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Woori Bank v. Citigroup Global Markets, Inc.

United States District Court, S.D. New York

August 5, 2014

WOORI BANK, Plaintiff,



On May 15, 2012, plaintiff Woori Bank filed this action against defendant Citigroup Global Markets, Inc., asserting claims of common-law fraud, fraud in the inducement, negligent misrepresentation, and unjust enrichment. All of plaintiff's claims arise out of its investment in a collateralized debt obligation ("CDO") marketed and sold by defendants. (Am. Compl. ¶¶ 93-112, A-F, ECF No. 59.)[1]

Pending before the Court is defendant's motion to dismiss the amended complaint, primarily on the grounds that (1) plaintiff's causes of action are barred by the applicable statute of limitations and (2) plaintiff cannot plausibly allege justifiable reliance, a required element of fraud claims under New York law. (Mem. of L. in Supp. of Mot. to Dismiss ("Def.'s Mot.") 1-2, ECF No. 67.) In support of its motion, defendant relies on Woori Bank v. Merrill Lynch, 542 F.Appx. 81 (2d Cir. 2013), a recent decision of the Second Circuit on a set of facts substantially similar to, but not identical with, those of this case.

For the reasons set forth below, defendant's motion is GRANTED.


Procedural History

On May 15, 2012, plaintiff initiated this action. (Compl., ECF No. 1.) On July 27, 2012, defendants moved to dismiss (ECF No. 37), and on March 27, 2013, Judge Swain granted that motion on the basis that the complaint offered insufficient examples of fraudulent misrepresentation, relied primarily on "atmospherics, " and contained "vague and conclusory" allegations of wrongdoing. (ECF No. 49 at 8-9.) On April 30, 2013, plaintiff moved to amend the complaint; Judge Swain allowed the amendment. (ECF Nos. 50-51, 57.)

On August 28, 2013, plaintiff filed its amended complaint, which is that now pending before this Court. That complaint contains notable differences from the prior: it alleges fraud with respect to only a single CDO (Armitage ABS CDO Ltd., hereinafter "Armitage") rather than the five CDOs identified in the original complaint, and eliminates all of the defendants named in the original complaint except defendant Citigroup Global Markets, Inc. (See Compl. ¶¶ 111-145.) The amended complaint expands the original complaint's allegations regarding defendant's misrepresentations about Armitage. (See id. ¶¶ 94-100; Am. Compl. ¶¶ 82-92). Finally, plaintiff has attached the Armitage CDO "pitch book" and Armitage financial data as exhibits to its amended complaint. (Id. Exs. 1, 2.)

On October 9, 2013, defendant filed the instant motion to dismiss the amended complaint. (ECF No. 66.) The motion became fully briefed on November 27, 2013. (ECF No. 73.) On May 29, 2014, the case was transferred to the undersigned. On June 9, 2014, the Court heard oral argument on the instant motion. (Oral Arg. Tr., June 9, 2014, ECF No. 82.)[2]

Factual Background

The Court assumes the truth of the facts alleged in the amended complaint and draws all inferences in plaintiff's favor.

From 2000 to 2007, defendant earned substantial profits from arranging and underwriting collateralized debt obligations ("CDOs") based on residential mortgage-backed securities ("RMBS"). (Am. Compl. ¶¶ 3, 37.)[3] From 2005 to 2007 alone, defendant arranged nearly $110 billion in CDOs. (Id. ¶ 37.)

In 2006, defendant began to recognize that the credit ratings on various CDO tranches did not reflect their true risk of default, in part because the underlying loans had been issued in violation of industry underwriting standards and were unreliable. (Id ¶¶ 4, 39-41, 43-45.) Plaintiff claims that defendant was aware of the discrepancies, even though CDO investors and ratings agencies were not, because it alone had access to the relevant data on the individual mortgages underlying the CDOs it offered for investment. (Id ¶ 4.)[4] To the extent that government agencies and third parties warned defendant of the risks of low-quality collateral, defendant allegedly ignored the warnings or used them to increase its margins by negotiating lower prices for the underlying loans, and did not disclose the risks to potential purchasers or ratings agencies. (Id ¶¶ 49-50, 55-60.) Plaintiff further asserts that defendant, in persuading banks and other entities to invest in CDOs, relied on historical data that it knew no longer reflected the actual likelihood that specific CDO tranches would return on investment. (Id ¶¶ 4-5.) Even as the risks began to come to light more broadly, defendant pressured ratings agencies to keep CDO credit ratings artificially inflated. (Id ¶ 71-72.)

In March 2007, Citigroup or its affiliates formed Armitage ABS CDO, Ltd. and Armitage ABS CDO, Inc. (collectively, "Armitage"), for the sole purpose of issuing securities as a CDO. (Id. ¶¶ 10-11.) Plaintiff alleges that defendant arranged, underwrote, and served as a "placement agent" and direct seller for Armitage. (Id. ¶ 9.) Armitage contained RMBS, related financial products based on residential mortgages, and shares of other CDOs, such as Class V.[5] (Am. Compl. Ex. 1 at 1.)

Defendant included a $20 million interest in Class V Funding III ("Class V"), a CDO it arranged in late 2006, as one of the assets underlying Armitage. (Id. ¶¶ 77, 80.) Plaintiff alleges that, although Credit Suisse Alternative Capital, Inc., an independent portfolio manager, supposedly selected the Class V's underlying assets, defendant itself surreptitiously included assets it believed would fail. (Id. ¶ 77). Then, by taking a short position[6] against Class V, defendant intended to and did profit from the CDO's default. (Id. at ¶ 78-79.)[7] According to plaintiff, defendant did not disclose this "collateral selection plus short" strategy in arranging the Class V CDO to potential investors in Armitage. (Id. ¶ 80.)

In early 2007, defendant entered into discussions with plaintiff regarding a prospective investment in Armitage. (Id. Ex. 1.) In connection with plaintiff's prospective investment, defendant provided plaintiff with a "pitch book" that described the CDO and the potential benefits and risks of investment. (Id. ¶ 82.) The pitch book included a "break-even default analysis, " a table purporting to show rates at which the underlying assets could default if Armitage buyers were to break even on their investment. (Id. ¶ 84.) Defendant had also previously provided plaintiff with information on RMBS' historical rates of default, recovery of investment, and changes in credit ratings. (Id. ¶¶ 86-89.) Taken together, the information suggested that even the junior tranches of Armitage were unlikely to go into default. (Id.) Plaintiff alleges that it relied on the break-even default analysis and the historical default rates in deciding to invest in Armitage. (Id. ¶¶ 83, 90.)

Plaintiff alleges further that defendant, in its marketing materials, "touted Vanderbilt Capital Advisors as experienced collateral managers that would act independently to select Armitage CDO's collateral, " while at the same time exercising tacit control over Vanderbilt's selection of assets. (Id. ¶ 91(B).)

On March 29, 2007, plaintiff purchased a $25 million interest in Armitage from defendant. (Id. ¶ 7.) Standard & Poor's ("S&P") had given an "A" rating to the tranche of Armitage in which plaintiff chose to invest. (Id. ¶ 7.) An "A" rating reflected S&P's assessment that the "obligor's capacity to meet its financial commitment on the obligation [was] still strong." (Id. ¶ 20.) Plaintiff alleges that, having never itself issued or underwritten a CDO, it lacked sophisticated knowledge of CDO finance and instead relied on credit ratings to judge the safety of prospective investments. (Id. ¶¶ 28-29.)

Plaintiff claims that at the time of its investment in Armitage, defendant was aware of the deterioration of the market in residential mortgages, and that it knew that the breakeven default rate and historical information it provided plaintiff did not accurately represent the true risks of investing in Armitage. (Id. ¶ 91(A).)

On November 19, 2007, Class V, a CDO included as collateral in Armitage, went into default. (Id. ¶ 79.) By December 4, 2007, Armitage itself was in default. (Id. ¶ 7.) Plaintiff sold its interest in Armitage on August 14, 2008. (Id.)[8] Plaintiff filed the instant lawsuit on May 15, 2012, alleging a variety of wrongdoing on the part of defendant.

Plaintiff asserts that it learned of defendant's wrongdoing from several sources that emerged subsequent to Armitage's default.

The FCIC report

Plaintiff alleges it learned of defendant's wrongdoing in part from a report issued by the Financial Crisis Inquiry Commission ("FCIC") in January 2011. (Id. ¶ 33.) The FCIC was a federal investigatory body appointed to study the financial crisis.[9] In January 2011, it issued its Financial Crisis Inquiry Report ("the Report"). (Id. ¶ 33.) The Report contains the FCIC's findings as to the causes of the 2007-2008 financial crisis. (Id.) According to the Report, defendant went to great lengths to persuade customers around the globe to invest in CDOs and other structured financial products. (Id. ¶ 38.) The Report contained testimony by Richard M. Bowen III, a former underwriter for Citigroup's Consumer Lending Group, in which he stated that, as of mid-2006, the majority of loans purchased by Citigroup did not meet the company's underwriting guidelines, and that Citigroup employees were aware of the issues in loan quality as early as 2005. (Id. ¶¶ 43-45.)

The Report found that, from January 2006 through June 2007, an independent due-diligence provider, Clayton Holdings LLC ("Clayton"), had identified 42% of Citigroup's mortgage purchases as below industry underwriting standards. (Id. ¶ 52.) Citigroup, however, had packaged nearly one-third of the non-conforming loans in the sample studied by Clayton, and all of the nonconforming loans not included in the sample, into its financial products. (Id. ¶¶ 52-55.) Allegedly, Citigroup used Clayton's findings to negotiate lower prices from the original lenders on the loans it was purchasing to repackage into CDOs. (Id. ¶ 54.) Testimony before the FCIC also ...

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