United States District Court, S.D. New York
[Copyrighted Material Omitted]
For Plaintiff: John G. Moon, Esq., S. Christopher Provenzano, Esq., MILLER & WRUBEL P.C., New York, NY.
For Defendant: Jayant W. Tambe, Esq., Kelly A. Carrero, Esq., Michael O. Thayer, Esq., JONES DAY, New York, NY.
ROBERT W. SWEET, D.J.
Deutsche Bank AG (" Deutsche Bank" or " Defendant" ) has moved pursuant to Rule 9(b) and 12(b) (6) of the Federal Rules of Civil Procedure and the Private Securities Litigation Reform Act to dismiss the First Amended Complaint (the " First Amended Complaint" or " FAC" ) of Arco Capital Corporation Ltd. (" Arco" or " Plaintiff" ). Upon the conclusions set forth below, the motion is granted and the FAC is dismissed with prejudice.
This action was commenced on September 27, 2013. On December 3, Deutsche Bank moved to dismiss the original Complaint. This motion was granted on June 6, 2013 (the " June 6 Opinion" ). On July 3, Plaintiff filed the FAC.
On July 29, 2013, Deutsche Bank moved to dismiss the FAC. The instant motion was heard and marked fully submitted on October 2, 2013.
The transaction giving rise to this action was alleged in the initial complaint and described in the June 6 Opinion. The additional allegations in the FAC, filed on July 5, 2013, principally involve a July 2008 transaction in which Arco purchased notes from Earl's Eight Limited, a special purpose entity incorporated in the Cayman Islands (" Earl's Eight" ). (FAC ¶ 97.) The transaction is alleged as follows:
In or about March 2007, Deutsche Bank, allegedly in violation of the terms of the CRAFT Transaction, designated Reference Obligations that did not conform to International Swaps and Derivatives Association, Inc. (" ISDA" ) standards. (FAC ¶ ¶ 93-94.) Arco learned of this breach in or about early 2008 when two such Reference Obligations defaulted, and demanded that Deutsche Bank renegotiate the terms of its purchase of certain CRAFT Notes. (FAC ¶ 94.) Deutsche Bank did so, and in July 2008, Deutsche Bank repackaged certain CRAFT Notes into securities called Earls Eight Series 469 Tranche B Pass Though Notes (" Earls Eight Notes" ). (FAC ¶ ¶ 95-97.) The Earls Eight Notes, as " securities" under the Exchange Act, incorporated the same Eligibility Criteria and other obligations as the CRAFT Notes, including the requirement that an " Independent Accountant" certify compliance with the Eligibility Criteria upon default. Deutsche Bank also agreed to additional obligations, such as not including non-ISDA derivatives as Reference Obligations. (FAC ¶ ¶ 96-97); (Declaration of Jayant W. Tambe, July 29, 2013 (" Tambe Decl." ), Ex. 22 (Letter Agreement dated July 15, 2008)); (Tambe Decl. Ex. 25 (Prospectus dated July 15, 2008).) Deutsche Bank sold Arco the Earls Eight Notes on July 15, 2008. (FAC ¶ 97.)
The Earls Eight offering documents contain disclaimers regarding the risks of the Earls Eight Notes, and caution investors to " examine carefully" the documentation relating to the underlying CRAFT Class G Notes. (Tambe Decl. Ex. 25 at 3.) Arco, as an investor in the Earls Eight Notes, was informed that:
Purchasers of [the Earls Eight] Notes should conduct such independent investigation and analysis regarding the [CRAFT Class G Notes] and all other assets from time to time comprising the [CRAFT Class G Notes] and [CRAFT CLO] . . . as they deem appropriate to
evaluate the merits and risks of an investment in [the Earls Eight] Notes.
(Id. at 1.) Through the Earls Eight offering documents, " [t]he Issuer [i.e. Earls Eight] and the Arranger [i.e. Deutsche Bank] disclaim[ed] any responsibility to advise the purchasers of [the Earls Eight] Notes of the risks and investment considerations associated with the purchase of the [Earls Eight] Notes as they may exist at the date hereof or from time to time thereafter." (Id. at 1.)
Arco's allegations arise out of events that occurred with respect to seventeen Reference Obligations, some related to the Earls Eight transaction and others relating to the CRAFT CLO, that Deutsche Bank designated in January 2007. (FAC ¶ ¶ 13, 14, 84, 91, 212, 232, 237.) The Reference Obligations were selected by Deutsche Bank, and noteholders could rely only on Deutsche Bank's assurances that they would be selected in compliance with the Eligibility Criteria. (FAC ¶ ¶ 119-121.) Prior to a default, Deutsche Bank purportedly permitted Arco no knowledge about any Reference Obligation. In 2007 there was a single default; three in 2008 (during the financial crisis); two in 2009; two in 2010; five in 2011; and in the first three months of 2012, an additional two. (FAC ¶ ¶ 123, 130, 133.) When the CRAFT CLO Notes came due in June 2012, CRAFT had experienced 15 defaults, not including the two non-ISDA Reference Obligations, which Arco used to force Deutsche Bank to repackage the Earls Eight Notes in July 2008. (FAC ¶ 138). Arco has alleged that it was not alerted to the possibility of fraud until after the five defaults occurred in 2011. (FAC ¶ 137.)
The accelerating series of defaults in 2011 purportedly led Arco to commence an investigation that ultimately revealed that Deutsche Bank had disregarded the Eligibility Criteria and used the Reference Portfolio to transfer its toxic loans to the noteholders. (FAC ¶ ¶ 122-138.) Initially, in trying to investigate the circumstances of these defaults, Arco was frustrated by a lack of publicly available information, (FAC ¶ 120-121, 134), and allegedly by stonewalling, repeated misrepresentations and false assurances by Deutsche Bank. (FAC ¶ ¶ 118, 120, 124-125, 127-131, 135-136.) Arco then obtained a few Independent Accountant certifications relating to some defaults, which indicated breaches of the terms of the transaction, not fraud. (FAC ¶ ¶ 101-108.)
In the fall of 2011, having difficulty obtaining further information, Arco's general counsel retained litigation consultants to perform factual investigation of the financial statements of the Reference Obligors. (FAC ¶ 135.) This analysis was difficult to conduct because many of the Reference Obligors were emerging markets companies or non-public. (FAC ¶ 136.) When Reference Obligations were finally identified and researched, Arco discovered apparent repeated violations of the Eligibility Criteria. (FAC ¶ ¶ 142-197.) By mid-2012, Arco believed from its investigations that the numerous defaults were not the result of a poor investment or simple noncompliance with the terms of the transaction, but represented a deliberate fraudulent effort by Deutsche Bank to transfer its bad debts to investors. (FAC ¶ 118).
Count I of the FAC has alleged scheme liability under Rule 10b-5(a) and (c) on the sale of CRAFT and Earls Eight Notes, Count II has alleged misrepresentation and omission liability on the sale of the Earls Eight Notes under Rule 10b-5(b), and Counts III and IV have alleged common law ...