Basis PAC-Rim Opportunity Fund (Master), et al., Plaintiffs-Respondents,
TCW Asset Management Company, Defendant-Appellant.
appeals from an order of the Supreme Court, New York County
(Shirley Werner Kornreich, J.), entered on or about October
19, 2015, which, to the extent appealed from, denied its
motion for summary judgment dismissing the complaint.
Gibson, Dunn & Crutcher LLP, New York (Christopher M.
Joralemon, Peter M. Wade, Diana M. Feinstein and Mark A.
Kirsch of counsel), for appellant.
Baach PLLC, New York (Bruce R. Grace of counsel), for
Friedman, J.P., Dianne T. Renwick, Paul G. Feinman, Judith J.
Gische, Barbara R. Kapnick, JJ.
Basis PAC-Rim Opportunity Fund (Master) and Basis Yield Alpha
Fund (Master) (together Basis), are two Australian-based
Cayman Islands hedge funds. Defendant TCW Asset Management
Company (TCW) is an investment advisor that served as the
collateral manager for Dutch Hill II (Dutch Hill), a $400
million collateralized debt obligation (CDO) investment.
Dutch Hill was created as an investment vehicle used for the
purpose of taking a net long position on extremely risky
Residential Mortgage-Backed Securities (RMBS). Nonparty
Deutsche Bank was the investment banker, structurer,
underwriter, and placement agent for Dutch Hill.
Bank marketed the Dutch Hill notes to potential investors and
negotiated the price of the notes. As the collateral manager,
TCW selected the assets for the Dutch Hill portfolio. The
primary investment strategy for Dutch Hill consisted of
pairing long positions in below investment-grade tranches of
RMBS, with short positions (via credit default swaps) in
higher-rated tranches of the same bonds. The theory was that
this strategy would significantly offset any declines in
value in the long positions (the below investment-grade
tranches) with gains in the corresponding credit hedge (the
higher-rated tranches of the same bonds).
January 2007, Deutsche Bank solicited Basis's investment
in Dutch Hill. Part of this solicitation included a marketing
book that outlined the general structure and preliminary
projections for an equity investment in Dutch Hill. TCW
marketed itself as having the ability to identify which risky
RMBS were likely to succeed and which were likely to fail. In
other words, TCW marketed itself as having the ability to
select the less risky RMBS from what was then known to be the
risky RMBS market. Throughout the first half of 2007, certain
individuals at TCW expressed the view that portions of the
subprime mortgage market were experiencing deepening
deterioration, including certain types of loans originated in
2006 and certain RMBS bonds issued in 2006. However, it was
TCW's view that selective portions of the subprime RMBS
market remained viable and provided a fundamentally sound
asset class. Prior to investing in Dutch Hill, Basis was also
aware that the RMBS subprime market was becoming increasingly
volatile in the first half of 2007.
on May 2, 2007, Basis purchased over $27 million of Dutch
Hill's Class D-3 notes, which were rated BB, the riskiest
portions of the investment vehicle. By the end of July 2007,
in the midst of the housing market crisis, Dutch Hill notes
had lost most of their value.
commenced this action on or about November 21, 2012,
asserting causes of action for fraudulent inducement,
fraudulent concealment, negligent misrepresentation, breach
of contract - third party beneficiary, and unjust enrichment.
On or about October 15, 2013, Basis filed an amended
complaint asserting only the fraud claims. TCW moved for
summary judgment, arguing that Basis was unable to meet its
burden of proving loss causation, an element of fraud. The
motion court denied TCW's motion for summary judgment,
finding issues of fact as to loss causation.
the motion court aptly articulated the concept of loss
causation, the court erred in its application. Both the
motion court's decision and Basis's argument on
appeal conflate the concept of loss causation with
materiality, falsity and reasonable reliance - other elements
of fraud. Once TCW made a prima facie showing that
Basis's loss was not due to any fraudulent statements or
omissions by TCW, the burden then shifted to Basis to raise
an issue of fact. Basis did not meet its burden and TCW's
summary judgment motion should have been granted.
claim requires "proof by clear and convincing
evidence" as to each element of the claim (Gaidon v
Guardian Life Ins. Co. of Am., 94 N.Y.2d 330, 350
). One such element is causation, and to establish
causation, plaintiffs must prove both that
"defendant's misrepresentation induced plaintiff[s]
to engage in the transaction in question (transaction
causation) and that the misrepresentations directly caused
the loss about which plaintiff[s] complain (loss
causation)" (Laub v Faessel, 297 A.D.2d 28, 31
[1st Dept 2002]). "Transaction causation is akin to
reliance, and requires only an allegation that but for the
claimed misrepresentations or omissions, the plaintiff would
not have entered into the detrimental securities
transaction'" (Lentell v Merrill Lynch &
Co., 396 F.3d 161, 172 [2d Cir 2005], cert
denied 546 U.S. 935');">546 U.S. 935 ). 
Loss causation is the causal link between the alleged
misconduct and the economic harm ultimately suffered by the
plaintiff'" (id. at 172). To establish loss
causation a plaintiff must prove that the "
subject of the fraudulent statement or omission was
the cause of the actual loss suffered'"(id.
at 173). Moreover, " when the plaintiff's loss
coincides with a marketwide phenomenon causing comparable
losses to other investors, the prospect that the
plaintiff's loss was caused by the fraud decreases',
and a plaintiff's claim fails when it has not...
proven... that its loss was caused by the alleged
misstatements as opposed to intervening events'"
(id. at 174, quoting First National Bank v Gelt
Funding Corp., 27 F.3d 763, 772 [2d Cir 1994]). Indeed,
when an investor suffers an investment loss due to a
"market crash  of such dramatic proportions that [the]
losses would have occurred at the same time and to the same
extent regardless of the alleged fraud, " loss causation
is lacking (see Loreley Fin. [Jersey] No. 3 Ltd. v Wells
Fargo Sec., LLC, 797 F.3d 160, 186-187 [2d Cir 2015]).
Although the Loreley case concerned a motion to
dismiss and thus focused on pleading requirements for loss
causation, that court did note that "[w]hether
[p]laintiffs can prove [their] allegations - and whether
defendants in turn can proffer evidence that the CDOs would
have collapsed regardless, due to the larger crash in the
[mortgage-backed securities] market - are evidentiary matters
for later phases of this lawsuit" (id. at 188).
TCW has proffered evidence that Dutch Hill would have
collapsed regardless of the assets selected by TCW due to the
housing market crash - a "marketwide phenomenon causing
comparable losses to other investors" (Lentell v
Merril Lynch & Co., Inc., 396 F.3d at 174). TCW
submitted an expert affidavit in which the expert opined that
even if TCW had selected assets that complied with the Dutch
Hill model and comported with TCW's representations to
Basis, Basis would still have suffered a loss due to an
external and intervening cause - namely, the housing market
crash. The expert conducted a common form of regression
analysis to "analyze the effect that macroeconomic
factors had on pools of collateral consistent with Dutch Hill
II's core asset portfolio... in order to create a
benchmark against which to compare the performance of the
loan pools analyzing the collateral in Dutch Hill II."
The TCW expert found that "any CDO backed by pools of
loans consistent with Dutch Hill II's ...