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Dandong v. Pinnacle Performance Ltd.

United States District Court, S.D. New York

August 22, 2013

GE DANDONG ET AL., Plaintiffs,
v.
PINNACLE PERFORMANCE LTD. ET AL., Defendants

Page 375

[Copyrighted Material Omitted]

Page 376

For Ge Dandong, Loh Tuck Woh Peter, Singapore Government Staff Credit Cooperative Society, Ltd., Ni Yan Amy, Ang Soo Cheng, Choh Gek Hong Johnson, Ng Shook Phin Susan, Zhao Yuzheng, Plaintiffs: Andrew Martin McNeela, Daniel Hume, LEAD ATTORNEYS, Christopher Scott Studebaker, Edward Michael Varga, Ira M. Press, Kirby McInerney LLP, New York, NY.

For Cho Siew Kong Douglas, Pan Yuen Daphne, Chua Hui Loo, Li Chan Chih Eric, Yeo Peng Chye, Boey Chern Yue, Lim Thian Loke, Neo Say Hoe, Ho Yu Wah Peter, Lam Yeen Leng, Plaintiffs: Andrew Martin McNeela, Daniel Hume, LEAD ATTORNEYS, Christopher Scott Studebaker, Ira M. Press, Kirby McInerney LLP, New York, NY.

For Pinnacle Performance Limited, Defendants: Bruce Domenick Angiolillo, LEAD ATTORNEY, Andrew David Waggaman Cattell, Hiral D Mehta, Jonathan K. Youngwood, Simpson Thacher & Bartlett LLP (NY), New York, NY.

For Morgan Stanley Asia (Singapore) PTE, Morgan Stanley & Co. International plc, Morgan Stanley Capital Services Inc., Morgan Stanley & CO. Inc., Defendants: Bruce Domenick Angiolillo, Jonathan K. Youngwood, LEAD ATTORNEYS, Andrew David Waggaman Cattell, Hiral D Mehta, Simpson Thacher & Bartlett LLP (NY), New York, NY.

For Morgan Stanley, Defendant: Bruce Domenick Angiolillo, LEAD ATTORNEY, Hiral D Mehta, Jonathan K. Youngwood, Simpson Thacher & Bartlett LLP (NY), New York, NY.

For Morgan Stanley Capital Services LLC, Morgan Stanley & Co. LLC, Defendants: Bruce Domenick Angiolillo, Jonathan K. Youngwood, LEAD ATTORNEYS, Hiral D Mehta, Simpson Thacher & Bartlett LLP (NY), New York, NY.

OPINION

Page 377

OPINION AND ORDER

JESSE M. FURMAN, United States District Judge.

In this putative class action, a group of Singapore investors (" Plaintiffs" ) assert various claims against Morgan Stanley & Co. and certain of its affiliates (collectively, " Defendants" ), related to a series of credit-linked notes (the " Pinnacle Notes" or the " Notes" ) issued by Defendant Pinnacle Performance Limited (" Pinnacle" ) and purchased by Plaintiffs. On October 31, 2011, the Honorable Leonard B. Sand -- to whom this case was previously assigned -- granted in part and denied in part Defendants' motion to dismiss Plaintiffs' complaint. See Dandong v. Pinnacle Performance Ltd., No. 10 Civ. 8086 (LBS), 2011 WL 5170293, at *1 (S.D.N.Y. Oct. 31, 2011).[1] By separate opinion dated December 12, 2011, Judge Sand granted a preliminary

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injunction to Plaintiffs, enjoining Defendants from pursuing an anti-suit injunction from the High Court of the Republic of Singapore. See Dandong v. Pinnacle Performance Ltd., No. 10 Civ. 8086 (LBS), 2011 WL 6156743, at *1 (S.D.N.Y. Dec. 12, 2011).

Defendants sought interlocutory review of both orders. Although the Second Circuit affirmed the injunction, it held that Judge Sand had erred in not addressing whether there was personal jurisdiction over Pinnacle and remanded for jurisdictional discovery on that issue. See Lam Yeen Leng v. Pinnacle Performance Ltd., 474 F. App'x 810, 814 (2d Cir. 2012) (summary order). The Court declined to reach the question of whether Judge Sand had properly ruled on Defendants' motion to dismiss. Id . at 814. After remand, on October 22, 2012, Plaintiffs filed an Amended Complaint, alleging claims for fraud, fraudulent inducement, breach of the implied covenant of good faith and fair dealing, and aiding and abetting fraud. (Docket No. 109).

Pinnacle has now moved, pursuant to Rule 12(b)(2) of the Federal Rules of Civil Procedure, for dismissal of the Amended Complaint for lack of personal jurisdiction. (Docket No. 127). Defendant Morgan Stanley has separately moved, pursuant to Rules 9(b), 12(b)(3), and 12(b)(6) of the Federal Rules of Civil Procedure, as well as the doctrine of forum non conveniens and principles of international comity, for dismissal of the Amended Complaint in its entirety. (Docket No. 120). For the reasons stated below, Pinnacle's motion to dismiss is DENIED, and Morgan Stanley's motion to dismiss is GRANTED in part and DENIED in part.

BACKGROUND

The factual background of this action is complex and summarized in greater detail in Judge Sand's prior opinions, familiarity with which is assumed.

Plaintiffs are retail investors who purchased the Pinnacle Notes from various distributor banks based in Asia between August 2006 and December 2007. The Pinnacle Notes are a type of credit derivative known as a credit-linked note (" CLN" ), which Defendants structured and issued in seven series during 2006 and 2007. ( See McNeela Decl. (Docket No. 134) Ex. 2 at ii; id . Ex. 3 at ii; id . Ex. 4 at ii; id . Ex. 5 at ii; id . Ex. 6 at ii). Credit-linked notes shift the credit risk associated with certain Reference Entities (" REs" ) from a protection buyer (typically the bank arranging the CLNs) to a protection seller (the CLN investors). As explained in Judge Sand's October 31, 2011 Opinion, CLNs are typically created as follows:

First, the bank arranging the CLNs creates a Special Purpose Vehicle (" SPV" ) to issue the CLNs. The SPV is generally . . . an orphan company owned by a trustee that will not appear on the balance sheet of any party to the transaction. The bank then buys protection from the SPV in the amount of the CLNs that will be issued to investors insuring it against the possibility that the REs would experience a credit event, such as a default. The name given to this particular transaction is a credit default swap, and this is, in effect, a derivative contract that functions like a form of insurance. Second, the SPV sells the CLNs to investors and uses the principal it receives therefrom to purchase highly-rated securities, or underlying assets, which serve as collateral in the event the REs default. . . . Third, in return for assuming the risk, investors receive interest in the form of (i) credit protection payments from the sponsoring bank and (ii) any interest generated

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by the underlying assets. Assuming that no credit event occurs, investors will receive the redemption value of the Note.

Dandong, 2011 WL 5170293, at *1 (internal quotation marks and citations omitted).

In 2005, Defendants retained the law firm of Maples and Calder (" Maples" ) to incorporate Pinnacle in the Cayman Islands as the SPV that would issue the Pinnacle Notes. ( See McNeela Decl. (Docket No. 126) Exs. 18 & 19). On November 30, 2005, Maples incorporated Pinnacle through its affiliate, Mapcal Ltd. ( See McNeela Decl. (Docket No. 126) Ex. 1 (" Gordon Dep." ) at 36:5-7). Pinnacle entered into a Proposals and Advice Agreement with Morgan Stanley Asia (Singapore) Pte. (" MS Singapore" ), under which MS Singapore proposed the terms and conditions of each series of Notes and oversaw the solicitation of investors. (Youngwood Decl. (Docket No. 128) Ex. 3 at 1-3; Gordon Dep. 64:5-10, 94:14-95:18, 98:21-99:25). After Pinnacle's directors approved MS Singapore's proposals, it issued the Notes, which were then sold to Plaintiffs by independent distributors. (Youngwood Decl. Ex. 3 at 2). Pinnacle's " sole business [was] the raising of money by issuing Series of Notes . . . for the purposes of purchasing assets and entering into related derivatives and other contracts." (McNeela Decl. (Docket No. 126) Ex. 3 at SING 618). Pinnacle used the principal raised from the sale of the Notes to purchase the Underlying Assets, namely, single tranche Synthetic Collateralized Debt Obligations (" CDOs" ) that were selected by Defendant Morgan Stanley & Co. International plc (" MS International" ) and issued by Morgan Stanley ACES SPC (" MS ACES" ). ( See Gordon Dep. 118:21-120:2, 122:6-14; Am. Answer ¶ ¶ 4, 104; McNeela Decl. Docket No. 126) Ex. 3 at SING 621; id . Ex. 30 § 2.3).

These CDOs (the " MS ACES CDOs" ) were linked to the performance of a portfolio of approximately 100 CDO reference entities (" CDO REs" ), see Dandong, 2011 WL 5170293, at *2, which Defendant Morgan Stanley Capital Services Inc. (" MS Capital" ) had selected. ( See McNeela Decl. (Docket No. 126) Ex. 13 at 1; id . Ex. 14 at 1; id . Ex. 15 at 1; id . Ex. 16 at 1; id . Ex. 17 at 1). According to Plaintiffs, Defendants marketed the Notes as safe, conservative investments (McNeela Decl. (Docket No. 134) Ex. 1 at SING 162963; id . Ex. 2 at ii; id . Ex. 3 at ii; id . Ex. 4 at ii; id . Ex. 5 at ii; id . Ex. 6 at ii), when in reality MS Capital had selected a highly disproportionate number of CDO REs that were at an elevated risk of default, and it had manipulated the characteristics of the MS ACES CDOs to suffer sudden, swift, and total impairment upon even modest CDO RE defaults (Am. Compl. ¶ ¶ 154, 167-244).

Plaintiffs further allege that, when promoting the Notes, Defendants did not inform investors that they had an inherent conflict of interest because they had " shorted" the MS ACES CDOs. Specifically, the MS ACES CDOs were based on a credit default swap under which Pinnacle -- using the investors' principal -- assumed the CDO's credit risk, taking the " long" position on the risk by selling protection to MS Capital. (Am. Compl. ¶ ¶ 72, 146-48; Gordon Dep. 115:20-116:20, 119:17-120:2; Am. Answer ¶ ¶ 4, 18). Plaintiffs allege that under this arrangement there was an express conflict of interest because MS Capital was the " short" counter-party to -- that is, bet against -- every MS ACES CDO that MS International had selected to serve as an Underlying Asset ...


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