Cross appeals from the order of the Supreme Court, New York County (Charles E. Ramos, J.), entered April 13, 2012, which, to the extent appealed from, denied defendant Appalachian Asset Management Corp.'s motion to dismiss the complaint as against it, granted defendants Messmore, McBeth and Garg's motions to dismiss the negligence cause of action as against them, and denied their motions to dismiss the causes of action for violation of § 42-110b (a) of the Connecticut Unfair Trade Practices Act (CUTPA), aiding and abetting Appalachian's alleged breach of fiduciary duty, and recklessness, denied defendant Garg's motion for summary judgment dismissing the complaint as against him, and granted Aetna's motion to consolidate this action with a related action and to file a consolidated amended complaint. Order of the same court and Justice, entered on or about May 8, 2012, which denied Defendant the motion of Christopher McDougal to dismiss the claims for negligence, recklessness, aiding and abetting defendant Appalachian's breach of fiduciary duty, and for a CUTPA violation.
Weil, Gotshal & Manges LLP, New York (Jennifer M. Oliver, Randi W. Singer and Andrey Spektor of counsel), for Appalachian Asset Management Corp., appellant-respondent.
O'Hare Parnagian LLP, New York (Robert A. O'Hare Jr., Jeffrey S. Lichtman, Andrew C. Levitt and Michael Zarocostas of counsel), for William Messmore, appellant-respondent.
DeCotiis, Fitzpatrick & Cole, LLP, Spring Valley (Gregory J. Bevelock, Alice M. Penna and Jeffrey D. Smith of counsel), for Douglas McBeth, appellant-respondent.
Seward & Kissel LLP, New York (M. William Munno, John J. Galban and Celinda Metro of counsel), for Sameer Garg, appellant-respondent.
John V. Golaszewski, New York, for appellant.
Bingham McCutchen LLP, New York (Jason D. Frank, Jordan D. Hershman, Harold S. Horwich and Derek Care of counsel), for respondent-appellant/respondent.
Angela M. Mazzarelli, J.P., Rolando T. Acosta, David B. Saxe, Dianne T. Renwick, Darcel D. Clark, JJ.
Plaintiff Aetna Life Insurance Company alleges that defendants directed and arranged the removal from a trust account held for Aetna's benefit of $48.65 million of high-grade securities that were trading at or near par value, and their replacement with toxic, "sticky" subprime-mortgage-backed securities that were actually worth a small fraction of that amount, which securities had been held in the inventory of Lehman Brothers Holding, Inc. (LBHI). Aetna asserts that defendants did so as part of an effort to prop up Lehman Brothers' financial position in the final days prior to its 2008 collapse. The complaint alleges causes of action for breach of the Connecticut Unfair Trade Practices Act (CUTPA) (Conn Gen Stat § 42-110b[a] et seq.); breach of fiduciary duty; negligence; and recklessness. We affirm the determination of the motion court holding that the allegations are sufficient to support each of the causes of action, and modify only to the extent of denying dismissal of the negligence claims against the individual defendants.
According to the complaint in each of the two (subsequently consolidated) actions at issue here, Lehman Re, Ltd., a wholly-owned subsidiary of LBHI, entered into a coinsurance agreement with Aetna, under which Lehman Re agreed to reinsure a block of fully paid-up life insurance policies that had been issued by Aetna, and to indemnify Aetna for all benefits paid by Aetna on the reinsured policies. In consideration for this indemnification obligation, Aetna paid Lehman Re a premium of $155, 667, 717, which was deposited in a trust account, to be held for Aetna's benefit. Under a contemporaneously executed trust agreement, Lehman Re, with Bank One Trust Company, as trustee, agreed to manage the assets in the trust account as security for Lehman Re's indemnity obligations. The agreement between Aetna and Lehman Re required Lehman Re to direct the trustee to invest trust account assets in specified types of "eligible securities, " defined as cash, certificates of deposit and certain types of investments permitted by the Connecticut Insurance Code; Lehman Re was authorized to withdraw assets from the trust account without Aetna's approval provided that the assets were replaced with other qualified assets.
However, Aetna alleges, pursuant to a longstanding investment advisory agreement between Lehman Re and defendant Appalachian Asset Management Corp. — a company which, like Lehman Re, was also a wholly-owned subsidiary of LBHI — Appalachian was given the authority to control and manage the assets in the Aetna trust account. That investment advisory agreement, Aetna says, gave Appalachian trading authority over the trust account assets.
The crux of the complaint is that on September 9, 2008, with the real estate market in crisis and the market for mortgage backed securities drying up, Appalachian arranged for the removal from the Aetna trust account of $48.65 million of high grade, CARAT securities that were trading at or near par value. In place of those valuable securities, Appalachian directed the substitution of securities then held in the inventory of LBHI with a purported face value of $44, 500, 000, issued by Ballantyne Re PLC and backed by subprime residential mortgage loans. Defendants allegedly knew that the Ballantyne Re securities were, in fact, "sticky, " or highly illiquid, with an actual value that was a fraction of their face value. They also allegedly knew that the Ballantyne Re securities were not of a quality required of securities maintained in the trust account under the trust agreement. The substitution was allegedly performed without Aetna's knowledge or consent.
Aetna's complaint further provides context for the troubling transaction, explaining that in early 2008, LBHI had recognized its problematic financial position, in that it was over-leveraged, with excessive "sticky" inventory positions that would be difficult to sell without incurring substantial losses or creating a loss of confidence in the inventory remaining on its balance sheet. LBHI was therefore attempting to take steps to make its financial position appear stronger than it actually was. Additionally, Aetna asserts that J.P. Morgan made a demand on LBHI in September 2008 to post an additional $3.6 ...