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Oddo Asset Management v. Barclays Bank Plc

June 27, 2012


The opinion of the court was delivered by: Lippman, Chief Judge:

This opinion is uncorrected and subject to revision before publication in the New York Reports.

Following the collapse of two investment vehicles, known as SIV-Lites, Oddo Asset Management ("Oddo") commenced this action against Barclays Bank PLC, Barclays Capital Inc. (collectively, "Barclays"), and The McGraw-Hill Companies, Inc. (parent company of Standard & Poor's) claiming aiding and abetting breach of fiduciary duty and tortious interference with contract. For the reasons that follow, we conclude that the collateral managers appointed to oversee the assets of the SIVLites did not owe a fiduciary duty to plaintiff, and plaintiff failed to state a cognizable claim for tortious interference with contract. We therefore affirm the Appellate Division order upholding the dismissal of the complaint.


Plaintiff Oddo Asset Management, a leading French asset management company with over 350 institutional clients and investments of 16.6 billion Euros,*fn1 purchased $30 million in Golden Key Ltd. ("Golden Key") AAA-rated and AA-rated mezzanine notes from Barclays in 2005-2006 and $20 million in AAA-rated mezzanine notes in Mainsail II ("Mainsail") from Barclays in July 2006. Golden Key and Mainsail were SIV-Lites, a type of structured investment vehicle that borrowed money and raised equity to purchase asset-backed securities. The SIV-Lites borrowed money by issuing commercial paper, mezzanine notes, and capital notes. Commercial paper (essentially short-term promissory notes) comprised about 90% of the funding for Golden Key and Mainsail and was senior in terms of priority of distributions. Commercial paper holders were paid a fixed rate of return and their entire principal was to be repaid upon maturity, in 90 days. When the commercial paper notes matured, the SIV-Lites were required to raise fresh funds in a process known as "rolling over" their commercial paper. The mezzanine notes had a four- or five-year term of maturity and also paid a set rate of return, and the principal was to be returned upon maturity. The capital notes had a later maturity date than the mezzanine notes and would be the first to absorb losses related to declines in the SIV-Lites' asset value. The SIV-Lite business model was to generate a higher rate of return from its asset-backed securities, which were comprised primarily of residential mortgage-backed securities ("RMBS") and commercial mortgage-backed securities ("CMBS"), than the interest the SIV-Lite had to pay the holders of the commercial paper, mezzanine notes, and capital notes.*fn2 The profits of the SIV-Lites were split between the capital note holders and the collateral managers.

Defendant Barclays arranged the creation of Golden Key and Mainsail by incorporating the SIV-Lites as limited liability entities in the Cayman Islands. Barclays also determined the size and leverage of the SIV-Lites and prepared the information memoranda describing the SIV-Lites and the notes to be issued. Barclays warehoused asset-backed securities*fn3 for purchase and provided loans in the event of a liquidity shortage.*fn4

Barclays also selected the collateral managers of Golden Key and Mainsail. Non-party Avendis Financial Services Limited ("Avendis") and defendant Solent Capital (Jersey) Limited ("Solent") were appointed as collateral managers to invest and manage the proceeds raised from the issuance of notes in Golden Key and Mainsail, respectively. The collateral managers were responsible for ensuring that the investment portfolio satisfied "Specific Investment Eligibility Criteria" and maintained a certain credit quality. For instance, instruments acquired by Golden Key were required to have a minimum public rating of at least AA- by Standard & Poor's ("S&P") at the time of acquisition. The collateral managers were also responsible for making trades, reinvesting principal proceeds from maturing assets, and maximizing recovery rates when defaults on the SIVLite's asset pool occurred. In their management agreements, Solent and Avendis agreed to perform their responsibilities with "reasonable care, in good faith, and in a manner generally consistent with . . . [the] standard of care and degree of skill . . . exercised by, institutional managers of international standing." The collateral managers sent weekly reports to the ratings agencies regarding the status of the investments. Periodic valuation reports for the SIV-Lites were sent by the administrator, QSR Management, to the note holders.

S&P (owned by defendant The McGraw-Hill Companies) evaluated the risk of default for the issued notes and rated Golden Key and Mainsail's "Tier 1" mezzanine notes AAA*fn5 and "Tier 2" mezzanine notes AA. A security trustee, the Bank of New York, was also appointed to represent the interests of note holders and was granted a security interest in all of Golden Key's and Mainsail's assets, securing the mezzanine notes.*fn6

According to Oddo, Avendis and Solent conspired with Barclays to transfer to Golden Key and Mainsail impaired sub-prime mortgage-backed securities at inflated prices. In July and August 2007, after obtaining the required note holder consents*fn7 and ratings confirmations from S&P,*fn8 Golden Key increased its size by purchasing $574 million in warehoused sub-prime mortgage-backed securities from Barclays at par, meaning at the price that Barclays paid for them. Upon transfer, Golden Key allegedly suffered an immediate loss of approximately $123 million, or 21% of the value transferred to Barclays. Likewise, Barclays sold $400 million in warehoused mortgage-backed securities to Mainsail in April 2007 and an additional $637 million in securities to Mainsail in July 2007. Mainsail purchased the securities at par, despite the fact that the securities had fallen significantly in value. The SIV-Lites were required to purchase at par according to their warehousing agreements with Barclays (see page 4, fn.3 supra). Immediately after acquisition, Mainsail allegedly suffered a loss of $505 million. Oddo maintains that Barclays offloaded the sub-prime asset-backed securities onto the balance sheets of Golden Key and Mainsail in order to shift losses from Barclays to the SIV-Lites, knowing that the securities would plummet in value. Oddo claims that both Avendis and Solent acquiesced to the expansion because they did not want to jeopardize their relationships with Barclays. The collateral managers sought to be appointed as managers on future Barclays-arranged investment vehicles and were hoping to obtain a larger fee with an expanded investment portfolio, according to Oddo.

About 28 days after S&P had confirmed the AAA ratings of the mezzanine notes of both Golden Key and Mainsail in July 2007, S&P issued a report downgrading the ratings of both SIVLites by 17 notches, from AAA to CCC. Oddo alleges that S&P knew that Golden Key and Mainsail's investment portfolios were at serious risk of downgrade, even prior to the acquisition of the warehoused securities from Barclays. Oddo claims that S&P abandoned its professional standards by confirming Golden Key and Mainsail's AAA ratings prior to the expansion of the investment portfolios. S&P allegedly acted as it did because Barclays was an important repeat customer.

Because both Golden Key and Mainsail held assets that were worth significantly less than their liabilities, the SIVLites were unable to re-borrow in the commercial paper market, which triggered mandatory acceleration events. The vehicles ultimately collapsed, and both Golden Key and Mainsail investors lost nearly all of their investments. Oddo allegedly lost a total of $43 million ($50 million minus the $7 million in notes that Barclays bought back).

In July 2008, Oddo commenced this action against

Barclays, S&P, and Solent.*fn9 Oddo asserts that Solent breached its fiduciary duty to the investors of Mainsail and Avendis breached its fiduciary duty to the investors of Golden Key, and that Barclays and S&P aided and abetted these breaches. Oddo claims Avendis and Solent conspired with Barclays to transfer the mortgage-backed securities to the SIV-Lites even though Barclays knew that the securities were toxic. S&P was allegedly complicit in the collateral managers' breach of fiduciary duty by issuing favorable ratings for the various notes issued by Golden Key and Mainsail, despite knowing that they were at risk of a downgrade. Oddo also claims that Barclays tortiously interfered with Oddo's contract with Golden Key and Mainsail.*fn10

Defendants moved to dismiss the complaint for lack of personal jurisdiction against Solent and for failure to state a cause of action, arguing that neither Avendis nor Solent owed a fiduciary duty to plaintiff under applicable law. Barclays argued that Oddo failed to state a claim for tortious interference because it did not allege an underlying breach of the mezzanine notes. Supreme Court dismissed the claims against Solent for lack of personal jurisdiction and also dismissed all claims against Barclays and S&P. Plaintiff appealed as to Barclays and S&P, and the Appellate Division affirmed, holding that "[t]he causes of action for aiding and abetting a breach of fiduciary duty fail[ed] to allege that the collateral managers of the . . . SIV-Lites had any contact or relationship with plaintiff such as would give rise to an underlying fiduciary duty" (Oddo Asset Mgt. v Barclays Bank PLC, 84 AD3d 692, 693 [1st Dept 2011]). The Appellate ...

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