N.Y. Jur. 2d Fraud and Deceit (2014)
§124 ..................................................................................................................... 25
§188 ..................................................................................................................... 25
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I. ARGUMENT
A. The Record Contains Ample Evidence Raising a Triable
Issue of Fact as to the Assignment of Tort Claims When
DAF Sold the Entirety of the Impaired Rated Notes to
Dresdner for Their Full Face Value
Plaintiff-Appellant Commerzbank’s Opening Brief demonstrated that on the
record below there exists at least a triable issue of fact as to Commerzbank’s standing
to sue on fraud claims associated with the Rated Notes.
New York authorities make it clear that “magic” words of assignment are not
required, particularly when the transfer is an unqualified, entire interest – precisely the
sort of transfer that took place between DAF and Dresdner. Here, a valid assignment
of claims associated with the Rated Notes is bolstered by several declarations that the
Second Circuit Court of Appeals held: (i) were erroneously ignored by the district
court; and (ii) should be considered because they provide a “significantly more
thorough” exposition of the Rated Notes’ transfer. Pennsylvania Public School Emps.
Ret. Sys. v. Morgan Stanley & Co., 772 F.3d 111, 122-23 (2d Cir. 2014); see also id.
at 122 (district court “should . . . have considered the new evidence proffered in the
motion for reconsideration and ratification”).1
1 Throughout this Brief, emphasis will be added and citations omitted unless
otherwise noted.
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Defendants respond with a blunderbuss attack on the record facts and
Commerzbank’s reasonable interpretation of the relevant law. They insist that the
only evidence of the transfer of the Rated Notes between DAF and Dresdner should be
confined to a single-page letter that, in truth, merely acknowledged the actual
agreement reached some time earlier. Because that document comprises a
(purportedly) unambiguous “contract,” Defendants say, any additional evidence of the
parties’ intent and agreement – specifically, the same declarations that the Second
Circuit found relevant – cannot be considered by this Court. And they insist that the
relevant law here has been settled for some 100-plus years, and that ruling in
Commerzbank’s favor would require an unwarranted repudiation of that law.
Each of Defendants’ contentions is wrong, as the following sections
demonstrate. The Court should answer the first Certified Question in the affirmative.
1. As a Threshold Matter, Defendants’ Entire “No-
Assignment” Argument Is Based Upon a False
Premise that Elevates a Simple Confirmation Letter
to a Purported “Contract” Between DAF and
Dresdner
Defendants devote the bulk of their brief to what they have labeled the
“Purchase Letter” (reproduced at A419), treating it as the sole “contract” between
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DAF and Dresdner for the Rated Notes.2 That (false) premise then feeds into
Defendants’ attacks on the additional evidence submitted below – evidence that the
Second Circuit held must be considered – while arguing that the Letter/“contract” is
unambiguous as a matter of law.
But the Letter is demonstrably not the contractual document that Defendants
make it out to be. Notably, it contains only the signatures of one side to the agreement
– that of a Dresdner Managing Director, and Dresdner’s Senior Counsel Christopher
Williams – and nothing to indicate DAF’s agreement; it thus lacks the necessary
manifestation of “mutual assent” central to any contract. Cf. Express Indus. &
Terminal Corp. v. New York State DOT, 93 N.Y.2d 584, 589 (1999) (“To create a
binding contract, there must be a manifestation of mutual assent sufficiently definite
to assure that the parties are truly in agreement with respect to all material terms.”).
That glaring omission is, on its own, sufficient to disqualify the Letter from being a
contract.
In addition, the Letter is dated “October 8, 2007,” which is four days after the
October 4, 2007 meeting of DAF’s Board of Trustees at which (according to the
2 Defendants also hint, darkly, that Plaintiff tried to “avoid[]” the Letter because
of some unspoken realization that the Letter forecloses any of Plaintiff’s assignment
arguments. Answering Bf. at 27-28. Nothing could be farther from the truth: Plaintiff
never regarded the Letter as the operative transferring document.
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Letter) the Board decided that DAF would have to “dispose of” the Rated Notes; its
post hoc creation is also confirmed by the fact that the Letter states it is “to confirm”
that Dresdner had “agreed to purchase” the Rated Notes for cash. A419. Far from
being a contract, the Letter merely documents Dresdner’s compliance with Rule 17a-9
of the Investment Company Act of 1940. 17 C.F.R. §270.17a-9.
Finally, Dresdner’s Senior Counsel Christopher Williams has since averred that
it was not DAF’s business practice to utilize formal purchase and sale agreements
when buying or selling securities. See A423:¶5 (“[i]t was not the business practice of
DAF in purchasing and selling securities to enter into purchase and sale . . .
agreements”). That averment, contained in Mr. Williams’s sworn declaration and
uncontradicted by Defendants or any other record materials, comprises admissible
evidence that this Court should consider while contemplating the Letter’s status as a
supposed contract. See Fed. R. Evid. 406 (habit-and-routine-practice evidence is
admissible to establish that “on a particular occasion the . . . organization acted in
compliance with the habit or routine practice”).
The foregoing, coupled with the lack of necessary signatures and indications of
mutual assent, make it clear that the Letter is not the contract that Defendants say it is.
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2. Even Indulging Defendants’ Insistence that the Letter
Is the Relevant “Contract,” Its Ambiguity Allows
Consideration of Additional Evidence Raising a
Triable Issue of Fact as to a Valid Assignment
It is axiomatic that the “fundamental rule in the construction of all agreements
is to ascertain the substantial intent of the parties.” M. O’Neil Supply Co. v.
Petroleum Heat & Power Co., 280 N.Y. 50, 55 (1939). It is equally axiomatic that if
“any doubt arises from the writing itself, the court must look into the intention of the
parties to be derived not alone from the words used but it must be read, so far as they
may be ambiguous, in the light of the surrounding facts and circumstances.” Id. at 56;
see also Yonkers Racing Corp. v. Catskill Regional Off-Track Betting Corp., 552
N.Y.S.2d 670, 675 (2d Dep’t 1990) (holding contract’s relevant paragraph
“sufficiently ambiguous to require that extrinsic evidence be considered in order to
ascertain the intention of the parties”).
Even assuming, arguendo, that the Letter does comprise the four corners of the
contractual agreement between DAF and Dresdner for the sale and purchase of the
Rated Notes, it is sufficiently ambiguous on the assignment issue that this Court may
look to the “surrounding facts and circumstances.” O’Neil Supply, 280 N.Y. at 56.
Indeed, the Letter’s ambiguity is apparent on its face.
First, as noted supra, there is no signature by one of the two parties to the $121-
plus million transaction – which signature reasonable observers would expect to see,
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indicating DAF’s assent with the remainder of the document’s recitations. Cf. Express
Indus., 93 N.Y.2d at 589 (binding contract requires “manifestation of mutual assent
sufficiently definite to assure that the parties are truly in agreement with respect to all
material terms”). Instead, the document is an unremarkable acknowledgment by
Dresdner that it earlier had agreed to purchase the impaired Rated Notes “on or before
2:00 p.m.” the following afternoon. A419.
Moreover, “[t]here is no way to tell from the face of the document how the
parties intended” to deal with any associated tort claims. Express Indus., 93 N.Y.2d at
590. There is no evidence in the Letter (or anywhere else in the record) of any
qualification by either side associated with the Rated Notes’ sale: e.g., whether DAF
intended to keep any associated claims for itself (and Dresdner’s assent to that intent).
Cf. Int’l Design Concepts, LLC v. Saks, Inc., 486 F. Supp. 2d 229, 236 (S.D.N.Y.
2007) (a transfer “‘unless in some way qualified’” is “‘properly the transfer of one
whole interest’” in the thing transferred). Defendants argue that this lack of recitation
on the point is fatal, but that argument runs headlong into the reality that no
“particular words” were required for a valid assignment (Leon v. Martinez, 84 N.Y.2d
83, 88 (1994)), especially when the transfer was of the entire interest in the Rated
Notes.
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Given the Letter’s facial ambiguity, the Court may look to surrounding facts
and circumstances – the bulk of which are contained within the Shlissel and Williams
declarations, describing the parties’ intent at the time, as well as the usual course of
business at DAF when buying and selling securities. A421-A438.
Defendants belittle those declarations as incompetent, lacking personal
knowledge, and ultimately inadmissible, and urge this Court to decline to consider
them. Answering Bf. at 36-40. Defendants are incorrect, however, for several
reasons.
First, Defendants overlook that the declarations have already been deemed
relevant to the first Certified Question by the federal court that retains jurisdiction
over this matter. Prior to submitting its Certified Questions to this Court, the Second
Circuit Court of Appeals expressly ruled that the two declarations were relevant to the
“assignment” question, and that the district court erred in refusing to consider them.
Pennsylvania Public School, 772 F.3d at 122 (district court “should . . . have
considered the new evidence proffered in the motion for reconsideration and
ratification”); see also id. at 123 (“[t]he Williams and Shlissel declarations . . . are
significantly more thorough with respect to the issue of transfer” of the Rated Notes).
Those rulings concerning the declarations thus comprise the “law of the case” in the
federal courts – both in the Second Circuit, as well as in the district court should the
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matter be remanded – and they must be heeded. See, e.g., United States v. Quintieri,
306 F.3d 1217, 1229 (2d Cir. 2002) (law-of-the-case doctrine “dictates what issues
may be raised in the district court and on any subsequent appeal”); see also id. (“law
of the case ordinarily ‘forecloses relitigation of issues expressly or impliedly decided
by the appellate court’”); see also United States v. Uccio, 940 F.2d 753, 757 (2d Cir.
1991) (under the law-of-the-case doctrine “the trial court is barred from reconsidering
or modifying any of its prior decisions that have been ruled on by the court of
appeals”).
Moreover, Defendants’ criticisms of the two declarants’ knowledge and their
declarations’ admissibility are unfounded. As Commerzbank’s Opening Brief
explained, at the time of the Rated Notes’ transfer between DAF and Dresdner, both
Shlissel and Williams held high-level positions in those two entities – respectively,
DAF’s President/Chief Executive Officer and Dresdner’s Senior Counsel – and as
highly placed corporate representatives certainly were in positions to aver as to the
parties’ understanding and belief at the time. Opening Bf. at 36-38.
With their insistence on averments of actual “participat[ion] in the transfer”
(Answering Bf. at 37), Defendants imply that the declarants had to have sat at the
negotiating table as the deal was hammered out – but the law is otherwise:
“[e]vidence of . . . an organization’s routine practice may be admitted to prove that on
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a particular occasion the person or organization acted in accordance with the habit or
routine practice.” Fed. R. Evid. 406 (“Habit; Routine Practice”). That evidence may
be admitted “regardless of whether it is corroborated or whether there was an
eyewitness.” Id. Thus, Williams’s averment of DAF’s contractual practices at the
time must be heeded. So, too, must his related averment that “it was the
understanding of DAF and its employees . . . that when buying or selling securities,
they were buying and selling the securities and all rights appurtenant to such
securities.” A423:¶5.
The futility of Defendants’ attempt to undercut the declarations is starkly
illustrated by one particular record fact: Mr. Williams, whom they argue had to have
participated in the Rated Notes transfer in order to say anything about it, is one of the
two Dresdner signatories to the Letter! A419. Thus, Defendants have hoisted
themselves on their own petard: the very document that they insist is the only
contractual agreement worth viewing by this Court also contains the signature of the
same individual whose sworn declaration they attack. Defendants cannot have it both
ways.
Finally, Defendants’ charge that the two declarations are “self-serving,” “late-
filed” vehicles for Commerzbank’s “gamesmanship” (Answering Bf. at 32-33 & 39-
40) is simply untrue. Commerzbank argued (and the Second Circuit agreed) that the
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declarations were properly submitted when they were because the district court had
improperly limited all 15 plaintiffs to a single, three-page “reliance” declaration, then
used it to decide Commerzbank’s standing to pursue the DAF tort claims.
Pennsylvania Public School, 772 F.3d at 122 (“There was no indication that the
separate issue of a transfer of rights, or standing, might arise from, much less be
dependent on, that declaration.”). As a result of Commerzbank having been put into
“an impossible position by the district court,” explained the Second Circuit, the court
then should “have considered the new evidence proffered in the motion for
reconsideration and ratification.” Id.3
3 On a related note, Defendants’ reliance on the Second Circuit’s criticism of an
unrecorded assignment in Property Asset Management makes no sense given the
record here. Answering Bf. at 40 (quoting Prop. Asset Mgmt., Inc. v. Chicago Title
Ins. Co., 173 F.3d 84, 87 (2d Cir. 1999)). There, the court acknowledged that words
or acts manifesting an assignment could suffice, but that the retroactive manifestation
of intent in that case was especially problematic because the “‘putative assignor and
assignee are sister corporations.”’ Id. Such after-the-fact expressions of intent could
thus be used to “permit the unfair manipulation of contract rights.” Id. Those
concerns are absent here: AGIMAT and Commerzbank are not “sister corporations,”
and Shlissel is not a Commerzbank officer. There thus existed zero incentive for
AGIMAT to try to “game” the system with its August 2012 ratification of Plaintiff’s
rights to pursue the Notes-related claims, as well as for Shlissel to step forward with
his detailed declaration. Defendants’ “gamesmanship” insinuation fails.
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3. Defendants’ Insistence that the Sale of a Note Never
Includes Related Tort Claims Unless Explicitly
Spelled Out Both Discounts Relevant Law and
Misapprehends Other Authorities that They Claim
Represent 100 Years of Settled Jurisprudence
Defendants insist that the “language” of the purported “transfer document”
controls (Answering Bf. at 27), allowing them to then argue that because the Letter
never mentions an explicit assignment of tort claims, nothing more than the contract
rights to the Rated Notes themselves was transferred. Id. at 28-29.
Defendants’ text-based argument fails on two levels.
First, as shown immediately supra, the Letter is decidedly not the document
whose language controls here. Defendants’ text-based argument simply piles a second
false premise onto the first demonstrably false one.
Second, Defendants’ argument discounts the vast body of applicable law
holding that valid assignments may be created despite a lack of relevant language.
Gingold v. State Farm Ins. Co., 642 N.Y.S.2d 812, 814 (Civ. Ct. 1996) (“the fact that
the document in question fails to contain the word ‘assignment’ is of no
consequence”). “No particular words are necessary to effect an assignment; it is only
required that there be a perfected transaction between the assignor and assignee,
intended by those parties to vest in the assignee a present right in the things assigned.”
Leon, 84 N.Y.2d at 88; accord Brandoff v. Empire Blue Cross & Blue Shield, 707
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N.Y.S.2d 291, 293 (Civ. Ct. 1999); Int’l Design, 486 F. Supp. 2d at 237 (applying
New York law). Thus, the sale of the entirety of the Rated Notes was “broad enough
to encompass all causes of action owned by” DAF before the sale. Int’l Design, 486
F. Supp. 2d at 237; accord Banque Arabe Et Internationale D’Investissement v.
Maryland Nat’l Bank, 57 F.3d 146, 151 (2d Cir. 1995) (“New York law does not
require specific boilerplate language to accomplish the transfer of causes of action
sounding in tort.”).
Defendants try to distinguish cases like Int’l Design, Banque Arabe, and Pro
Bono Invs., Inc. v. Gerry, No. 03 Civ. 4347 (JGK), 2008 U.S. Dist. LEXIS 87450
(S.D.N.Y. Oct. 28, 2008) – each of which allowed the transfer of tort claims despite
their assignments not mentioning that possibility – by asserting that each assignment
contained “specific language” driving that conclusion. Answering Bf. at 22. The
three decisions, say Defendants, thus “underscore that an assignment does not
encompass tort claims absent express words to the contrary.” Id. at 23.
The three cases do no such thing, and actually support Commerzbank’s position
here. Although Commerzbank’s Opening Brief describes them in more detail
(Opening Bf. at 40-44), for purposes of this Brief’s rejoinder to Defendants’ “express
words” argument, it should suffice to point out the following:
Int’l Design held that the assignment of “‘all assets of [Apparel Group]’”
was “broad enough to encompass all causes of action owned by [Apparel
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Group]” (486 F. Supp. 2d at 237), while also pointing out that it was
proper to consider “the surrounding circumstances” in addition to that
language. Id.
Pro Bono held that the unqualified assignment of “‘all assets’” meant
that the assignment included “all claims, causes of action, and lawsuits
belonging to” the assignor: “It would make no sense for all of the
physical assets to have been transferred out of Bishop & Co to Pro
Bono, LLC but to have left the right to bring claims and causes of action
relating to those assets in Bishop & Co. without any language suggesting
that there was such a reservation.” 2008 U.S. Dist. LEXIS 87450, at
*27-*28.
Banque Arabe construed the transfer of “‘all of [BAII’s] rights, title and
interest’” in both a “Participation Agreement” and a certain loan “to be
broader than an interest in the contract,” overturning the district court’s
conclusion that the language “did not reflect a clear intention to
transfer . . . any tort claims arising out of either” the loan or Participation
Agreement. 57 F.3d at 152.
Here, the unqualified sale of the entirety of the Rated Notes by DAF to Dresdner was,
by necessity, all the assets that the Rated Notes comprised; the case law thus remains
supportive of Commerzbank’s position.
Hearkening to the “seminal case” of Fox v. Hirschfeld, 142 N.Y.S. 261 (1st
Dep’t 1913), Defendants say that it has been the law in New York “for at least one
hundred years that the assignment of contractual rights does not automatically transfer
tort claims.” Answering Bf. at 19. Defendants bookend that premise with this Court’s
decision 15 years ago in Cal. Pub. Emps. Ret. Sys. v. Shearman & Sterling
(“CalPERS”), 95 N.Y.2d 427 (2000), asserting that CalPERS endorsed Fox’s rule and
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rejected the purported assignment of certain tort claims despite the “unqualified
transfer of a whole interest in a promissory note from one party to another.”
Answering Bf. at 21. According to Defendants, this Court held that language “which
purported to transfer ‘all’ of the assignor’s ‘right, title and interest in, to and under the
[loan] documents’” was nonetheless insufficient to transfer the certain tort claims. Id.
Defendants are mistaken in their reliance on both decisions, and couch that
reliance in a false premise to boot.
First, Commerzbank is not asking this Court to rule that the assignment of
contract rights “automatically” transfers tort claims. Instead, Commerzbank asks this
Court to acknowledge and apply the related axioms that: (i) the unqualified transfer of
an entire interest in a thing – whether property, contract, or Rated Note – is broad
enough to encompass all causes of action (and potential causes of action) associated
with that thing and formerly owned by the assignor; and (ii) that both the words and
actions surrounding the transfer help inform the parameters of the assignment. Those
axioms, along with the declarations here providing unrefuted evidence of the parties’
intentions and regular business practices, combine to create a triable issue of fact as to
the assignment.
Defendants contort Fox and CalPERS to fit their narrative, too – but contortions
are no substitute for reasoned analysis. As Commerzbank’s Opening Brief noted, later
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decisions have acknowledged the continuing viability of Fox – but nonetheless
allowed the assignment of non-specified tort claims because it was apparent from both
the unqualified transfer language of entire interests, as well as “‘surrounding
circumstances,’” that the tort assignments had been accomplished. Opening Bf. at 46
n.32. Fox is correctly viewed through the main rationale driving the decision there:
i.e., that the assignment’s plain language on its face was limited and qualifying. See
142 N.Y.S. at 262. There is no such limiting language in the record here, however –
instead, a somewhat ambiguous post-agreement Letter, along with strong record
materials (that the Second Circuit held should have been considered), supporting the
conclusion that the Rated Notes transaction was understood by both parties to carry
with it all rights, claims, and obligations associated with the Rated Notes. See A421-
A438.
This Court’s CalPERS decision may represent to Defendants a continuum of the
blanket rule that they claim Fox represents, but actually it supports Commerzbank’s
position here: i.e., where there exists specific language of assignment, that language
controls; in its absence, however, it is entirely proper to consider the surrounding acts
and circumstances to ascertain the parties’ intent.
In CalPERS, this Court rejected assignee CalPERS’s attempt to sue a third-
party law firm (“Shearman”) for legal malpractice and breach of contract in
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connection with Shearman’s botched preparation of loan documents for a $23.2
million long-term commercial loan and promissory note that CalPERS had been
assigned by the original lender. 95 N.Y.2d 427. Due to Shearman’s error, the
promissory note provided for an acceleration penalty of only $1.1 million, instead of
the $9.1 million that both CalPERS and its assignor had expected; neither noticed the
change. Id. at 432. When the loan recipient subsequently defaulted, CalPERS
received only $1.1 million under the acceleration clause. Id. CalPERS then sued
Shearman.
In rejecting CalPERS’s attempt to use the “Omnibus Assignment” to sue
Shearman for malpractice, this Court focused on the instrument’s express language:
“The instrument purported to assign all of [the assignor’s] ‘right, title and interest in,
to and under the [loan] documents’ to CalPERS.” Id. at 432.4 That language,
reasoned this Court, referred only to “rights and interests under the loan documents
(including the promissory note),” and not the “overall loan transaction” penned by
4 The “Omnibus Assignment” is the relevant one in CalPERS; there was a second
attempted assignment pursuant to a “Settlement Agreement” between CalPERS and
the assignor, but this Court rejected the second assignment on the ground that by that
time, the assignor had already assigned the note to CalPERS under the Omnibus
Assignment, and so “no longer had any rights to, or under, the note.” 95 N.Y.2d at
436.
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Shearman. Id. at 435 (citing Banque Arabe, 57 F.3d at 152).5 Thus, while the
assignment “transferred every right of action” the assignor had against the defaulting
party, the alleged claim against Shearman “does not arise from the note itself or from
the loan documents,” but rather “is premised on the firm’s failure to prepare loan
documents for [the assignor] that complied with” previously understood terms. Id. at
435-36.
That unsurprising holding thus bolsters Commerzbank’s position here, where –
despite Defendants’ wrong-headed insistence that the October 8, 2007 Letter is the
only relevant “contract” relating to the Rated Notes – there is no plain text spelling out
the parameters of what was transferred to Dresdner from DAF. In that event, it is
proper to consider the surrounding circumstances and parties’ actions to ascertain the
assignment’s boundaries. See, e.g., Banque Arabe, 57 F.3d at 151-52 (under New
York law, “‘any act or words . . . which “show an intention of transferring the chose
in action to the assignee’”” are sufficient “to accomplish the transfer of causes of
action sounding in tort”); Int’l Design, 486 F. Supp. 2d at 236 (“whether tort claims
are encompassed within the assignment is a matter of contract interpretation”). When
5 This Court’s nod to Banque Arabe reaffirms the fact that the language of
assignment – if it exists, and is clear enough – controls. Cf. Banque Arabe, 57 F.3d at
152 (“language in the Assignment alone is sufficient to demonstrate BAII’s intent to
transfer all of their rescission and fraud claims”).
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undertaken here, that exercise demonstrates – well above a triable issue of fact – that
the parties intended and understood that the Rated Notes’ sale at full price transferred
all associated rights and interests. Supra §I.A.2.6
4. Defendants’ Policy Musings Are No Substitute for the
Application of Law to the Record Facts
Defendants urge this Court not to “change” what they say is settled New York
law, advancing a slew of policy-laden reasons they say justifies ignoring the many
decisions supporting a valid assignment here. Answering Bf. at 24-27. Those policy
concerns should not sway this Court.
First, as Commerzbank has already demonstrated supra and in its Opening
Brief, the ostensibly “settled” jurisprudence concerning assignments is, upon closer
scrutiny, a series of broad concepts into which discrete facts must be fitted and
analyzed. Decisions like CalPERS favored by Defendants do not foreclose finding a
valid assignment here; in fact, they actually counsel in favor of it. Supra §I.A.3.
6 Defendants argue that no intention to transfer tort claims can be inferred from
the Rated Notes’ purchase at par because that price was a “legal requirement.”
Answering Bf. at 34. That is only partly true: While Dresdner would have to purchase
them at par if it did, the initial decision to purchase the Rated Notes was not required.
In other words, it is Dresdner’s initial decision even to buy the impaired Rated Notes
that shows – or at least raises a triable issue of fact – that it knew it was paying full
price for devalued securities and all the rights and claims that would be expected to go
along with them. Defendants’ musings about why else Dresdner might have wanted
to buy them (Answering Bf. at 34-35) are just that – idle speculation.
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Second, Defendants’ remaining, scattered policy concerns are each easily
dispatched. They say, for example, that tort defendants need to be able “to ascertain
who holds a potential claim against them” (Answering Bf. at 26) and, relatedly, that a
ruling in Commerzbank’s favor would violate “settled expectations of all commercial
parties” as to “which party owns a tort claim.” Id. at 24. That chimerical fear finds
little grounding in reality, however. Commerzbank is not advocating unlimited
exposure for potential fraudsters; rather, Commerzbank seeks only the ability to
pursue the tort rights that the original Rated Notes purchaser relinquished when it sold
the entire bundle of them to Dresdner. Moreover, Defendants’ fear of upsetting
“settled expectations” and confusing defendants is illogical: Just how would a third-
party defendant even know what had been assigned between other parties in a private
agreement? The assignor/assignee parties would know, of course, and thus even
under Commerzbank’s view of the law their settled expectations are not upset.
Defendants’ assertion that “it makes little sense to construe a grant of
contractual rights as encompassing tort claims” (Answering Bf. at 25; accord id. at
27) merely rehashes an underlying (and discredited) premise affecting their entire
brief – namely, that assignments require specific words in order to be valid.
Assignments do not, especially when the transfer of an entire interest is unqualified.
See, e.g., Int’l Design, 486 F. Supp. 2d at 236-37 (unqualified transfer of property is
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“‘properly the transfer of one whole interest’” in the thing transferred, and is “broad
enough to encompass all causes of action owned by” the transferor).
Defendants also insist that the principles of law at issue are sufficiently clear so
that this Court’s “intervention” is not warranted. Answering Bf. at 25. But that rose-
colored view of the law is belied by the parties’ extensive disagreement on just what
the cases hold and their rationales, as well as by this Court’s having agreed to accept
the Certified Questions from the Second Circuit in the first place.
Finally, Defendants overstate Commerzbank’s position when they imply that
Commerzbank is urging a “default” rule (Answering Bf. at 25) under which tort
claims are “automatically assigned along with a transfer of contract rights.” Id. at 27.7
Commerzbank advocates no such blanket rule, nor is it urging this Court to
undo over 100 years of purportedly settled “assignment” jurisprudence. Rather, it
simply asks this Court – just as the Second Circuit did – to consider whether the
summary judgment record here, with its unique pieces of evidence and concomitant
7 Defendants also suggest that Commerzbank’s “only attempted justification” for
the assignment’s validity is that no other party is now available to bring the claim.
Answering Bf. at 26. That is untrue: Throughout the district court litigation, and now
before this Court, Commerzbank has steadfastly argued that New York assignment
law is broad enough, and the facts in this case compelling enough, to find a valid
assignment with the transfer of the entirety of DAF’s Rated Notes to Dresdner.
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nuances, raises at least a triable issue of fact as to a valid assignment of tort claims
when DAF sold its entire interest in the Rated Notes to Dresdner.
B. There Exists a Triable Issue of Fact as to Morgan Stanley’s
Liability Under New York Fraud Law
Commerzbank’s Opening Brief explained how Morgan Stanley is liable for the
fraudulent ratings and related materials used to sell the Rated Notes despite avoiding
outright attribution or named responsibility for the ratings themselves. Opening Bf. at
52-69. The argument utilizes several tenets of New York fraud law allowing liability
even without an attributed misstatement linked to a specific speaking actor – namely,
that a defendant also may be liable for fraud if it: (i) “‘authorizes,’ or ‘causes’ a
misrepresentation to be made” (e.g., Allstate Ins. Co. v. Countrywide Fin. Corp., 824
F. Supp. 2d 1164, 1186 (C.D. Cal. 2011) (applying New York law); accord Metro.
Life Ins. Co. v. Morgan Stanley, No. 651360/2012, 2013 N.Y. Misc. LEXIS 3056, at
*34 (N.Y. Sup. Ct. July 8, 2013)); (ii) knowingly participates in a scheme to defraud
(e.g., CPC Int’l Inc. v. McKesson Corp., 70 N.Y.2d 268, 286 (1987)); or (iii) omits to
disclose material (albeit not readily available) facts to others whom it knows will then
act on the basis of that mistaken knowledge. See, e.g., Williams v. Sidley Austin
Brown & Wood, L.L.P., 832 N.Y.S.2d 9, 11 (1st Dep’t 2007).
Defendants attack each of these three avenues of liability but, as is explained
below, their attacks are misguided and ultimately fail.
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1. Defendants’ Slavish Focus on the Singular “Making”
of a Misstatement to a Fraud Victim Misses the Mark
Defendants try to distinguish the broader fraud liability identified in Allstate
and Metropolitan Life by claiming that, in both cases, the plaintiffs had alleged that
“the defendants themselves made false statements about the investments at issue.”
Answering Bf. at 51 (emphasis in original). Thus, argue Defendants, the two
decisions offer no solace to Commerzbank and actually are consistent with authority
holding that “only the maker of a misstatement may be liable for fraud.” Id.
Defendants misread the two decisions.
In support of their “only-the-maker” premise Defendants cite Allstate, 824 F.
Supp. 2d at 1184, but that particular page merely lists “eight categories of statements”
that were allegedly material and false. Id. Later in the opinion, in a section entitled
“Who Made the Representations?” the Allstate court first makes clear that the
misstatements had appeared in offering documents “put out by the [four] Depositor
Defendants”; thus, “[t]here is no doubt that the Depositor Defendants ‘made’ the
representations” and may be held primarily liable. Id. at 1186.8
8 Morgan Stanley is equivalent to the Depositor Defendants, in any event: it put
together the offering documents used to sell the impaired Rated Notes, manipulated
the modeling process to end up with the ratings that it desired, and ensured that the
misleading documents containing the fraudulent ratings got into the hands of innocent
investors who would rely upon them. See Opening Bf., §IV.A.4
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It was a second group of non-speaking defendants, however, that the Allstate
court deemed could also be held primarily liable under New York’s “more lenient”
fraud standard: three “Countrywide entities” that “‘authorized’ or ‘caused’ the
representations” in the offering documents “by virtue of their control over the
Depositor Defendants.” Id. Plainly, the second set of defendants never “made” a
misstatement in the traditional manner (despite Defendants’ contrary suggestion), but
could be primarily liable for fraud nonetheless – just like Morgan Stanley here.
Similarly, in Metropolitan Life, the New York state court addressed attributed
misstatements versus “causing” them to be made. Defendant Morgan Stanley,
combating fraud allegations over its role in selling nine RMBS offerings that MetLife
had purchased, tried to distance itself from six of the nine by arguing that it “acted
only as underwriter” in those six – claiming that role meant it lacked “sufficient
control over the statements” in them. Metro. Life, 2013 N.Y. Misc. LEXIS 3056, at
*33. (For the remaining three of the nine, Morgan Stanley entities had acted as
“sponsor” and/or “depositor,” as well. Id. at *4-*5. Presumably the non-control
argument would have been facially invalid for those three.)
Morgan Stanley’s attempt to disavow attribution failed to sway the
Metropolitan Life court. It held that “Morgan Stanley may be held liable for drafting
and distributing statements they knew to be false, regardless of who they credit as the
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source of the information.” Id. at *34. Morgan Stanley could also be held liable “for
acting as an insider with respect to the alleged fraudulent scheme.” Id. at *35. And
Morgan Stanley could be liable yet again “for promoting” certificates based on credit-
rating agencies’ inflated ratings “if, as alleged, they knew the ratings were based on
false information” and they “pressur[ed] and manipulat[ed] the agencies into using
outdated ratings models.” Id. Clearly, the Metropolitan Life decision did not turn on
whether Morgan Stanley was the “maker” of the misstatements, as Defendants now
claim. Cf. Answering Bf. at 51.
Defendants also attack Allstate (and Metropolitan Life, by extension) for citing
a New York treatise in support of their holdings, but their disapproval is much ado
about nothing. Id. at 51-52. Defendants chide the Allstate court for using the
disjunctive “or” instead of the treatise’s conjunctive “and” when explaining that “‘[a]
party may be liable under New York state law if it “makes,” “authorizes,” or “causes”
a misrepresentation to be made.’” Id. at 51 (quoting Allstate, 824 F. Supp. 2d at
1186). But any difference between a disjunctive versus conjunctive treatment of
“authorize” and “cause” appears inconsequential on the record facts here, where
Morgan Stanley did both: It not only arranged and placed the (falsely rated) Rated
Notes and disseminated the offering documents used to sell them, but talked up the
false ratings before they were issued, and deliberately insinuated itself into the ratings
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process by “pressur[ing]” the Rating Agencies to issue ratings “it did not believe”
were accurate, “manipulated the Cheyne SIV modeling process to create the ratings it
desired,” and actually authored one rating report while revising another. See Opening
Bf., §IV.A.4 (emphasis in original).9
Defendants do concede that under New York law, primary fraud liability may
lie for actors who use intermediaries to distribute misleading information to third
parties. Answering Bf. at 52. That concession is relevant, for what Morgan Stanley
did here – forcing the Rating Agencies to issue ratings that all of the Defendants knew
were false, and then gathering those false ratings into offering documents that Morgan
Stanley distributed to hapless investors – is even worse.10
9 Defendants say that Allstate and Commerzbank cited two different sections of
the same treatise, and that both sections discuss fraud liability only for a party either
making a misrepresentation, or authorizing and causing it to be made. Answering Bf.
at 51-52 (citing, respectively, 60A N.Y. Jur. 2d Fraud and Deceit §188 (2014) and
60A N.Y. Jur. 2d Fraud and Deceit §124 (2014)). It appears that Allstate contains a
typo, however, for on the LEXIS website §188 of that volume actually is entitled
“Effect of profitability of transaction,” and contains none of the language cited by
Allstate (or Commerzbank, for that matter). The section-number typo is ultimately of
no moment; as explained infra, the record facts support liability for Morgan Stanley’s
having authorized and caused the misleading ratings to be distributed to investors.
10 A simple hypothetical demonstrates the absurdity of relegating Morgan
Stanley’s heavy-handed influence on the false ratings to mere aiding and abetting.
Suppose that Morgan Stanley knowingly provided false information to innocent
Rating Agencies, who then issued false ratings for the multi-billion-dollar products
marketed by Morgan Stanley. The duped Rating Agencies would be innocent of
fraud, of course – but without the primary fraud violation, perforce Morgan Stanley
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In trying to excuse Morgan Stanley’s role here, Defendants rely heavily upon
both the Mateo and Eurycleia decisions, in which the Appellate Division’s First
Department ruled against plaintiffs seeking to hold third parties primarily liable for
misstatements expressly attributed to others. Answering Bf. at 44-46 (citing Mateo v.
Senterfitt, 918 N.Y.S.2d 438 (1st Dep’t 2011); Eurycleia Partners, LP v. Seward &
Kissel, LLP, 849 N.Y.S.2d 510 (1st Dep’t 2007)). Against the backdrop of those
holdings, Defendants accuse Commerzbank of attempting to limit the two cases “to
their facts” in its Opening Brief (Answering Bf. at 46) – as if that limitation were
somehow nefarious or improper.
But the two holdings do turn on facts unique to both cases, and it is beyond
cavil that different facts often yield different results. See, e.g., Doomes v. Best Transit
Corp., 17 N.Y.3d 594, 604-05 (2011) (rejecting party’s position utilizing “an overly
expansive reading” of a particular case: “Geier’s holding, which is limited to its
particular facts and regulations, should not be applied to any case” positing different
set of relevant facts); see also Mount Vernon Fire Ins. Co. v. Creative Hous., 88
N.Y.2d 347, 352 (1996) (“Insofar as our decisions in [two earlier decisions] cannot be
would also be innocent of any aiding-and-abetting claim. Injured purchasers would
find themselves without any recourse.
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readily harmonized with [a third decision], those decisions should be limited to their
facts.”).
Upon closer scrutiny, both Mateo and Eurycleia are limited to the facts unique
to those decisions, and do not foreclose fraud liability here for Morgan Stanley under
any of Commerzbank’s several theories – i.e., (i) for having authorized and caused the
false ratings to be disseminated in offering documents aimed at innocent investors, (ii)
for a fraudulent scheme, or (iii) for fraudulent omissions.
To briefly recap: The Mateo plaintiffs attempted to hold a law firm responsible
for a fraud perpetrated by the law firm’s client, a one Henry Vargas, in selling an
interest in a real estate company that Vargas did not possess. But the Appellate
Division reversed the lower court’s denial of the law firm’s motion to dismiss, for a
panoply of reasons that distinguish Mateo from the situation here:
The fraud allegations “fail[] to state with particularity any knowing or
reckless misrepresentation of a material fact by [the law firm].” 918
N.Y.S.2d at 440.
The alleged misrepresentations concerning the company and Vargas’s
supposed interest in it either (i) were attributable only to Vargas himself,
or (ii) were nonactionable statements of future intention. Id.
The plaintiffs failed to allege that the law firm reasonably should have
foreseen that a class of persons like the plaintiffs “would act in reliance
on the alleged misrepresentations.” Id.
The complaint failed to allege that the law firm “knew or should have
known . . . that Vargas’s representations were in fact false.” Id.
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The plaintiffs had been unable to allege that the law firm had caused
their losses; in fact, several events “constitute[d] superseding causes that
broke the chain of causation.” Id. at 441.
In contrast with these rationales, plaintiffs here alleged, and unearthed evidence
of: (i) Morgan Stanley’s fingerprints all over the fraudulent ratings, from creation to
their deliberate placement in the Rated Notes’ offering documents; (ii) Morgan
Stanley’s knowledge/intent that innocent investors would rely upon the false ratings in
purchasing the otherwise-unmarketable Rated Notes; and (iii) that the Rated Notes
purchasers suffered huge losses directly attributable to the fraudulent Rated Notes and
Morgan Stanley.11
The situation in Eurycleia was much the same as in Mateo: again, a plaintiff
sought to hold a law firm liable for its client’s misstatements – this time,
misstatements that the hedge-fund client had made in an offering memorandum
concerning the hedge fund’s supposed “investment strategy.” Eurycleia, 849
N.Y.S.2d at 512. Again, the Appellate Division rejected attempts to hold an outside
law firm liable for its client’s statements, citing several reasons that do not foreclose
liability here:
11 Commerzbank’s Opening Brief also points out that the Mateo panel focused
solely on the making of an attributed misstatement; it never considered additional
avenues of fraud liability that are available under New York law. Opening Bf. at 67.
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The plaintiffs were complaining “solely about the representations made
by the fund” about “its investment plans, its auditor, and the financial
documents” that it would later provide to investors. Id.
The offering document expressly disclaimed any relationship between
the law firm and the fund’s investment strategy: it specified that the law
firm’s legal advice to the fund “was solely related to the fund’s
formation and to tax law.” Id.
And the plaintiffs had failed to challenge “either the propriety of the
fund’s formation or the tax advice.” Id.
Again, that set of facts is a far cry from the situation at bar, where Morgan
Stanley did far more than merely prepare an offering memorandum containing a third
party’s statements. Instead, the record shows that Morgan Stanley was the grand
architect of the fraud, contacting potential investors and touting the ostensibly gold-
standard level of the as-yet-unreleased Rated Notes (A113-A115), then “pressur[ing]
the Rating Agencies to issue ratings it did not believe were accurate” (A132) while
“manipulat[ing] the Cheyne SIV modeling process to create the ratings it desired”
(A131), and arranging and placing the Rated Notes while distributing to investors the
necessary offering documents containing falsehoods. A48-A49.12
12 As Commerzbank’s Opening Brief noted, the Eurycleia panel’s reasoning never
reached additional potential boundaries of fraud liability under New York law.
Opening Bf. at 65-66. It never acknowledged that defendants also may be held liable
for fraud for either authorizing or causing fraudulent statements to be made. Allstate,
824 F. Supp. 2d at 1186; see also Opening Bf., §IV.A.4. (Morgan Stanley deeply
involved in the fraudulent ratings’ creation and dissemination). Nor did the Eurycleia
panel discuss whether the law firm might have potential liability for its participation in
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Defendants spill much ink arguing that Commerzbank cannot pursue claims of
both fraud and aiding-and-abetting fraud against each of them. Answering Bf. at 47-
48. They acknowledge that the “pleading” of alternative theories “might be allowed
under some circumstances,” but claim that the possibility evaporates in the context of
summary judgment. Id. at 47 (emphasis in original); see also id. at 48 (“[t]his circular
result defies reason and is not supported by New York law”).
Defendants are only half right.
It is certainly true that pleading in the alternative is allowed. “That plaintiff
might be ultimately precluded from recovering against each defendant under
[alternative] theories . . . does not preclude her from pleading both in the alternative.”
Haythe & Curley v. Harkins, 625 N.Y.S.2d 154, 155 (1st Dep’t 1995); see also N.Y.
CPLR 3014 (“Separate causes of action or defenses . . . may be stated regardless of
consistency. Causes of action or defenses may be stated alternatively or
hypothetically.”).
a fraudulent scheme, as argued against Morgan Stanley here. And while the Eurycleia
panel did discuss fraudulent omissions, it ruled against that possibility there – pointing
out that the law firm was not in a fiduciary relationship with the plaintiffs. 849
N.Y.S.2d at 512. That analysis did not go far enough, however, for the panel never
discussed whether the “special facts” exception to that requirement existed. Cf.
Swersky v. Dryer & Traub, 643 N.Y.S.2d 33, 37 (1st Dep’t 1996).
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But Defendants’ purported distinction between pleading and summary judgment
is illusory – at least as far as Commerzbank here, in the posture of a nonmovant
defending against summary judgment, is concerned. Because a summary judgment
motion is the “procedural equivalent of a trial, a litigant must elect among inconsistent
positions upon seeking expedited disposition.” Jones Lang Wootton USA v. LeBoeuf,
Lamb, Greene & MacRae, 674 N.Y.S.2d 280, 286 (1st Dep’t 1998); accord Unisys
Corp. v. Hercules, Inc., 638 N.Y.S.2d 461, 462 (1st Dep’t 1996). In other words, the
rule is qualified by the posture of the party seeking to advance an alternative theory: it
depends upon whether the party is seeking summary judgment, or – like
Commerzbank here – defending against a summary judgment motion. In the latter
case, the alternative remedies are allowed to remain in the case. See On the Level
Enters., Inc. v. 49 E. Houston LLC, 964 N.Y.S.2d 85, 86 (1st Dep’t 2013) (rule “does
not require a litigant to elect remedies when defending a motion for summary
judgment”).
This distinction makes eminent sense, as the inquiry at this stage is merely
whether the record facts have raised a triable issue of fact as to various theories of
liability for various defendants – whether those theories comprise outright fraud
accomplished via attributed misstatements, a fraudulent omission, a fraudulent
scheme, or the aiding and abetting of any of them. Defendants’ fears of a “looking-
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glass world” where the ultimate liability could result in a “circular result” (Answering
Bf. at 48) are overblown: depending upon what a jury decides at trial, liability may lie
for various defendants on various claims – but not for contradictory ones. See, e.g.,
Bd. of Educ. v. Farmingdale Classroom Teachers Ass’n, 38 N.Y.2d 397, 406 (1975)
(even in the modern system of alternative pleading, “double recoveries will not be
allowed”).
Seeking solace in federal securities law, Defendants argue that New York’s
definition of “fraud” is consistent with the federal approach – and that in the latter
regime, supposedly “only the maker of an alleged misstatement may be liable in a
private civil action for the misstatement.” Answering Bf. at 48-49 (citing Janus
Capital Grp., Inc. v. First Derivative Traders, ___ U.S. ___, 131 S. Ct. 2296 (2011)).
Everyone else, in Defendants’ reading of the law, is merely an aiding-and-abetting
secondary actor. Id. at 49-50.
Defendants’ reading of federal law is too cramped. While Janus assuredly dealt
with the “maker” of a misstatement under SEC Rule 10b-5, it was addressing only
subsection 10b-5(b), under which “it is unlawful for ‘any person, directly or
indirectly, . . . [t]o make any untrue statement of a material fact’ in connection with
the purchase or sale of securities.” Janus, 131 S. Ct. at 2301 (quoting 17 C.F.R.
§240.10b-5(b)). But Janus did not purport to address the remaining subsections of
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that Rule, which also make it unlawful for an actor to either (i) employ “any device,
scheme, or artifice to defraud,” or (ii) engage in “any act, practice, or course of
business” that would operate as a fraud or deceit upon any person in connection with
the purchase or sale of any security. 17 C.F.R. §240.10b-5(a) & (c). Indeed, the
Supreme Court in other decisions has noted that liability under the federal securities
laws and SEC rules also lies for misleading conduct beyond statements and omissions.
See, e.g., Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148, 158
(2008) (rejecting any reading of appellate court’s suggestion that only misleading
statements, omissions, or manipulative trading practices are actionable: “If this
conclusion were read to suggest there must be a specific oral or written statement
before there could be liability under §10(b) or Rule 10b-5, it would be erroneous.”);
see also id. (“[c]onduct itself can be deceptive”); see also SEC v. Zandford, 535 U.S.
813, 820 (2002) (addressing securities-fraud “scheme” liability while noting that
“neither the SEC nor this Court has ever held that there must be a misrepresentation
about the value of a particular security in order to run afoul of the Act”). Defendants’
reliance on Janus is thus misplaced.13
13 Defendants’ reliance on Janus is misplaced for another reason, as well.
According to Janus, “the maker of a statement [for purposes of Rule 10b-5(b)] is the
person or entity with ultimate authority over the statement, including its content and
whether and how to communicate it.” 131 S. Ct. at 2302. As shown above, Morgan
Stanley certainly had “ultimate authority” over the contents of the false offering
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2. Morgan Stanley’s Liability Under a Fraudulent
“Scheme” Theory Is Readily Apparent
Even without “making” a misstatement, Morgan Stanley faces liability for its
knowing participation in a scheme to defraud. See, e.g., CPC Int’l, 70 N.Y.2d at 286
(reinstating common-law fraud claims against Morgan Stanley and other defendants
where the complaint “describes a scheme – involving all the defendants – devised and
executed for the specific purpose of defrauding the prospective purchaser”); see also
Danna v. Malco Realty, Inc., 857 N.Y.S.2d 688, 689 (2d Dep’t 2008) (“[l]iability for
fraud may be premised on knowing participation in a scheme to defraud”); Kuo Feng
Corp. v. Ma, 669 N.Y.S.2d 575, 576 (1st Dep’t 1998) (“It is well established that
liability for fraud may be premised on knowing participation in a scheme to
defraud.”).
The record here amply shows knowing participation sufficient to support
scheme liability, illustrating how Morgan Stanley designed, structured, maintained,
and marketed the fraudulent Cheyne SIV to innocent investors. See Opening Bf. at
10-12 (describing evidence showing Morgan Stanley’s role in the fraudulent scheme);
id. at 30-31 (noting Morgan Stanley’s authorship of Moody’s ratings report, and
documents it drafted and disseminated to investors – including whether to include
within those documents the false ratings that Morgan Stanley solicited from the co-
defendant Rating Agencies.
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revision of S&P’s “Pre-Sale” report); see also A131 (district court finds that record
contains “evidence suggesting that despite misgivings, Morgan Stanley manipulated
the Cheyne SIV modeling process to create the ratings it desired”).
Despite the clarity of New York case law on the point, Defendants muddy the
analysis. They say that because Morgan Stanley “did not ‘utter a falsehood,’” it “thus
cannot be liable under a scheme theory.” Answering Bf. at 53. Seeking support for
that fantastic notion, Defendants partially quote this Court – insisting that scheme
liability “requires a showing that a ‘defendant knowingly uttered a falsehood
intending to deprive the plaintiff of a benefit,’” thereby deceiving and damaging the
plaintiff. Id. (quoting CPC Int’l, 70 N.Y.2d at 285). With that attempt to turn the
focus away from “scheme” and back to the actual “making” of a misstatement,
Defendants are twice wrong, however.
First, this Court never held that “scheme” liability “requires” a knowing
utterance. Rather, this Court acknowledged that to state a cause of action for
common-law fraud, “it is sufficient” for a plaintiff to allege that the defendant
knowingly uttered a falsehood. Id. There is a world of difference, however, between
“requir[ing]” something to be done before liability will attach, versus acknowledging
that to do something would be “sufficient.” The difference eludes Defendants, and so
undermines their argument.
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Second, besides overreaching, Defendants’ “utterance” argument is hopelessly
circular. If a material misstatement were required to establish “scheme” liability, that
alternative strain of fraud liability would be rendered superfluous. Thus, in the
absence of attributed misstatements, New York law also provides for “scheme”
liability. Cf. Danna, 857 N.Y.S.2d at 689; CPC Int’l, 70 N.Y.2d at 285; see also
Sargiss v. Magarelli, 12 N.Y.3d 527, 531 (2009) (upholding fraud allegations against,
inter alia, the brother of a now-deceased man who had fraudulently denied ownership
in a private corporation years before: “If there was a fraudulent scheme, [the
brother’s] knowledge of it and participation in it are clear because it would have been
impossible for decedent to carry out the fraudulent scheme as alleged without [the
brother] knowing of the scheme and participating in it.”).
Defendants continue their assault on that alternative path of liability by insisting
that neither CPC Int’l nor Danna stand for the proposition that participation in a
scheme in the absence of an actual misstatement can suffice to plead a defendant’s
liability for fraud. Answering Bf. at 54. To bolster that insistence Defendants repeat
their incorrect interpretation of CPC Int’l – i.e., that this Court expressly required an
actual, attributed misstatement – and suggest that Danna likewise is “most plausibly
read” as upholding nothing more than “an implied aiding and abetting” theory. Id.
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Again, Defendants are mistaken, and their reliance upon “plausible”
interpretations and “implied” holdings crumbles under a straightforward analysis of
the cases’ actual holdings and rationales.
As to Defendants’ insistence that Morgan Stanley’s “scheme” liability in CPC
Int’l depended wholly upon its having spoken, that insistence suffers from two
problems: First, as noted above, if the fraud charges stemmed from outright
misstatements by Morgan Stanley, there would have been no need for this Court to
journey down the “scheme” lane; it would have analyzed Morgan Stanley’s conduct
under the “speaking” prong of common law “fraud” elements. Second, it is apparent
that while Morgan Stanley may have made at least one attributed misstatement having
to do with its belief that an offering memorandum contained accurate information, this
Court in CPC Int’l focused on Morgan Stanley’s participation in the overall scheme –
not its words. The key misstatements there concerned “fictitious [financial]
projections overstating [a subsidiary’s] business prospects” that were prepared by
several individuals, which “Morgan Stanley [then] knowingly incorporated” into
selling materials (CPC Int’l, 70 N.Y.2d at 274), along with contractual warranties
given by defendant McKesson in a purchase-and-sale agreement. Id. at 285-86.
Whether the defrauded plaintiff reasonably relied upon the (i) false projections or, “on
the other hand,” (ii) the contractual warranties, was of no moment to this Court:
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together, the allegations described a scheme “involving all the defendants – devised
and executed for the specific purpose of defrauding the prospective purchaser” by
selling stock for more than it was worth. Id. Similar hands-on involvement by
Morgan Stanley is alleged here – especially the knowing incorporation into selling
materials of false ratings prepared by the Rating Agencies. Commerzbank has not
“mischaracterize[d]” CPC Int’l (Answering Bf. at 54); rather, the decision is directly
on point.
As for Danna, there is nothing in that opinion vaguely supporting Defendants’
suggestion that it is “plausibly” read as upholding only an “implied” aiding-and-
abetting/conspiracy claim. Danna breathes not one word about “aiding and abetting”;
instead, it notes that “[l]iability for fraud may be premised on knowing participation in
a scheme to defraud.” 857 N.Y.S.2d at 689. While the Danna opinion’s factual
exposition is admittedly abbreviated, the fraudulent “scheme” involved a party “acting
in concert” with other defendants and taking “advantage of a fiduciary relationship”
with the plaintiffs in order to get the latter to purchase real estate at an inflated price
(id.); the Appellate Division makes no distinction between speaking or non-speaking
defendants. Id.
Finally, Defendants, like the district court before them, also try to manufacture
relevance out of the fact that CPC Int’l and Danna addressed “scheme” liability at the
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pleading stage (Answering Bf. at 54); they suggest that the legal theory loses all force
elsewhere in the course of litigation because Commerzbank is unable to cite a New
York case in which a primary fraud claim has “survived summary judgment” despite
the lack of a misstatement attributed to a defendant. Id. at 55.
But why should it matter that authorities like CPC Int’l and Danna involved the
pleading stage, versus a post-summary-judgment point in the litigation? Both panels
announced a straightforward legal rule: liability for fraud may be premised on
participation in a fraudulent scheme. The substantive force of that rule is not
diminished by the stage of the litigation; it remains a constant throughout the
litigation, although plaintiffs’ burden – whether of pleading a claim, or surviving
summary judgment, or presenting evidence to a jury – may differ as the litigation
marches toward trial and a judgment. Commerzbank has pointed to sufficient record
evidence to raise a triable issue of fact as to Morgan Stanley’s liability for a fraudulent
scheme.14
14 It is slightly ironic that Defendants insist that Commerzbank’s interpretation of
CPC Int’l and Danna somehow “destroy[s] the distinction between fraud, on the one
hand, and aiding and abetting, on the other.” Answering Bf. at 55. Ironic, because it
is Defendants’ fantastic interpretation – i.e., that an attributed misstatement is required
even for “scheme” liability – that obliterates any distinction between liability for
fraudulent statements, and liability for knowing participation in a fraudulent scheme.
This Court holds that the latter is a viable, alternative avenue to fraud liability. CPC
Int’l, 70 N.Y.2d at 286.
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3. Record Facts Fully Support Morgan Stanley’s
Liability for Actionable Omissions
There exists yet another avenue of liability for Morgan Stanley’s conduct in
connection with the fraudulent Rated Notes: its knowing omissions concerning the
fraudulent ratings.
Those omissions in the Rated Notes and the offering documents that Morgan
Stanley used to solicit the Rated Notes’ purchases make it liable for fraud under New
York’s “special facts” doctrine. See, e.g., Williams, 832 N.Y.S.2d at 11 (“[a]lthough
there are no allegations of any affirmative misrepresentations by [defendant] itself,
and no fiduciary relationship . . . fraud is sufficiently stated” by allegations of special
knowledge or information “not attainable by plaintiff”); Swersky, 643 N.Y.S.2d at 37
(despite defendant’s lack of fiduciary duty to disclose certain information based upon
arm’s length transaction, fraudulent concealment claim should have been sustained
given facts supporting special facts doctrine). As set forth in more detail in
Commerzbank’s Opening Brief, the record contains myriad pieces of evidence that
Morgan Stanley possessed superior knowledge about the fraudulent ratings that was
not available to investors (which by definition included DAF). Opening Bf. at 59-60.
Defendants acknowledge the “special facts” doctrine’s existence (Answering
Bf. at 56), but then advance two arguments for why it supposedly is inapplicable here.
Id. at 56-59. Neither attempt succeeds.
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Defendants first assert that Commerzbank “failed to argue, let alone meet the
requirements” of the doctrine “at or before summary judgment.” Id. at 56.
That abbreviated “waiver” argument is patently wrong, for the record
demonstrates otherwise. In the district court the assembled plaintiffs both pleaded and
argued the facts necessary to satisfy the doctrine. See, e.g., A231:¶19 (“Morgan
Stanley had in its possession, at the time it sold assets to the Cheyne SIV investors,
quantitative and qualitative information demonstrating the fact that the assets backing
the Cheyne SIV were far riskier than represented and were, indeed, impaired at the
time the Cheyne SIV was created and grew even riskier over time.”); A259:¶93
(“Despite its knowledge of New Century’s risky loan origination[] practices, Morgan
Stanley never notified investors of the potential deterioration in asset credit quality or
any negative trends across the Cheyne SIV portfolio.”); A268-A269:¶120 (Rating
Agencies received from Morgan Stanley “information not available to investors
regarding the collateral underlying the Notes”); A296:¶211 (“Knowing that investors
entrusted billions of dollars to Morgan Stanley, and knowing that such investors were
sold Rated Notes that were represented to be secure and stable investments, Morgan
Stanley had a duty to report to these investors that their investment capital and income
was at risk due to increasingly deteriorating credit conditions.”); Appellant’s
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Supplemental Appendix (“ASA”) 115 (“[Morgan Stanley] and the rating agencies were
also well aware, but failed to disclose, that the structured finance assets held by
Cheyne had inflated ratings and were riskier than represented.”); ASA2 (“Concealed
from plaintiffs was the poor quality of the Cheyne SIV’s toxic assets, the risks posed
by the Cheyne SIV’s woefully insufficient structural protections, and a deeply flawed
ratings process.”); ASA3 (“[Morgan Stanley] is liable for the fraudulent ratings and
for its omission of material facts from the Cheyne SIV documents it created and
distributed.”).
Such pleading and argument sufficed to preserve the argument: “It is not
necessary to set out the legal theory on which [a] claim is based.” Siegelman v.
Cunard White Star, Ltd., 221 F.2d 189, 196 (2d Cir. 1955). Morgan Stanley’s
contrary argument “misconceives the nature of federal pleading which is by statement
of claim, not by legal theories.” Newman v. Silver, 713 F.2d 14, 15 n.1 (2d Cir. 1983);
see also Bartholet v. Reishauer A.G., 953 F.2d 1073, 1078 (7th Cir. 1992) (“[T]he
complaint need not identify a legal theory, and specifying an incorrect theory is not
fatal.”). And the Second Circuit is fully capable of deciding the issue when this Court
returns the matter to it after answering the Certified Questions.
15 Commerzbank attaches a Supplemental Appendix to this Reply Brief containing
additional record pages that were not included in either Plaintiff-Appellant’s
Appendix or the Supplementary Appendix for Defendants-Respondents.
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Defendants’ second argument attacks the merits of the doctrine’s application
here, taking issue with the record facts. Answering Bf. at 56-59. Although they insist
that the “only support” for Commerzbank’s special-facts argument are some district
court findings that merely “suggest” Morgan Stanley knew that investors lacked
access to all of the information available to the Rating Agencies (id. at 56-57), the
record is actually much more fulsome on the point, illustrating both Morgan Stanley’s
superior knowledge of information unavailable to investors, and that investors acted
without that knowledge.
For instance, beyond finding that “each plaintiff lacked access to all the
information available to the Rating Agencies” (A99), the district court also
acknowledged record “evidence” that Morgan Stanley had pressured “the Rating
Agencies to issue ratings it did not believe were accurate” (A132), and that “Morgan
Stanley manipulated the Cheyne SIV modeling process to create the ratings it desired.”
A131. Moreover, plaintiffs declared, under penalty of perjury, that the Rated Notes
would not have been purchased but for the assigned ratings (A327:¶2), and that
reliance on the ratings “was particularly critical and necessary due to the Cheyne
SIV’s complexity and the limited information available to plaintiffs.” A328:¶5.
Plaintiffs also declared that they could not have discovered that the ratings were false,
even with “[a]n independent evaluation.” Id. And even the Defendants conceded that
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investors would not have had access to all information: Morgan Stanley admitted that
“disclosure [for SIVs] is significantly less than a typical CDO as many of the specific
details are contained in the operating manual,” which was not publicly available.16
Moody’s CEO explained that “in the structured finance market, there is insufficient
public information,” so “investors are unable to conduct their own analysis and
develop their own independent views about potential or existing investments.”17
Likewise, S&P admitted that structured finance investors “rel[y] on S&P for review of
the transaction, and for S&P to identify the credit risk (ratings) associated with the
tranches they intend to purchase.”18 Together, the foregoing record materials raise at
least a triable issue of fact as to the special facts doctrine’s applicability here –
allowing this Court to answer the second Certified Question in the affirmative.
Despite the foregoing, Defendants suggest that there is “no evidence that the
credit ratings were a ‘substantial factor’ in DAF’s specific investment decision.”
Answering Bf. at 57; see also id. at 57 n.31 (no evidence of reliance). But that
suggestion overlooks the undeniable reality that the ratings themselves were a
condition precedent to the Rated Notes’ issuance at all (A404-A407:¶28), and that
16 ASA4.
17 ASA5.
18 ASA5.
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they were virtually unmarketable without high credit ratings from the Rating
Agencies. A222:¶1. It also gives short shrift to detailed testimony from
Commerzbank’s Rule 30(b)(6) corporate representative.19
That representative, Sascha Klaus, testified at length about the first line of
reliance in DAF’s purchasing process – namely, a so-called “risk management team”
that was responsible for vetting “eligible investment[s].” See A216/59:16-60:16
(excerpt of Sascha Klaus deposition dated October 26, 2011). Unless and until a
security was placed on that eligible-investments list, DAF could not invest in it.
ASA6/58:22-24 (“[DAF] cannot make investments in securities when they are not put
19 Defendants also omit that the district court never ruled upon the discrete issue
of DAF’s reliance in this matter. That procedural fact is relevant, for appellate courts
ordinarily decline to reach issues that were not actually analyzed and decided by the
district court. See, e.g., Altvater Gessler-J.A. Baczewski Int’l (USA) Inc. v. Sobieski
Destylarnia S.A., 572 F.3d 86, 91 (2d Cir. 2009) (“[w]e decline Sobieski’s invitation
to affirm the district court’s dismissal on the alternative grounds”); accord Bechhoefer
v. United States DOJ, 209 F.3d 57, 63 (2d Cir. 2000). Reaching such grounds is
particularly inappropriate where the decision would involve unsettled issues of fact
raised at the litigation’s preliminary stages; under applicable New York law, reliance
is “ordinarily a jury question.” In re Refco Inc. Sec. Litig., No. 07 MDL 1092 (JSR),
2011 U.S. Dist. LEXIS 33554, at *55 (S.D.N.Y. Mar. 28, 2011). For purposes of the
Certified Questions, it is enough that the available evidence here at the least raises a
triable issue of fact as to the role the fraudulent ratings played in DAF’s decision to
spend $121 million-plus on the Rated Notes.
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on the eligible list . . . .”). According to Klaus, the two members of that risk
management team were “Latonia Hubbs” and “Brett Jetter.” A217/60:17-24.20
When asked “[h]ow did your risk management team come to approve the
Cheyne SIV as an eligible investment?”21 Klaus’s response was straightforward: “The
ratings were reviewed, meaning you looked up the ratings of the security, you
reviewed the rating agency reports on the security. . . . The rating agency reports for
such securities were relatively detailed.”22 Defense counsel then asked, point-blank:
“Who made the decision to put the Cheyne SIV on the approved investments list?”23
Klaus responded that it was “[d]efinitely one of . . . two” people – Hubbs or Jetter –
and then followed up by recollecting that “it was Brett Jetter.”24 When asked what
Jetter had told Klaus about the Cheyne SIV’s approval, Klaus again hearkened to the
(false) ratings at this case’s heart:
[M]y answer to your previous question, which I repeat, he looked up the
ratings, S&P and Moody’s, and he reviewed the rating agency reports
20 Although the Klaus deposition transcript occasionally refers to a “Brad” Jetter,
Klaus later informed the court reporter that he was, in fact, “Brett” Jetter. ASA7.
21 A216/59:23-25.
22 A217/60:4-12.
23 A217/60:17-18.
24 A217/60:19-24.
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that contains [sic] the features I just mentioned, portfolio composition,
structural features, performance, all the elements which were in the – in
the rating agency reports.25
Notably, Klaus knew all of this because in preparing for the deposition as
Commerzbank’s corporate designee, “I spoke to [Jetter] . . . and I asked him. . . . He
told me he reviewed the rating agency reports, as I just said.” A218/61:13-23.
Plainly, there exists sufficient record evidence to at least get over the hurdle of a
triable issue of fact as to whether the credit ratings were a “substantial factor” in
DAF’s investment decisions.26
Finally, Defendants’ assertion that no plaintiff offered evidence that “any of the
Defendants-Respondents disbelieved” the false credit ratings they put out (Answering
Bf. at 58) borders on the ridiculous and is contradicted by the record.
First, Defendants’ cited authority for that assertion is their own joint summary
judgment memorandum in the district court. See id. (citing Suppl. App’x 138-40).
Circular arguments should not sway this Court.
25 A218/61:3-9.
26 Defendants relegate to a footnote their main criticism of Mr. Klaus, asserting
his testimony is “entirely irrelevant” because he failed to speak with any DAF
employees “responsible for making [DAF’s] investment decisions.” Answering Bf. at
57 n.32. That assertion ignores Klaus’s interactions with the very individuals
responsible for placing the Cheyne SIV onto DAF’s approved-investment list – and
Klaus’s testimony that DAF’s investment in the SIV could not have been made absent
its placement on that list. ASA6/58:22-24.
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More importantly, Defendants omit that the district court rejected that same
argument on summary judgment – expressly finding several instances of the various
defendants’ knowledge that the credit ratings were false. See A90 (district court holds
that “Plaintiffs have offered extensive evidence from which a jury could infer that the
ratings were either disbelieved when made” or issued in a “‘highly unreasonable’”
manner representing “‘an extreme departure from the standards of ordinary care’”);
A91 (holding that plaintiffs presented expert testimony “supporting an inference that
the ratings were highly unreasonable when made,” including an inference “that those
on the ratings committee did not believe the ratings to be accurate”); A131 (court
holds “plaintiffs have offered sufficient evidence from which a jury could infer that
Morgan Stanley: (1) had actual knowledge of the Rating Agencies’ fraud”); A133
(court holds “jury could reasonably infer that: (1) the Rating Agencies assigned the
MCNs ratings that they did not believe were accurate; [and that] (2) Morgan Stanley
had actual knowledge that the Rating Agencies were assigning ratings they did not
believe in”).
Given the foregoing record facts, Defendants’ blithe assertion that they could
not have known that purchasers would rely upon the false ratings is demonstrably
incorrect. Morgan Stanley’s omissions while in the possession of superior knowledge
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remain yet another avenue to hold it liable for fraud in connection with the Rated
Notes.27
II. CONCLUSION
In light of the foregoing reasons, as well as the record facts and argument
contained in the Opening Brief, this Court should answer both Certified Questions in
the affirmative.
DATED: March 25, 2015 ROBBINS GELLER RUDMAN
& DOWD LLP
JOSEPH D. DALEY
DANIEL S. DROSMAN
LUKE O. BROOKS
JOSEPH D. DALEY
655 West Broadway, Suite 1900
San Diego, CA 92101-3301
Telephone: 619/231-1058
619/231-7423 (fax)
Attorneys for Plaintiff-Appellant
Commerzbank AG
27 Defendants suggest that Morgan Stanley’s “financial stake” in the Cheyne
SIV’s success and its own losses from the subprime market’s collapse undermine any
evidence of its “disbelie[f]” in the credit ratings. Answering Bf. at 58. The
suggestion, besides being directly contradicted by the record (see supra), unfairly tries
to exploit Morgan Stanley’s own failed trading strategies in the overall subprime
market, while ignoring the reality that not all schemes succeed. Fla. State Bd. of
Admin. v. Green Tree Fin. Corp., 270 F.3d 645, 662-63 (8th Cir. 2001) (“The ultimate
profitability of a course of conduct is not conclusive of intent.”).
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INDEX TO SUPPLEMENTAL APPENDIX
DOCUMENT DESCRIPTION PAGES
Excerpts from Plaintiffs’ Memorandum of Law
in Support of Their Opposition to Defendants’
Joint Motion for Summary Judgment Pursuant
to Federal Rule of Civil Procedure 56(c),
filed July 2, 2012 [Docket No. 430] ...................................................... ASA1-ASA5
Excerpt from the October 26, 2011 Deposition of
Sascha Klaus, Rule 30(b)(6) Designee for
Commerzbank .................................................................................................... ASA6
Errata Sheet for the Deposition Transcript of
Sascha Klaus, taken on October 26, 2011
[Docket No. 432-1, attached as Tab 1 of
Docket No. 432 (Declaration of Daniel S.
Drosman in Support of Plaintiffs’ Opposition
to Defendants’ Joint Motion for Summary
Judgment Pursuant to the Court’s June 22, 2012
Directive)] .......................................................................................................... ASA7
the deal does not work." P(k); see ^3(l).10 In the same e-mail, this MS executive expressed grave
misgivings about the Cheyne SIV: "The more I think about this trade the worse Ifeel about the
risk/reward that it has." ^3(k). For the rating agencies, colluding with MS was a slippery slope -
once they approved HELs, MS strong-armed them into classifying HELs as "liquid" in performing
critical liquidity tests. P(m). Moody's later admitted that this "was a mistake." ^3(n).
MS also coerced the rating agencies to issue "A" ratings on Cheyne's MCNs, an
unprecedented public rating that no other SIV had obtained. ^3(o). After first insisting that a 1%
capital buffer to protect the MCNs from losses was a "pillar of [its] analysis," S&P ultimately
acquiesced to pressure from MS and allowed Cheyne to reduce the buffer by 25%. P(p). S&P's
Lapo Guadagnuolo informed MS that the targeted "A" rating on the Cheyne MCNs was not possible
and that S&P was willing to assign only a "BBB" to the Cheyne MCNs. ^3(q). The next day,
Drennan wrote a threatening e-mail to Mr. Guadagnuolo's boss, Perry Inglis, "mak[ing] it clear that
[MS] believe[s] the position committee is taking is very inappropriate." Id. Again, S&P acquiesced
to pressure from MS and agreed to assign an "A" rating to the Cheyne MCNs (despite the lower
capital buffer). ^3(r).11 After the SIV was launched, Drennan boasted that MS's efforts "did get us
the rating we wanted in the end." ^3(t).
MS and the rating agencies were also well aware, but failed to disclose, that the structured
finance assets held by Cheyne had inflated ratings and were riskier than represented. Because the
Cheyne SIV's rating was heavily dependent on the ratings of the underlying collateral, the increased
risk and false ratings on that collateral translated into false ratings on the SIV notes themselves. See
10 Plaintiffs' expert, Dr. Sanjiv Das, analyzed this issue and also came to the conclusion that the
SIV would not have been viable without HELs. Das Decl., ^ 6 , 10-11.
11 See also ^3(s) ("[T]he step we needed to undertake in order to rate the capital notes was to
assume a probability of enforcement of less than 100%. This 'relaxation' of our methodology
would apply ONLY for capital notes seeking a rating up to 'A.'").
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Case 1:08-cv-07508-SAS-DCF Document 430 Filed 07/02/12 Page 21 of 60
ASA1
plaintiffs need only come forth with evidence "that would allow a factfinder to ascribe some rough
proportion of the whole loss to [the defendant's alleged] misstatements." Id. (emphasis in original).
Here, the evidence establishes a triable issue of fact as to the element of loss causation.
Defendants' false statements and omissions led plaintiffs to believe that Cheyne was an
exceptionally strong obligor supported by a healthy portfolio of high-quality assets and highly robust
structural protections. Supra, §§II.A.-B., D. The false ratings signified a safe, secure and reliable
investment with an extremely low probability of transitioning to "junk" status, and a high likelihood
of full recovery even in the extraordinary event of a default. Supra, §II.A. Concealed from plaintiffs
was the poor quality of the Cheyne SIV's toxic assets, the risks posed by the Cheyne SIV's woefully
insufficient structural protections, and a deeply flawed ratings process. Supra, §II.A.-C.; see also
P(eee). Plaintiffs' substantial losses were directly caused by the false ratings when the concealed
risks were realized because the value of Cheyne's toxic subprime assets declined, taking the SIV
down with them. ^29(a).
That the SIV would collapse was utterly foreseeable.
[T]he risk that caused plaintiffs' losses - that [Cheyne] consisted of toxic assets that
would become worthless - was precisely within the zone of risk concealed by the
Top Ratings. That plaintiffs would suffer losses when these toxic assets collapsed
and [Cheyne] entered receivership was reasonably foreseeable. Therefore, . . . the
materialization of the risk concealed by the Top Ratings caused plaintiffs' losses.
King County, 708 F. Supp. 2d at 340; see also Louros v. Kreicas, 367 F. Supp. 2d 572, 579
(S.D.N.Y. 2005) (loss foreseeable and summary judgment denied where broker represented that
investments were "'conservative,'" and "'safe'" when, in fact, the investments were highly risky
securities). A depreciation in the value of the underlying assets causing the SIV to fail was precisely
within the "zone of risk" that is "determined by the purposes of the securities laws, i.e., 'to make
sure that buyers in securities get what they think they are getting.'" In re Omnicom Grp., Inc. Sec.
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Case 1:08-cv-07508-SAS-DCF Document 430 Filed 07/02/12 Page 44 of 60
ASA2
B. Morgan Stanley Made an Actionable Misstatement
MS's assertion that it made no actionable misstatement misses the mark. In CPC Int 'l Inc. v.
McKesson Corp., 70 N.Y.2d 268, 285-86 (1987), the New York Court of Appeals reinstated
common law fraud claims against MS and certain individual defendants because all defendants were
involved in a "scheme . . . devised and executed for the specific purpose of defrauding the
prospective purchaser by selling it the Mueller stock for more than it was worth." In New York,
therefore, "[l]iability for fraud may be premised on knowing participation in a scheme to defraud,
even if that participation does not by itself suffice to constitute the fraud." Danna v. Malco Realty,
Inc., 857 N.Y.S.2d 688, 689 (2d Dep't 2008); see also Chubb & Son, Inc. v. Kelleher, No.
92CV4484(TLM), 2010 U.S. Dist. LEXIS 141842, at *24-*25 (S.D.N.Y. Oct. 22, 2010).
The evidence in this case establishes that MS devised and executed the fraudulent scheme:
MS designed, structured, maintained, marketed and sold the Cheyne SIV. See ^2(a). MS also
created and disseminated the false ratings through the Information Memorandum and other key deal
documents. Id., ^2(e), ̂ 2(b). MS actually authored Moody's ratings report. ^2(c). MS also revised
S&P's Pre-Sale Report before it was issued on May 17, 2005. See ^2(d). Because MS was
responsible for the SIV from cradle to grave, MS is liable for the fraudulent ratings and for its
omission of material facts from the Cheyne SIV documents it created and distributed. See id., ^2(f),
Abu Dhabi because it contained only "bare allegation[s]" of falsity, without "further factual
enhancements"); Plumbers' Union Local No. 12 Pension Fund v. Nomura Asset Acceptance Corp.,
632 F.3d 762 (1st Cir. 2011) (First Circuit case analyzing §§11 and 12 claims); Compuware Corp. v.
Moody's Investors Servs., 499 F.3d 520 (6th Cir. 2007) (Sixth Circuit case analyzing defamation
claim); ESBE Holdings, Inc. v. Vanquish Acquisition Partners, LLC, 858 N.Y.S.2d 94, 95 (1st Dep't
2008) (finding remark that "Southeast Cruise was a great project" to be a "'nonactionable
expression[] of opinion, mere puffing'"); Mandarin Trading Ltd. v. Wildenstein, 16 N.Y.3d 173,
177, 179 (2011) (refusing to hold an author of a letter liable where the letter containing a "belief as
to a painting's value was addressed to a non-party and neither indicated "the purpose of the letter nor
who requested the valuation of the painting").
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ASA3
the ratings assigned to the MTNs were a "substantial factor" and "the most important factor" in
SEI's purchase decision. ^26(b); see also ^28(c).
SinoPac purchased Combination Capital Notes ("CCNs") that were comprised primarily of
MCNs rated A/A3 along with a small portion of unrated JCNs. The A/A3 ratings and the high
ratings on the Cheyne SIV's underlying assets were a substantial factor in SinoPac's decision to
purchase the CCNs. ^15(a). The investment approval memorandum and analysis report prepared
before SinoPac's investment explicitly relied on the A/A3 credit ratings on the MCNs and the high
ratings on the Cheyne SIV's underlying assets. ^15(b).
The foregoing conclusively establishes that each plaintiff substantially relied on the ratings.
In addition, because the ratings were directly tied to the yield, and because - as defendants concede
all investors rely on yield when purchasing bonds (^28(b)), it is axiomatic that the plaintiffs relied on
the ratings assigned to the Rated Notes. ^28(c)-(e); see also ^28(f). Significantly, the ratings on the
Rated Notes were required in order for the Cheyne SIV to exist in the first instance. The A/A3
ratings on the MCNs were a "condition[] precedent" to marketing the Rated Notes. ^28(g)-(i),
^28(zz). Similarly, "AAA/Aaa [ratings] by S&P and Moody's . . . [were] needed on the Senior
Notes programmes." ^28(j); see ^28(k)-(l). As Mr. Tabe explained, "the Aaa ratings assigned to
SIVs [enabled] them to sell their securities to the market." ^28(l); see ^28(m).
Defendants further admit that plaintiffs had to rely on the ratings assigned to the Rated Notes
because of the opaque nature of complex structured finance instruments like the Cheyne SIV and the
limited information available to investors. ^28(n); see also ^28(o)-(q). MS conceded that
"disclosure [for SIVs] is significantly less than a typical CDO as many of the specific details are
contained in the operating manual," which was not publicly available. ^28(aaa); see also ^28(r)-
(u). Put simply: "Investors rely on credit ratings, among other tools, to make investment
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ASA4
decisions." 128(x). As Moody's CEO Raymond McDaniel explained, "in the structured finance
market, there is insufficient public information" so "investors are unable to conduct their own
analysis and develop their own independent views about potential or existing investments." 128(y);
see also 1128(z)-(cc). Likewise, S&P has admitted that structured finance investors "rel[y] on S&P
for review of the transaction, and for S&P to identify the credit risk (ratings) associated with the
tranches they intend to purchase." 128(dd); see also 128(d), 128(ee). As S&P recognized, "S&P's
business model involves assigning ratings to deals so issuers are able to attract investors." 128(ff);
see also 128(gg).
In response, defendants advance several factually incorrect and irrelevant arguments. First,
defendants posit that because some plaintiffs "might" have been able to purchase other securities
with lower ratings and higher yields, they did not rely on the ratings. But the fact that some
plaintiffs might have been able to purchase riskier products in return for a higher yield does not
undermine their reliance here. For example, when asked whether it would have purchased lower-
rated Cheyne SIV notes, Butterfield responded: "I don't know. . . they weren't ratedAA, they were
rated AAA, so it's impossible to answer that question." 128(hh); see also 1128(ii)-(jj).
Similarly, the level of due diligence individual plaintiffs performed is irrelevant here, where
the facts necessary to uncover defendants' fraud were "peculiarly within the knowledge of the
defendants," and where due diligence would not have revealed that the ratings were false. See
128(a), 1128(kk)-(pp); 128(tt); Todd v. Pearl Woods, Inc., 248 N.Y.S.2d 975, 977 (2d Dep't 1964),
aff'd, 15 N.Y.2d 817 (1965); see also JP Morgan Chase Bank v. Winnick, 350 F. Supp. 2d 393, 410
(S.D.N.Y. 2004); Alexander v. Evans, No. 88 Civ. 5309 (MJL), 1993 WL 427409, at *17 (S.D.N.Y.
Oct. 15, 1993) ("the reliance requirement was not designed to shield perpetrators of fraud by forcing
investors to conduct exhaustive research every time they invest money, lest the seller be
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TSG Reporting - Worldwide 877-702-9580
Page 58
1 Highly Confidential - S. Klaus
2 SIV was first put on the eligible list, you said
3 before 2007 and then you clarified, '04 or '06.
4 Do you recall that?
5 A I recall my, my statement, and I
6 think they are not contradictory --
7 Q I didn't mean to suggest they were.
8 A What I wanted to say is during my
9 preparation I looked at the dates and right at
10 this moment it was '04 or '06, I do not recollect
11 exactly, but I know it was not '7. So, therefore,
12 I said it was before 2007.
13 Q And do you also know that it wasn't
14 2005? Is there a reason that you are saying '04
15 or '06?
16 A It's based on the photographic memory
17 I believe to have right in this moment. Yeah, I
18 think I remember either '04 or '06. Yeah.
19 Q Did DAF make any investments in the
20 Cheyne SIV before the time that the SIV had been
21 approved as an eligible investment?
22 A Did the DAF made? No. The money
23 market fund cannot make investments in securities
24 when they are not put on the eligible list, and I
25 am not aware of any breach of that rule while we
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Case 1:08-cv-07508-SAS-DCF Document 432-1 Filed 07/02/12 Page 18 of 19
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1015751_1
CPLR 2105 CERTIFICATION
The undersigned counsel of record for Plaintiff-Appellant Commerzbank AG,
admitted to this Court pro hac vice, hereby certifies that the foregoing contents of
Plaintiff-Appellant’s Supplemental Appendix have been compared with the originally
filed documents available on the district court’s docket, and are true and complete
copies of the same.
DATED: March 25, 2015
JOSEPH D. DALEY
1015751_1
DECLARATION OF SERVICE
I, the undersigned, declare:
1. That declarant is and was, at all times herein mentioned, a citizen of the
United States and employed in the City and County of San Diego, over the age of
18 years, and not a party to or interested party in the within action; that declarant’s
business address is 655 W. Broadway, Suite 1900, San Diego, California 92101.
2. On March 25, 2015, a digital version of the foregoing document:
REPLY BRIEF FOR PLAINTIFF-APPELLANT AND SUPPLEMENTAL
APPENDIX was submitted to the Clerk of the Court for the State of New York, Court
of Appeals by using the Court of Appeals Public Access and Search System.
3. On the same date, declarant filed one original and nine copies of REPLY
BRIEF FOR PLAINTIFF-APPELLANT AND SUPPLEMENTAL APPENDIX with
the Clerk of the Court by placing in a sealed package for overnight delivery with the
fees thereon fully prepaid and depositing at a designated pick-up location for U.P.S. in
San Diego, California.
3. Declarant further certifies that service of the foregoing document was
made by depositing three true copies thereof in a United States mailbox, or dispatched
it to a third-party commercial carrier for delivery within three calendar days, in San
Diego, California in a sealed envelope with postage thereon fully prepaid and
addressed to the parties listed on the attached Service List.
I declare under penalty of perjury that the foregoing is true and correct.
Executed on March 25, 2015, at San Diego, California.
JANA P. KUSY
Service List - 3/25/2015
Page 1 of 2
(08-0168)
MORGAN STANLEY SIV
Counsel for Defendant(s)
Dean Ringel
Floyd Abrams
Jason M. Hall
80 Pine Street
New York, NY 10005-1702
212/701-3000
212/269-5420(Fax)
Cahill Gordon & Reindel LLP
James P. Rouhandeh
William R. Miller Jr.
Andrew D. Schlichter
450 Lexington Avenue
New York, NY 10017
212/450-4000
212/701-5800(Fax)
Davis Polk & Wardwell LLP
Mark A. Kirsch
Christopher M. Joralemon
Lawrence Jay Zweifach
200 Park Avenue
47th Floor
New York, NY 10166-0193
212/351-4000
212/351-4035(Fax)
Gibson, Dunn & Crutcher LLP
Joshua M. Rubins
James J. Coster
Aaron M. Zeisler
230 Park Avenue, 11th Floor
New York, NY 10169
212/818-9200
212/818-9606(Fax)
Satterlee Stephens Burke & Burke LLP
Counsel for Plaintiff(s)
Marc I. Gross
Tamar A. Weinrib
600 Third Avenue
New York, NY 10016
212/661-1100
212/661-8665(Fax)
Pomerantz LLP
Samuel H. Rudman
58 South Service Road, Suite 200
Melville, NY 11747
631/367-7100
631/367-1173(Fax)
Robbins Geller Rudman & Dowd LLP
Service List - 3/25/2015
Page 2 of 2
(08-0168)
MORGAN STANLEY SIV
Michael J. Dowd
Daniel S. Drosman
Luke O. Brooks
655 West Broadway, Suite 1900
San Diego, CA 92101
619/231-1058
619/231-7423(Fax)
Robbins Geller Rudman & Dowd LLP
Jason C. Davis
Post Montgomery Center
One Montgomery Street, Suite 1800
San Francisco, CA 94104
415/288-4545
415/288-4534(Fax)
Robbins Geller Rudman & Dowd LLP