United States District Court, S.D. New York
[Copyrighted Material Omitted]
For Bank of America, National Association, Banc of America Securities LLC, Plaintiffs: Kathryn Schaefer Zecca, Matthew M. Madden, Richard A. Sauber, PRO HAC VICE, LEAD ATTORNEYS, Robbins Russell Englert Orseck Untereiner & Sauber, LLP, Washington, DC; Lawrence Saul Robbins, LEAD ATTORNEY, Robbins Russell Englert Orseck Untereiner & Sauber, LLP, Washington, DC; Michael Lawrence Waldman, alex Potapov, PRO HAC VICE, Robbins Russell Englert Orseck Untereiner & Sauber, LLP, Washington, DC.
For U.S. Bank National Association, solely in its capacity as Trustee under the Indenture, Plaintiff: Kathryn Schaefer Zecca, Kathryn Schaefer Zecca, Matthew M. Madden, PRO HAC VICE, LEAD ATTORNEYS, Robbins Russell Englert Orseck Untereiner & Sauber, LLP, Washington, DC; Lawrence Saul Robbins, LEAD ATTORNEY, Robbins Russell Englert Orseck Untereiner & Sauber, LLP, Washington, DC; Michael Lawrence Waldman, alex Potapov, PRO HAC VICE, Robbins Russell Englert Orseck Untereiner & Sauber, LLP, Washington, DC.
For Bear Stearns Asset Management Inc., Defendant, Counter Claimant: Barry H Berke, Eric Anders Tirschwell, Jason Michael Moff, Kerriann Law, Marjorie E. Sheldon, Norman Christopher Simon, Seth Franklin Schinfeld, Kramer Levin Naftalis & Frankel, LLP, New York, NY.
For Ralph Cioffi, Defendant, Counter Claimant: Edward J. M. Little, John Thomas McGoey, Kathryn Rebecca Vogel, Lisa Ann Cahill, Hughes Hubbard & Reed LLP (NY), New York, NY; Marc Alan Weinstein, U.S. Attorney's Office, SDNY (St Andw's), New York, NY.
For Matthew Tannin, Defendant, Counter Claimant: Maryann Jungmin Sung, Nina Minard Beattie, Theresa Marie Trzaskoma, Brune & Richard LLP, New York, NY.
For Raymond McGarrigal, Defendant, Counter Claimant: Catherine L. Redlich, LEAD ATTORNEY, Christin Jill Masimore, Driscoll & Redlich, New York, NY.
For Banc of America Securities LLC, Counter Defendant: Kathryn Schaefer Zecca, Matthew M. Madden, Richard A. Sauber, PRO HAC VICE, LEAD ATTORNEYS, Robbins Russell Englert Orseck Untereiner & Sauber, LLP, Washington, DC; Lawrence Saul Robbins, LEAD ATTORNEY, Robbins Russell Englert Orseck Untereiner & Sauber, LLP, Washington, DC; Michael Lawrence Waldman, alex Potapov, PRO HAC VICE, Robbins Russell Englert Orseck Untereiner & Sauber, LLP, Washington, DC.
MEMORANDUM OPINION AND ORDER
ALISON J. NATHAN, United States District Judge.
This cases arises from a transaction between Plaintiffs Bank of America and Banc of America Securities LLC (" BAS" ) (collectively " BOA" ), and Defendant Bear Stearns Asset Management (" BSAM" ) in May of 2007. The transaction led to the creation of a " CDO-squared" --that is, a Collateralized Debt Obligation (" CDO" ) comprised of CDOs known as " the Issuer" --constructed out of Mortgage Backed Security (" MBS" ) assets taken from two of BSAM's funds. Following the default and liquidation of the two BSAM funds from which the Issuer's assets derived, BOA ultimately suffered billions of dollars in losses as a result of the transaction. BOA thereafter commenced the present action alleging that its losses from this transaction are attributable to a fraud perpetrated by BSAM and three of its former directors, Matthew Tannin, Ralph Cioffi, and Raymond McGarrigal (collectively " Defendants" ). Plaintiffs further allege that they suffered losses as a result of BSAM's alleged breach of a contract with Plaintiffs that facilitated the transaction and breach of its fiduciary duties owed to the Issuer.
Following several years of discovery and two amended complaints, Defendants filed a motion for summary judgment seeking dismissal of all claims on January 11, 2013. (Dkt. No. 115). Plaintiffs cross moved for summary judgment on Defendants' counterclaims on January 15, 2013. (Dkt. No. 123). In conjunction with summary judgment briefing, the parties also filed competing Daubert motions. (Dkt. Nos. 108, 110).
As discussed below, Defendants' Daubert motion to exclude the testimony of Dr.
Mukesh Bajaj is granted. Furthermore, because Plaintiffs cannot prove proximate cause without Dr. Bajaj's testimony, and because Plaintiffs' CDO-squared transaction fraud claim and breach of fiduciary duty claim fail for other separate reasons, Defendants' summary judgment motion is granted in its entirety and all four claims are dismissed.
I. STANDARD OF REVIEW
Summary judgment is properly granted when, after reviewing the evidence in the light most favorable to the non-moving party, " there is no genuine issue as to any material fact" and " the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c); Nabisco, Inc. v. Warner-Lambert Co., 220 F.3d 43, 45 (2d Cir. 2000). For summary judgment purposes, a genuine issue exists if the evidence is such that a reasonable jury could decide in the non-moving party's favor. Id .
In a summary judgment setting, " the burden is upon the moving party to demonstrate that no genuine issue respecting any material fact exists." Gallo v. Prudential Residential Servs., Ltd. P'Ship, 22 F.3d 1219, 1223 (2d Cir. 1994). " When the burden of proof at trial would fall on the nonmoving party, it ordinarily is sufficient for the movant to point to a lack of evidence ... on an essential element of the nonmovant's claim." Cordiano v. Metacon Gun Club, Inc., 575 F.3d 199, 204 (2d Cir. 2009). " Where the moving party demonstrates the absence of a genuine issue of material fact, the opposing party must come forward with specific evidence demonstrating the existence of a genuine dispute of material fact." Brown v. Eli Lilly & Co., 654 F.3d 347, 358 (2d Cir. 2011) (citations omitted). " More specifically, it must do more than simply show that there is some metaphysical doubt as to the material facts and may not rely on conclusory allegations or unsubstantiated speculation." Id . (citations and quotation marks omitted).
This case involves a transaction in May of 2007 between BOA and BSAM that created a CDO-squared entity known as " the Issuer" that was to issue securities in the " aggregate principal amount" of at least $4 billion. (Def. 56.1 ¶ 7). The transaction, which was one of three that BOA had considered conducting with BSAM through negotiations commencing in January of 2007, constituted the largest CDO deal that BOA had ever done at that time. (Def. 56.1 ¶ ¶ 7, 16, 20). BOA's structured securities group (" SSG" ) was interested in the deal at least in part because BOA had been " trying to increase [its] role in the CDO business," which was becoming a very lucrative business for BAS, and SSG had a " mandate" to " improve the bank's standing in ABS CDO issuance in the lead tables and generate revenue." (Def. 56.1 ¶ ¶ 15, 16).
On March 9, 2007, BSAM and BAS entered into an Engagement Letter that outlined the principal terms of the transaction. (Ex 5). To proceed with this large a transaction, SSG had to submit a " transaction approval package" (" TAP" ) and obtain sign-off from multiple departments throughout BOA. (Def. 56.1 ¶ 23).
The source of the assets making up the Initial Collateral that formed the Issuer's initial assets were two of BSAM's funds, the " High-Grade Structured Credit Strategies Enhanced Leverage Fund" (" EL Fund" ) and the " High-Grade Structured Credit Strategies Fund" (" HG Fund" ) (collectively, " the Funds" ). The Funds' performance was not identified as one of the primary risks and was not mentioned anywhere in the TAP. (Def. 56.1 ¶ 25).
On May 22, 2007, " in order to facilitate the closing," BAS bought the Initial Collateral from the Funds for transfer to the Issuer at closing, which was scheduled for May 24. (Def. 56. ¶ 36). The CDO-squared purchased the Initial Collateral from BAS' warehouse on May 24, 2007, for the same prices (with an adjustment for accrued interest) that BAS had paid the Funds for those assets on May 22. (Def. 56.1 ¶ 37).
At the same time as this deal was being finalized, throughout May of 2007, news of negative return at the Funds corresponded with an increasing number of investors in the Funds seeking redemption requests for future redemption dates. By May 18, 2007, the Friday before the scheduled closing, requests for future redemptions, which would be payable over the next few months, had risen to $304.5 million in the EL fund (50% of investor equity capital) and $75.7 million in the HG fun (about 8% of investor capital). (Def. 56.1 ¶ 43). As of May 23, 2007, the day before the transaction closed, redemption requests at the HG fund were up to somewhere between 15% and 17% of investor equity capital. (Def. 56.1 ¶ 44).
At approximately 6:00 PM on May 23, 2007, Defendant Ralph Cioffi called Brian Foley, a BOA banker who was heavily involved in the deal, to tell him that a letter (the " May 23 Disclosure Letter" ) would be delivered shortly concerning redemption requests by investors at either the EL Fund or one of BSAM's other funds. (Def. 56.1 ¶ 47). Michael McLaughlin, head of SSG for BOA, was in London at the time, but he received the BSAM letter from Sai Raman, the head of BOA's Structures Derivatives Group by email. In an email exchange, Raman and McLaughlin called BSAM's May 23 Disclosure Letter " disturbing." (Def. 56.1 ¶ 53). Raman thought that Cioffi knew of the redemptions earlier and that he ought to have mentioned it. ( Id .). McLaughlin did not recall at his deposition reporting the letter to anyone (including his boss) or discussing it with anyone other than Raman, and he did not contemplate calling off the deal or postponing it at that time. (Def. 56.1 ¶ 55). No disclosure about the developments at the Funds was added to the Issuer's offering materials. (Def. 56.1 ¶ 60).
After the deal closed on May 24, 2007, BAS served as the structuring agent, underwriter and placement agent for the Issuer. In addition, BAS, along with Citigroup Global Markets Inc. (" Citi" ) and Merrill Lynch Money Markets Inc. (" Merrill Lynch" ), marketed the Issuer's " Super Senior Notes." (Def. 56.1 ¶ 9). BAS, along with the Issuer and other commercial paper dealers, sold short-term commercial paper from the Issuer without disclosing to the third party investors the information in BSAM's May 23 Disclosure Letter. (Def. 56.1 ¶ 60). BAS agreed to " purchase or provide protection in the form of a 2a-7 put," meaning that they agreed to buy back up to $3.24 billion worth of Super-Senior Notes if they could not be sold to investors. (Def. 56.1 ¶ 10). For reasons that are not clearly before the Court, BAS halted any efforts to sell the Issuer's long-term Mezzanine Tranches to third-party investors. (Def. 56.1 ¶ 59). BAS received a $15.4 million structuring fee upon closing. (Def. 56.1 ¶ 12).
Before the transaction closed, it was agreed that one or more of the affiliates (including the Funds) would purchase the Issuer's mezzanine notes and the preference shares at the CDO-squared closing. (Ex. 5 ¶ 5(b)). As a result, on May 24, 2007, the Funds purchased from the Issuer approximately $700 million worth of mezzanine notes. In a " repo transaction" later that day, a separate division of BOA independently
loaned the Funds the $700 million necessary to finance that purchase, thereby increasing BOA's overall exposure to the transaction. ( See Def. 56.1 ¶ 65).
After the deal close, which was after the news of the Funds' redemptions was conveyed to BOA in a letter addressed to its legal department and after BOA then proceeded both with the CDO-squared transaction and with the unrelated repo transaction to finance the Funds' purchase of the Issuer's mezzanine notes, BOA's Brian Foley told Defendant McGarrigal that " BSAM as an institution and you personally, are excellent partners. I thoroughly enjoyed working with you and look forward to the next deal." (Exs. 38-39). SSG continued to invite BSAM and Defendant Cioffi to golfing events and dinners. (Exs. 40-43; Hentemann at Depo. 181; McDowell Depo. at 149-53).
A few weeks later, in June of 2007, the situation at the EL Fund grew dire, so dire, in fact, that redemptions were suspended. (Def. 56.1 ¶ 73). Several days after that, BOA issued a margin call, demanding that the Funds post additional collateral of $94 million to secure the May 24 repo transaction loan. (Def. 56.1 ¶ 74). The Funds failed to comply. ( Id .).
On June 14, 2007, BSAM held a meeting with the Funds' repo counterparties, including representatives from BOA, at which it discussed performance issues at both Funds. (Def. 56.1 ¶ 75). On June 15, 2007, BOA proposed to " buy the entire repo portfolio" it had with the Funds, including the Mezzanine Notes from the CDO-squared pursuant to a transaction purchase agreement. (Def. 56.1 ¶ 76).
Redemptions at the HG Fund were suspended on June 30, 2007. (Def. 56.1 ¶ 80). On July 17, 2007, investors were told that there was " effectively no value left" in the EL Fund and " very little value left" in the HG fund, and that BSAM would " seek an orderly wind-down of the Funds over time." (Def. 56.1 ¶ 81).
Beginning in mid-August 2007 and continuing through October 2007, BOA, pursuant to its commitment as a 2a-7 put provider, bought all of the commercial paper that had been issued by the Issuer. (Def. 56.1 ¶ 82). The Issuer's trustee declared an event of default in February of 2008 and auctioned off the collateral in December of 2008. (Def. 56.1 ¶ ¶ 83-84). At the auction, BOA purchased more than half of the collateral -- 48 out of 84 bonds. (Def. 56.1 ¶ 82-84).
A. Plaintiffs Cannot Prove Proximate Cause
As discussed below, Plaintiffs, who must demonstrate loss causation as part of their burden of proving proximate cause, rely on the expert testimony of Dr. Mukesh Bajaj. But the Court concludes that Dr. Bajaj's testimony is inadmissible because his methodology is unreliable. In the absence of Dr. Bajaj's testimony, Plaintiffs cannot prove proximate cause and, as a result, all four claims must be dismissed. Moreover, Plaintiffs' CDO transaction fraudulent omission claim fails for the separate reason that there is no evidence from which a rational jury could find a duty to disclose. And Plaintiffs' breach of fiduciary duties claim fails because a contractual agreement stipulated that the transaction at issue was conducted at " arm's length."
1. Plaintiffs Must Prove Loss Causation
The Court concludes that this action must be dismissed because, based on the undisputed evidence, Plaintiffs are unable to prove how much, if any, of their damages can be traced to the ultimate disclosure of the information that Plaintiffs allege was wrongfully withheld. Lentell v. Merrill Lynch & Co.,
396 F.3d 161, 173 (2d Cir. 2005).
To establish proximate cause, Plaintiffs must show that the alleged non-disclosure caused their losses. Laub v. Faessel, 297 A.D.2d 28, 745 N.Y.S.2d 534, 536 (App.Div. 2002) ( a plaintiff must " show both that defendant's misrepresentation induced plaintiff to engage in the transaction in question (transaction causation) and that the misrepresentations directly caused the loss about which the plaintiff complains (loss causation)." ); see also Emergent Capital Inv. Mgmt., LLC v. Stonepath Grp., Inc., 343 F.3d 189, 196-97 (2d Cir. 2003); Amusement Indus., Inc. v. Stern, 693 F.Supp.2d 327, 352 (S.D.N.Y. 2010) (" Both the First Department and the Second Circuit have equated loss causation in a common law fraud claim with the 'proximate causation' requirement in other tort cases and in the federal securities context." ). Plaintiffs must prove proximate cause for each of their claims. Diesel Props S.r.l. v. Greystone Bus. Credit II LLC, 631 F.3d 42, 52-53 (2d Cir. 2011) (" Causation is an essential element of damages in a breach of contract action; and, as in tort, a plaintiff must prove that a defendant's breach directly and proximately caused his or her damages." ) (emphasis in original); LNC Invs., Inc. v. First Fid. Bank, N.A., 173 F.3d 454, 465 (2d Cir. 1999) (" [W]here damages are sought for breach of fiduciary duty under New York law, the plaintiff must demonstrate that the ...