United States District Court, S.D. New York
[Copyrighted Material Omitted]
For Plaintiffs: MILLER & WRUBEL P.C., By: John G. Moon, Esq., Claire L. Huene, Esq., New York, NY.
For Defendants: JONES DAY, By: Jayant W. Tambe, Esq., Kelly A. Carrero, Esq., New York, NY.
ROBERT W. SWEET, U.S.D.J.
Defendant Deutsche Bank AG (" Deutsche Bank" or the " Defendant" ) has moved pursuant to Rules 9(b) and 12(b) (6) of the Federal Rules of Civil Procedure to dismiss the complaint (the " Complaint" ) of plaintiff Arco Capital Corporation Ltd. (" Arco" or the " Plaintiff" ).
Upon the conclusions set forth below, the motion of Deutsche Bank to dismiss the cause of action for securities fraud is granted with leave to replead within 20 days, and supplemental jurisdiction over Arco's state law claim is declined.
I. Prior Proceedings
On September 27, 2012, Arco filed the Complaint setting forth two causes of action against Deutsche Bank for (1) securities fraud in violation of Section 10(b) of the Securities Exchange Act of 1934 (the " Exchange Act" ) and (2) for breach of contract.
On December 3, 2012, invoking Rules 12(b)(6) and 9(b) of the Federal Rules of Civil Procedure, Deutsche Bank moved to dismiss the Complaint. The instant motion was heard and marked fully submitted on January 16, 2013.
The following factual background is drawn from the Complaint and from documents referenced in or integral to the Complaint as submitted by the parties. The allegations of the Complaint are accepted as true for the purposes of this motion, see Chambers v. Time Warner, Inc., 282 F.3d 147, 152 (2d Cir. 2002), and do not constitute findings of fact by the Court.
This action arises out of Deutsche Bank's allegedly intentional or reckless misconduct in connection with a June 2006 collateralized loan obligation (" CLO" ) transaction (the " Transaction" ), known as CRAFT EM CLO 2006-1 (the " CRAFT EM CLO" or the " Issuer" ). (Compl. ¶ 1).
Deutsche Bank is a financial institution organized and existing under the laws of Germany with its principal place of business in the United States in New York, New York. (Id. ¶ 15).
Arco is an exempted limited company organized and existing under the laws of the Cayman Islands and externally managed by a company with its principal place of business in Guaynabo, Puerto Rico. (Id. ¶ 14).
In June 2006, Deutsche Bank offered investors the opportunity to acquire debt securities (the " Notes" ) tied to a portfolio (the " Reference Portfolio" ) of Deutsche Bank-originated emerging markets investments and derivative transactions (the " Reference Obligations" ). (Id. ¶ 2). The transactions were effected through CRAFT EM CLO, a Cayman Islands company created by Deutsche Bank. (Id. ¶ ¶ 2-4, 30, 77). As a " synthetic" CLO, the Craft EM CLO did not go out and purchase outright whole loans or other direct exposures to the emerging market companies or derivatives counterparties; instead, it gained exposure synthetically through credit default swap transactions (the " CDS Agreements" ), which the Issuer entered into with Deutsche Bank. (Id. ¶ ¶ 2-3, 31-43; Exs. 14-17 [Swap Confirmations]).
In exchange for the interest payments on the Notes, investors agreed to risk the principal due on the Notes based on the Reference Portfolio. If a Reference Obligation defaulted in a way covered by the CDS Agreements (a " Credit Event" ), Deutsche Bank received a payment (a " Credit Event Payment" ), which directly reduced the principal due on the Notes at maturity. (Id. ¶ 3).
The Notes were issued in trenches with different levels of seniority: Class E, Class F and Class G Notes, with Class G as the most junior. (Id. ¶ 4). The Class E-1, F-1, and G-1 Notes were issued in June 2006 (the " First Offering" ), and the Class E-2, F-2, and G-2 Notes were issued in January 2007 (the " Second Offering" ). (Id. ¶ ¶ 1, 5, 31, 34, 77, 81). All classes of Notes were scheduled to mature on July 15, 2012. (Id. ¶ 10).
According to Arco, Deutsche Bank caused the Issuer to enter into an Indenture, dated June 21, 2006 (the " Indenture" ) with HSBC Bank USA, N.A. (" HSBC" ), located in New York, as Trustee. (Id. ¶ 5). Arco alleges that Deutsche Bank controlled the transactions from its offices in New York, that all funds went to and from HSBC in New York, and that investors purchased the Notes by delivering funds to HSBC. (Id.).
In June 2006, during the First Offering, Gramercy Emerging Markets Fund (" Gramercy" ), a company associated with Arco, purchased Class F and Class G Notes on Arco's behalf. (Id. ¶ ¶ 81-82). During the Second Offering in January 2007, Gramercy purchased new Notes on behalf of Arco. (Id. ¶ 83). Gramercy, as the alleged agent for Arco, purchased Class G-1 Notes with an original notional amount of $15 million, Class G-2 Notes with an original notional amount of $15 million, Class F-1 Notes with an original notional amount for $8.75 million, and Class F-2 Notes with an original notional amount for $17.5 million. (Id.). In total, Gramercy purchased a total of $56.25 million of the Class G and Class G Notes during the First Offering and Second Offering. (Id.). In May 2007, Gramercy transferred the Notes to Arco in a pass-through transaction, in which Arco reimbursed Gramercy at par for the amounts Gramercy had advanced to purchase the Notes. (Id. ¶ 84).
The Representations and Warranties by Note Purchasers
In connection with the purchase of the Notes, Gramercy executed a separate note subscription agreement (the " Note Subscription Agreement" ) with the Issuer. (Id. ¶ 61). The Note Subscription Agreement became an irrevocable agreement between Gramercy and the CLO, stating that:
This subscription by the Purchaser is irrevocable; provided, however, that the execution and delivery by the Purchaser of this Subscription Agreement will not constitute an agreement between the Company and the Purchaser until this Subscription Agreement is accepted on behalf of the Company and, if not so accepted (as described below), this subscription and the obligations of the Purchaser hereunder will terminate.
(Exs. 8-11 at § 1(b) [Note Subscription Agreements]).
On or before the closing date of each issuance, each Note Subscription Agreement was agreed to and accepted in the Cayman Islands by a director of the CLO employed by the CLO's " Administrator," Maples & Calder, a Cayman Islands law firm. (Exs. 8-11 at Signature Pages [Note Subscription Agreements]; Ex. 12 at § 2.4 [Administration Agreement]; Ex. 13 [Registers of Directors and Officers]). The Administration Agreement required them to " perform all services and take all actions in connection with [the transaction] in or from within the Cayman Islands." (Ex. 12 at § 2.9 [Administration Agreement]). Deutsche Bank was not a party to any of the Note Subscription Agreements, but was expressly identified as a third party beneficiary. (Exs. 8-11 at § 17 [Note Subscription Agreements]).
In Section 4 of each Note Subscription Agreement, Gramercy made several representations and warranties, including that:
o It " received the Indenture and the other Transaction Documents and has not relied on any information . . . other than information that is contained in, and the terms and provisions of, the Indenture and the ...