Case 1:10-cv-07497-VM Document 73
Filed 03/21/12 Page 1 of 64
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
--------------X
DODONA I, LLC,
10 civ. 7497
(VM)
Plaintiff,
DECISION AND ORDER
-againstGOLDMAN, SACHS & CO., et al.,
Defendants.
----------------------------- X
VICTOR MARRERO, United States District Judge.
Plaintiff Dodona I, LLC ("Dodona")
brings this suit on
behalf of a putative class of investors
offerings led by defendants Goldman,
The Goldman Sachs Group,
Funding
2006-1,
Ltd.
Funding 2006 -I,
Funding
Mezzanine
the
"Hudson
Peter
L.
Ostrem
("Herrick")
violations
2006-2,
1934
Act"),
10b-s
("§
§
and
10(b)/I),
of
Hudson Mezzanine
Hudson Mezzanine
Ltd.
/I )
former
78a et
§
seq.
thereunder
("Rule
-1­
employees
K.
Herrick
Dodona
alleges
Exchange
(the
and Securities and Exchange Commission
promulgated
Corp.")
and Hudson 2
Derryl
Securities
Hudson
2
Goldman
"Defendants").
15 U.S.C.
and
,
( "Hudson
and
the
("GS&CO" ) ,
Hudson Mezzanine
Hudson 1 Corp.,
( "Ostrem" )
10 (b)
2
Corp.
SPEs"),
(collectively,
of
Ltd."),
("Hudson
(together with Hudson 1 Ltd.,
Ltd. ,
1
("Hudson 1 Corp. II),
Ltd.
Funding
Sachs & Co.
("Goldman"),
("Hudson
Corp.
2006-2,
Inc.
in two securities
10b-s"),
Act
"Exchange
("SEC")
17
of
Rule
C.F.R.
§
Case 1:10-cv-07497-VM Document 73
240.10b-5i
law
§ 20(a)
fraud;
Filed 03/21/12 Page 2 of 64
("§ 20(a)")i
of the Exchange Act
fraud;
fraudulent
Herrick,
and Ostrem
abetting
and
aiding
common
concealment; and unjust enrichment.
On April 5,
2011, Goldman,
GS&Co,
filed a motion to dismiss pursuant to Federal Rule of Civil
Procedure 12(b) (6)
April 6,
2011,
the extant Hudson SPEs 1
Hudson 2 Corp. No.
53),
(\\Rule 12(b)(6)").
(Docket No.
-
48.)
On
Hudson 2 Ltd. and
filed a separate motion to dismiss (Docket
which adopted and incorporated the arguments made
in their co-defendants' motion to dismiss.
For the reasons
discussed below, Defendants' motions to dismiss are GRANTED
in part and DENIED in part.
I .
BACKGROUND
The facts below are taken from Dodona's Amended Class
Action Complaint
(Docket No.
40)
(\\Complaint" or "Compl.")
and documents cited or relied upon therein.
specifically
quoted,
documents will be made.
no
further
Except where
reference
to
these
The Court accepts these facts as
true for the purposes of ruling on the motions to dismiss.
See Spool v.
World Child Int'l Adoption Agency,
520 F.
3d
178, 180 (2d Cir. 2008).
According to the Amended Class Action Complaint, Hudson 1 Corp. filed
for dissolution on October 27, 2009, and Hudson 1 Ltd. was liquidated
on October 29, 2009. Neither of the Hudson 1 entities has answered the
Complaint.
In view of this situation, Dodona is directed to inform the
Court how it intends to proceed against Hudson 1 Corp. and Hudson 1
Ltd.
1
-2­
Case 1:10-cv-07497-VM Document 73
A.
Filed 03/21/12 Page 3 of 64
THE SYNTHETIC COLLATERALIZED DEBT OBLIGATION
The allegations
in this
suit
relate
mortgage crisis of the late 2000s,
of which are now a
its
the
subprime
the causes and effects
regular feature
Court and others.
to
of
litigation in this
Specifically, Dodona's claims arise from
investment
in
Mezzanine Funding 2006-1
offerings,
securities
two
("Hudson 1")
Funding 2006-2 ("Hudson 2")
Hudson
and Hudson Mezzanine
(together, the "Hudson CDOs") .
The Hudson CDOs were examples of a complex subspecies
of financial instrument,
the synthetic collateralized debt
obligation.
collateralized
("CDO")
Whereas
are
securities
"backed
by
a
debt
obligations
portfolio
of
fixed­
income assets," such as residential mortgages, a "synthetic
CDO"
does not actually own any cash assets.
Instead,
it
"mimics" the cash flow of particular "referenced" assets by
means
of
("CDS").
A
a
transaction
(Compl.
CDS
covering
~
like
referenced
protection buyer,"
credit
default
swap
credit
one
insurance
party,
agreement
the
"credit
pays periodic premiums in exchange for a
that
the
other
seller,l/
will
make
an
a
a
asset:
promise
experience
the
31.)
functions
a
called
"negative
party,
insurance
credit
the
payout
event,"
default or credit rating downgrade.
-3­
(Id.
"credit
should
such
~
as
33.)
protection
the
a
asset
payment
Synthetic
Case 1:10-cv-07497-VM Document 73
Filed 03/21/12 Page 4 of 64
CDOs allow investors to assume the position of the credit
protection seller, betting that the referenced assets will
not experience a negative credit event.
In the case of the Hudson CDOs
the referenced assets
l
were residential mortgage backed securities ("RMBS
are,
in
turn,
Thus
mortgages.
Dodona
were
l
therefore
collateralized
I
the investors
betting
the
by
that
underlying
pools
of
fI
RMBS
).
residential
in the Hudson CDOs,
the
referenced
residential
like
RMBS
and
would
mortgages
perform well, and not experience negative credit events.
RMBS and CDOs are typically organized into prioritized
tiers
I
called
"tranches.
II
The
lowest
tranche
bears
highest risk but carries the greatest rate of return
higher "senior
l
the
while
tranches provide the inverse.
The level of
risk each tranche bears is expressed via a
credit rating
assigned by
a
tl
credit
Standard & Poor's.
rating
agency
such
I
as
Moody's
or
Should the performance of the portfolio
of underlying or referenced assets deteriorate,
tranche, with the lowest credit rating
l
the lowest
would suffer losses
prior to the more senior tranches.
B.
GOLDMAN/S ROLE IN THE SUBPRIME MORTGAGE MARKET
Dodona/s claims against the Defendants are built upon
allegations that Goldman had a hand in many aspects of the
subprime
mortgage
market
in
-4 ­
the
late
2000s.
Subprime
Case 1:10-cv-07497-VM Document 73
Filed 03/21/12 Page 5 of 64
mortgages are those mortgages with a high risk of default.
During 2005, 2006, and 2007, Goldman: 1) purchased subprime
loans
on
a
bulk
originators
(a/kia,
traded subprime
mortgage
RMBSi
2)
basisi
"warehouse
invested
securities
and
as
and
and
"structured product correlation desk"
synthetic
marketed
(Id.
mortgage-related assets."
,
of
backed
by
mortgage-related
established
5)
a
that "structured and
collateralized
CDOs
and
tranches
CDOs
in
mortgage
created
specific
principal
transactions;
to
3)
i
underwrote
4)
a
credit
lending")
and other RMBS
securitizationsi
5)
extended
41.)
subprime
by
In 2005,
Goldman
reportedly underwrote at least fifteen CDOs backed by RMBS,
and in 2006 it underwrote nineteen such CDOs.
For the purposes of this suit,
in
the
subprime
reasons.
First,
mortgage
market
Goldman' s
is
significant
it means that by late 2006,
significant exposure
involvement
for
two
Goldman had
to subprime mortgages.
Goldman had
bet heavily that residential mortgages would continue to do
well i
or,
in
financial
parlance,
Goldman
was
"long"
on
subprime mortgage-backed securities.
Second,
Goldman's
purchase
of
subprime
loans,
its
dealings with mortgage originators, and its underwriting of
RMBS provided Goldman,
showing
the
"by at least 2006," with information
deteriorating
-5­
performance
of
subprime
Case 1:10-cv-07497-VM Document 73
mortgages.
~
Id.
Filed 03/21/12 Page 6 of 64
According to a report that Goldman
17.)
authored in 2010 for regulators, when Goldman structured or
underwrote
it
RMBS,
performed
its
investigating 1) the counterpartYi 2)
compliancej
and
property
4}
selected loan files,
state
federal
review [ed]
values."
property
[]
(Id.
lending
~
diligence,
loan level creditj 3)
Goldman
verif[ied]
statutes,
appraisals
also
compliance with
and
selective [ly]
against
comparable
As a result of its due diligence,
48.)
Goldman officials
due
valuation.
"review [ed]
and
own
noticed an
events in subprime loans,
increase
in negative
credit
such as early payment defaults,
"kickouts,1I and repurchase claims.
In addition, Goldman outsourced mortgage appraisals to
a
firm
According
called
to
Clayton
media
Holdings,
reports,
"significant deterioration of
flags ll around 2005.
Clayton
lending
Id. ~ 50.}
( "Clayton") .
Inc.
began
standards"
noticing
and
"red
A report Clayton produced
to the Financial Crisis Inquiry Commission showed that,
of
the loans Clayton reviewed for Goldman in the first quarter
of 2006,
twenty-two percent were
initial
"rejects,"
i.e.,
mortgages with flaws so serious that they should have been
rejected
outright;
by
the
first
quarter
percentage had increased to 25.5 percent.
-6
of
2007,
that
Case 1:10-cv-07497-VM Document 73
C.
Filed 03/21/12 Page 7 of 64
THE RISK REDUCTION PROGRAM As a result of Goldman's entanglement in the subprime
mortgage market and the due diligence it performed related
to
some
Goldman
of
those
were
lending,"
activities,
"aware
id.
~
of
52),
the
by
2006,
increased
officials
risks
in
and had recognized a
within
subprime
corresponding
need to reduce Goldman's long exposure.
According
to
Michael
Goldman's
Swenson
Structured
("Swenson"),
manager
of
Product
("SPG"),
during the summer of 2006,
the
Trading
co­
Group
it became clear that
the "market fundamentals in subprime" were going to have a
"very
unhappy
performance
explained,
ending."
review
Id.
for
the
indices 3
("Birnbaum" ),
gave
a
review :
fiscal
In
55. )
year
his
2007,2
selfSwenson
"[w] e were long and needed to reduce risk in a
situation where there were
ABX
~
we
were
long
few opportunities
[on] "
Id.
to
shed the
Josh
Birnbaum
Goldman's managing director for SPG Trading,
similar
appraisal
"Given how much
broker market in 2006,
ABX
in
his
2007
self-performance
we had purchased through the
the world would think
[Goldman]
was
Goldman's first quarter for the fiscal year 2007 began on November 25,
2006, thus encompassing the Hudson 1 and Hudson 2 offerings.
2
The ABX is a group of indices created to measure the performance of
select groups of subprime RMBS.
"Investors can bet on (i. e., go
\ long') or against (i. e.
go \ short') the ABX indices by entering
among other things, into CDS with a counterparty."
(Compl. ~ 35.)
3
I
I
-7 ­
Case 1:10-cv-07497-VM Document 73
very
long
Birnbaum
for
the
concluded
Filed 03/21/12 Page 8 of 64
foreseeable
that
future.
Goldman
needed
~
(Id.
II
to
57.)
"flip
[its]
risk."
Consequently,
Goldman
reduction program.
"decided
~
Id.
11
future
direction
late
overall
residential housing market
the
embarked
In
59.)
[its]
reduce
to
officials
on
a
Goldman
2006,
exposure
"risk
to
the
given the uncertainty of
of
the
housing
market
and
the
increased volatility of mortgage-related product markets. II
~
(Id.
On
67 . )
Financial
Officer
December
David
14,
2006,
Viniar
Goldman's
( "Viniar" )
Chief
convened
a
meeting to discuss the mortgage department's "position and
risk,"
id.
reduction
In a
~
62),
in Goldman's
December 15,
should
be
market
positions
2006
"aggressive"
predicted that
the
during which he
email,
goes
into
in
what
the
subprime
market.
Viniar stated that Goldman
shedding
"there will
reportedly directed a
subprime
assets,
and
be very good opportunities as
is
likely
to
be
even
greater
distress and we want to be in a position to take advantage
of them.
II
Id.
~
63.)
One way Goldman began offsetting subprime risk was by
shorting RMBS
betting
that
and mortgage-backed CDOs subprime
mortgages
in other words,
and
instruments built upon them would decrease
8­
the
securities
in value.
As
Case 1:10-cv-07497-VM Document 73
Birnbaum explained after
only get flat,
the
Filed 03/21/12 Page 9 of 64
fact,
"[Goldman]
but get VERY short.
according to Swenson,
(Id.
II
~
should not
57.)
Thus,
"[i] n November and December of
2006,
we aggressively capitalized on the franchise to enter into
efficient shorts in both the RMBS and CDO space.
55. )
Goldman did this in part by "buying protection"
synthetic CDOs.
Goldman "go[tJ
Id.
~
59.)
~
(Id.
II
in
In the first quarter of 2007,
short CDS on RMBS and CDOs,
g[ot]
short the
super-senior BBB- and BBB index,
and g[ot]
short AAA index
as
~
By
overall
protection. "
Id.
78.}
March
2007,
Goldman's SPG Trading unit had a net short position of $2.1
billion on certain mortgage assets,
including CDS on RMBS
and CDOs.
In
November
between
November
Goldman
2007,
24,
2006
and
reduced its overall exposure to
informed
August
the
31,
2007,
it
had
(Id.
~
79.)
THE HUDSON CDOS
The Hudson 1
this
that
"subprime mortgage backed
securities" from $7.2 billion to $2.4 billion.
D.
SEC
shift
commenced
and Hudson 2
in Goldman's
on
December
offerings
strategy.
5,
2006;
months later, on February 8, 2007.
-9­
occurred during
The Hudson 1 offering
Hudson
2
commenced
two
Case 1:10-cv-07497-VM Document 73
Filed 03/21/12 Page 10 of 64
According to the "Marketing Book,,4 for Hudson 1, dated
October
2006,
program
in
approach
"Goldman
to
2006
Sachs
create
invest
to
in
developed
a
the
consistent,
attractive
Hudson
CDO
programmatic,
relative
value
opportunities in the RMBS and structured product market."
(Donne Decl.,
ex.
H (Docket No.
broker-dealer subsidiary,
GS&CO,
Goldman's
structured the deals,
served as
50).)
the underwriter and selected the referenced RMBS assets;5 it
also "warehoused" the portfolio prior to closing and served
as
the
liquidation
received a
fee
of
agent.
$30.1
For
million
these
for
services,
Hudson
GS&Co
and
1
$4.5
million for Hudson 2, which derived from the gross proceeds
of
the
offerings.
implemented
through
The
the
Hudson
creation
CDO
of
offerings
the
Hudson
were
SPEs,
"special purpose entities" formed by Goldman for the sole
purpose of issuing and selling the Hudson CDO securities.
Ostrem
and
Herrick,
who
were
vice
presidents
in
SPG
Trading, led the offerings.
Hudson 1 and Hudson 2,
were
nearly
identical
4 Dodona
cites and quotes
Defendants submitted the
motions to dismiss.
in
from
full
both
which were
structure
the Marketing Book
Marketing Book in
synthetic CDOs,
and
collateral
in the Complaint.
support of their
5
The Hudson CDOs were "static," meaning that they were not actively
managed by a CDO manager.
Once the referenced assets were selected,
they
could
only be
modified,
sold,
or
transferred
in
limited
circumstances.
-10­
Case 1:10-cv-07497-VM Document 73
Hudson 1
content.
Filed 03/21/12 Page 11 of 64
consisted of
$837
million
of
organized into eight separately-rated tranches,
notes,
and a $1.2
Hudson 1 referenced 140
billion senior swap transaction.
subprime-related and other RMBS through ens, and carried an
aggregate
notional
Hudson
consisted
2
amount
of
of
approximately
$407.9
organized into eight tranches,
through
ens
million.
with
an
million
billion. 6
$2
of
also
notes,
and referenced eighty RMBS
aggregate
notional
amount
All the RMBS referenced in Hudson 2
of
$400
were also
referenced in Hudson 1.
The Marketing Book for Hudson 1 reported that "Goldman
ha [d]
aligned
incentives
with
the
Hudson
program
by
investing in a portion of equity and playing the ongoing
role of Liquidation Agent."
was
long
on
a
portion of
tranche.
However,
value
the
of
International
Id.
the
In other words, Goldman
equity
notes,
lowest
Goldman was also short on the entire
Hudson
("GSI"),
enos.
Non-defendant
Goldman
a subsidiary of Goldman,
the sole credit protection buyer for both of
enos,
the
with Goldman as
its
guarantor. 7
This
Sachs
served as
the Hudson
meant
that
As described in the Marketing Book, dated October 2006, Hudson 1 was
"A $2.0 Billion Static Mezzanine Structured Product CDO."
(Donne
Decl., ex. H.)
6
7 For Hudson 1,
GSI was also the initial swap counterparty for the $1.2
billion senior swap.
-11­
Case 1:10-cv-07497-VM Document 73
Filed 03/21/12 Page 12 of 64
Goldman,
through its subsidiary,
was on the opposite side
of
CDS
In
the
from
investors.
referenced RMBS experienced a
the
negative
event
credit
that
the
event,
GSI
would receive an insurance payout from the investors.
1.
In
The Hudson CDO Offering Circulars
connection
published
with
the
offering
two
Hudson
CDO
offerings,
circulars
GS&Co
"Offering
(the
Circulars"), which detailed the structure and terms of the
Hudson CDOs,
explained the roles of
the various parties,
and made risk disclosures and disclaimers. 8
Circulars - each over 100 pages -
The Offering
listed the credit ratings
and par value for each tranche of securities, and provided
a
diagram
appendices,
of
the
they
structure
of
the
transaction.
included
specifically
the
names
In
and
identifying "CUSIP" numbers of the referenced RMBS, as well
as
the credit scores and average
the underlying mortgage borrowers. 9
loan-to-value ratios of
The Offering Circulars
also described the negative credit events which,
under the
8 Dodona cites and quotes from the Offering Circulars in the Complaint.
Defendants submitted the full Offering Circulars in support of their
motions to dismiss.
The Offering Circulars also enumerated the percentages of the
referenced RMBS that would be "prime," "midprime," and "subprime." For
Hudson I, as of the closing date, 4.65 percent were expected to be
prime, 54 percent were expected to be midprime, and 41.35 percent were
expected to be subprime.
For Hudson 2 as of the closing date, 62.5
percent were expected to be midprime and 37.5 percent were expected to
be subprime.
I
-12­
Case 1:10-cv-07497-VM Document 73
terms
of
the
CDS,
would
Filed 03/21/12 Page 13 of 64
trigger
payments
by
the
credit
protection sellers to the credit protection buyers.
In addition to the structure and terms of the Hudson
CDO offerings,
the Defendants
also made
risk
and disclaimers in the Offering Circulars.
reminders
general
that
investing
These included
securities
in
"SPECULATIVE AND INVOLVES SIGNIFICANT RISK";
5,
ex.
B at
that
5);
,,[t] he
use
of
disclosures
is
(id., ex. A at
leverage
generally
magnifies an investor's opportunities for gain and risk of
loss";
(id., ex. A at 45, ex. B at 41); that credit ratings
are "not a guarantee of quality";
at
and
52);
fluctuate
underlying
conditions,
that
the
value
based
on
the
pool
of
assets
[and]
markets
the
of
"the
ex.
the
credit
investment
quality
general
condi t i on
(id.,
"
(id., ex. A at 55, ex. B
certain
of
A at
49,
B.
at
of
could
the
economic
financial
46.)
The
Offering Circulars also discussed the risks associated with
RMBS
in
particular,
such
as
the
risk
of
geographically
concentrated underlying mortgages and "balloon" or "jumbo"
loans.
Id., ex. A at 52, ex. B at 49.)
The Defendants disclosed that "[vlarious potential and
actual
conflicts
of
interest
may
arise"
from
other
activities of GSI, GS&Co, and their affiliates, and that it
was expected that GS&Co would have underwritten some of the
-13 ­
Case 1:10-cv-07497-VM Document 73
(Id.,
referenced RMBS.
In particular,
ex.
Filed 03/21/12 Page 14 of 64
A at 56-57,
ex.
B at 53-54.)
the Offering Circulars noted that the GS&Co
and GSI might have "interests different from or adverse to"
the
note
holders
and might
possess
material,
non-public
information regarding the Hudson CDO securities, but had no
obligation of disclosure.
the
Accordingly,
53,)
purchasers
to
investor[s],1t
advisors,
A at 57 - 58 ,
Offering
represent
that
ex.
Id.
that
they
Circulars
they
had
ex.
were
consulted
required
"sophisticated
with
their
as
[]
necessary and appropriate in
order to make an informed investment decision,
II
including
"a full understanding of all of the risks
A at
9,
ex.
B at
"CONSIDER AND ASSESS
DEFAULTS
LIKELY
ON
THE
LEVEL
OBLIGATIONS.
II
Finally,
"Credit
9.)
FOR THEMSELVES
TIMING
THE
OBLIGATIONS,
OF
instructed to
LIKELY LEVEL OF
AS
RECOVERIES
(Id. ,
II
Investors were
REFERENCE
AND
ON
WELL
THE
AS
THE
REFERENCE
Id. ex. A at 8-9, ex. B at 8-9.)
the Offering Circulars identified GSI as the
Protection
Protection Buyer.
94.)
own
and that they "had access to such financial and
other information
ex.
Bat
II
Buyer,
(Id.,
More specifically,
and
II
ex.
the
A at 25,
"initial
100,
ex.
Credit
B at 24,
the Offering Circulars disclosed
that "[i]t is expected that Goldman Sachs International, an
affiliate of
Goldman Sachs
& Co.,
-14­
will
act
as
the
sole
Case 1:10-cv-07497-VM Document 73
Credit Protection Buyer,
Filed 03/21/12 Page 15 of 64
which creates concentration risk
(Id., ex. A
and may create certain conflicts of interest."
at 50 ,
ex . Bat 47.)
identified GSI as the
In total,
each Offering Circular
"Credit Protection Buyer"
at
least
seven times.
E.
AFTERMATH AND ALLEGATIONS
Dodona purchased $3
million of
GS&Co on approximately January 24,
Hudson
2 notes
2007; and $1 million of
the Hudson 1 notes on approximately February 6,
an intermediate
fund,
from
which had purchased its
2007 from
securities
from GS&Co.
The
credit
deteriorated
at
housing market.
quality
the
of
same
the
time
Hudson
as
the
CDOs
rapidly
downturn
of
the
By September 2007, Moody's downgraded the
credit rating of certain of the Hudson 1 notes and placed
on "negative watch" certain of the Hudson 2 notes.
By mid­
2008, Standard & Poor's had downgraded $286 million of the
Hudson 2 notes,
junk status.
by April
(Compl.
have
~
and the Hudson 1 notes were downgraded to
Certain of the Hudson 1 notes were liquidated
and May
116.)
received
of
2009
"reportedly at
large
losses.
II
As the credit protection buyer, GSI would
insurance
payouts
downgrades.
-15­
as
a
result
of
those
Case 1:10-cv-07497-VM Document 73
Filed 03/21/12 Page 16 of 64
The fallout of the subprime crisis spurred regulatory
and legislative
Senate
In April
investigation.
Permanent
Subcommittee")
Subcommittee
released
on
its
2011,
the
Investigations
findings
U. S.
("Senate
regarding
the
financial crisis, including the role that Goldman and other
investment banks played.
members
cited
the
Hudson
securities offerings,
sold
to
clients
The Senate Subcommittee and its
COOs,
among
several
other
as evidence that Goldman "issued and
RMBS
and
COO
securities
containing
or
referencing high risk assets that Goldman Sachs wanted to
get off its books," and that Goldman's strategic shorting
allowed it to "profit []
from the loss in value of the very
COO securities it had sold to its clients.
Id.
II
"
108,
52. )
The
and
Complaint
documents
prepared
by
quotes
produced
the
extensively
to
Senate
and
from
memoranda
Subcommitte.
allegations of
fraud draw from
the
conclusions.
In
Dodona
particular,
the
and
The
Senate
testimony
findings
Complaint's
Subcommittee's
alleges
that
the
Defendants created the Hudson COOs as part of a scheme to
decrease Goldman's subprime exposure at the expense of its
investors
failed
by
shorting
to disclose
those
this
same
COOs;
strategy to
that
investors;
Defendants
and
that
Defendants failed to disclose that they did not reasonably
-16­
Case 1:10-cv-07497-VM Document 73
believe
that
the
Hudson
investors like Dodona.
Filed 03/21/12 Page 17 of 64
CDOs
would
be
profitable
for
Dodona claims it suffered damages
when the Hudson CDa notes were liquidated and when it sold
them at a loss.
II.
A.
LEGAL STANDARD
STANDARD OF REVIEW UNDER RULE 12 B
"To
contain
survive
a
sufficient
motion
to
factual
dismiss,
matter,
a
complaint
accepted
as
must
true,
to
'state a claim to relief that is plausible on its face.'"
Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949 (quoting Bell Atl.
Corp. v. Twombly, 550 U.S. 544, 570 (2007».
This standard
is
content
met
"when
the
plaintiff
pleads
factual
that
allows the court to draw the reasonable inference that the
Id.
defendant is liable for the misconduct alleged."
A
court should not dismiss a complaint for failure to state a
claim
if
the
factual
allegations
sufficiently
right to relief above the speculative level."
U.S. at 555.
to
dismiss
complaint,
is
to
"assess
the
legal
Litig.,
383 F.
Supp.
well-pleaded
factual
-17­
of
the
the evidence which
In re Initial Pub.
2d 566,
(internal quotation marks omitted).
all
Twombly, 550
feasibility
not to assay the weight of
Offering Sec.
accept
a
The task of the court in ruling on a motion
might be offered in support thereof."
2005)
"raise
574
(S.D.N.Y.
The court mus t
allegations
in
the
Case 1:10-cv-07497-VM Document 73
complaint as
true,
Filed 03/21/12 Page 18 of 64
and draw all
the plaintiff's favor.
reasonable
inferences
See Chambers v. Time Warner,
in
Inc.,
282 F.3d 147, 152 (2d Cir. 2002).
Plaintiffs claiming fraud,
and common law fraud,
including securities fraud
must satisfy the heightened pleading
requirements of Federal Rule of Civil Procedure 9 (b)
9 (b)")
by
"stat [ing]
constituting
with particularity the
fraud./I
Communications,
Fed.
Inc.
v.
R.
Civ.
Shaar Fund,
P.
circumstances
9(b)
Ltd.,
("Rule
see
i
ATSI
493 F.3d 87,
99
(2d Cir. 2007).
A complaint alleging securities fraud must
also
requirements
meet
Litigation
which
the
Reform
requires
Act
that
a
of
("PSLRA"),
complaint
alleged to have been misleading,
the
statement
is
the
misleading,
15
Private
U.
S. C.
"specify
Securities
78u-4 (b) ,
§
each
statement
the reason or reasons why
and,
if
an
allegation
regarding the statement or omission is based on information
or belief, the complaint shall state with particularity all
facts on which that belief is formed."
B.
THE EXCHANGE ACT
Section 10 (b)
" [t]
Id.
0
use
of
or employ,
sale of any security
device or contrivance
10b-5,
promulgated
the
Exchange Act makes
in connection with
the
it unlawful
purchase
or
any manipulative or deceptive
/I
thereunder,
-18­
15 U.S.C.
provides
§
78j (b).
that
Rule
it
is
Case 1:10-cv-07497-VM Document 73
unlawful
in connection with the purchase or sale of any
I
security,
to
Filed 03/21/12 Page 19 of 64
\\ (a)
defraud,
[t] 0 employ any device,
[t]o
(b)
make
any
scheme, or artifice
untrue
statement
of
or
material fact or to omit to state a material fact
(c)
a
[t]o engage in any act, practice, or course of business
which operates
C.F.R.
as a fraud or deceit
240.10b-5.
§
Section 10 (b)
prohibition against manipulation,
II
operates as a
whether in the
false statements or market manipulation.
17
"broad"
form of
united States v.
Royer, 549 F.3d 886, 900 (2d Cir. 2008); see ATSI, 493 F.3d
at 99.
Dodona alleges 1) misrepresentations or omissions
of material fact and 2) market manipulation.
1.
Misstatements or Omissions of Material Fact
"To
state
misrepresentations,
defendant
fact,
(1)
(2)
purchase
a
under
plaintiff
Rule
must
10b-5
allege
that
for
the
made misstatements or omissions of material
with
or
claim
a
scienter
sale
of
l
in
(3)
connection
securities,
upon
(4 )
with
the
which
the
plaintiff relied, and (5) that the plaintiff's reliance was
the proximate cause of its injury."
In
order
to
satisfy
Rule
requirements,
"[a]
securities
misstatements
must
(1)
plaintiff
contends
were
specify
ATSI, 493 F.3d at 105.
9(b)
PSLRA
pleading
fraud
complaint
based
on
the
statements
that
the
identify
the
fraudulent,
-19­
and
(2)
Case 1:10-cv-07497-VM Document 73
speaker,
and
(4)
at
99.
(3)
Filed 03/21/12 Page 20 of 64
state where and when the statements were made,
explain why the statements were fraudulent."
An
[defendant]
omission
is
actionable
is subject to a
duty to disclose
facts."
In re Time Warner Inc.
267
Cir 1993).
to
(2d.
disclose
all
party chooses to speak,
v.
Swiss
(S.D.N. Y.
Li tig.,
nonpublic
the
the omitted
9 F. 3d 259,
it has a
information,
Co.,
(quoting
once
a
'duty to be both accurate
Plumbers Union Local No.
Reinsurance
2010)
Sec.
when
Although "Rule 10b-5 imposes no duty
material,
and complete.'"
"only
Id.
753
F.
Caiola v.
12 Pension Fund
Supp.
2d
Citibank,
166,
N.A.,
180
N. Y.,
295 F.3d 312, 331 (2d Cir. 2002)).
Whether a misstatement or omission is material is "an
inherently fact-specific
when a
plaintiff
reasonable
making
634
alleges
investor
investment
F.3d
finding
would
a
statement
have
decisions."
706,
that
716-17
considered
or
that
significant
Li twin v.
Blackstone
(2d
2011)
is a mixed question of law and fact,
misrepresentations
satisfied
or omission
Cir.
quotation marks and citations omitted).
properly be dismissed
is
a
in
Grp.
(internal
Since materiality
"a complaint may not
on the ground that the alleged
omissions
are
not
material
unless
they are so obviously unimportant to a reasonable investor
that reasonable minds could not differ on the question of
-20­
Case 1:10-cv-07497-VM Document 73
their
importance.
ECA
II
Filed 03/21/12 Page 21 of 64
Local
&
134
IBEW
Trust of Chicago v. JP Morgan Chase Co.,
(2d Cir. 2009)
2.
acts;
Pension
553 F.3d 187, 197
(internal quotation marks omitted) .
Market Manipulation
A claim of market manipulation under
10b-5
Joint
"requires
a
plaintiff
to
allege
§
10(b} and Rule
(1)
manipulative
(2) damage (3) caused by reliance on an assumption of
an efficient market free of manipulation;
(4) scienter;
(5)
in connection with the purchase or sale of securities;
(6)
furthered
or
any
ATSI,
493
by
facility of
the
a
defendant's
national
use
securities
of
the
mails
exchange."
F.3d at 101.
"In order for market activity to be manipulative, that
conduct must
Wilson v.
5515958,
involve misrepresentation or nondisclosure.
Merrill
at
*8
Lynch
(2d
&
Cir.
F.3d
Co.,
Nov.
14,
2011) .
2011
II
WL
However,
allegations of misrepresentations or omissions alone cannot
support a claim of market manipulation.
101.
ATSI,
492 F.3d at
Rather," [t] here must be some market activity,
as 'wash sales,
matched orders,
(quoting Santa Fe Indus.
(1977)).
Inc. v
or rigged prices.'"
such
Id.
, 430 U.S. 462, 476
Essentially, a claim of market manipulation
require[s]
a showing that an alleged manipulator
engaged
in
market
activity
aimed
at
deceiving
investors as to how other market participants have
-21­
Case 1:10-cv-07497-VM Document 73
Filed 03/21/12 Page 22 of 64
valued a security.
. The gravamen of manipulation
is deception of investors into believing that prices
at which they purchase and sell securities are
determined by the natural interplay of supply and
demand, not rigged by manipulators.
Wilson,
2011 WL 5515958,
at
*7
(internal quotation marks
and citations omitted) .
In order to satisfy the heightened pleading standards
for
fraud,
a
complaint alleging market manipulation must
"plead with particularity the nature,
purpose,
and effect
of the fraudulent conduct and the roles of the defendants,"
including
"what
manipulative
defendants performed them,
performed
acts
were
performed,
which
when the manipulative acts were
and what effect the scheme had on the market for
I
the securities at issue.
ATSI,
II
493 F. 3d at 102
(internal
quotation marks omitted).
3.
Scienter
Scienter
manipulate,
Rights,
marks
"a mental state embracing intent to deceive,
l
or defraud,
Ltd.,
551 U. S.
omitted),
is
II
Tellabs,
308
a
I
319
required
Inc.
(2007)
element
v.
Makor Issues
&
(internal quotation
of
fraud l
whether
accomplished by misrepresentation or market
manipulation.
In
of
order
to
plead
a
"strong
inference"
scienter,
plaintiffs must allege with particularity either (a)
"facts
to show that the defendant had both motive and opportunity
to commit
fraud [i]
II
or
(b)
"facts
-22­
that
constitute strong
Case 1:10-cv-07497-VM Document 73
Filed 03/21/12 Page 23 of 64
conscious
circumstantial
evidence
of
recklessness./I
Kalnit v.
Eichler l
Cir.
(internal
2001)
assessing
whether
a
264
quotation
plaintiff
consider whether all the facts
misbehavior
F.3d 131
marks
has
pled
omitted).
scienter
taken together
I
138
1
or
(2d
In
courts
I
give rise
I
to an inference of scienter that is "at least as compelling
as
any
Tellabs l
A
opposing
inference
intent.
nonfraudulent
of
II
551 U.S. at 314.
complaint
opportunity
to
has
commit
sufficiently
fraud
if
ll
alleged
it
pleads
"motive
facts
and
showing
that the defendant "benefited in some concrete and personal
way from the purported fraud.
307-8
300 1
(2d Cir.
Novak v.
/I
2000).
"Motives
most corporate officers
Kasaks,
that are
198.
The
common to
do not constitute
for the purpose[]11 of establishing scienter.
at
216 F. 3d
opportunity
to
commit
'motive'
ECA, 553 F.3d
fraud
is
generally
assumed where the defendant is a corporation or corporate
~I
officer.
Supp.
2d 453,
468
In re AstraZeneca Sec. Litig.,
(S.D.N.Y.
2008);
Pension Comm.
of Montreal Pension Plan v. Banc of Am.
Supp.
2d
163 I
181
(S.D.N.Y.
2006)
Sec.,
559 F.
of Univ.
LLC,
446 F.
( "Regarding
the
'opportunity' prong, courts often assume that corporations,
corporate officers,
and corporate directors would have the
opportunity to commit fraud if they so desired.
-23 ­
lI
)
•
Case 1:10-cv-07497-VM Document 73
A
plaintiff
recklessness"
is
"highly
pleading
Filed 03/21/12 Page 24 of 64
the
"conscious
misbehavior
or
theory of scienter must allege conduct which
unreasonable
and
which
represents
an
extreme
departure from the standards of ordinary care to the extent
that
the
danger was
the
either known to
Kalnit,
264 F.3d at 142 (internal quotation marks omitted).
where
it
access
complaint
alleges
statements. "'
4.
defendants
Id.
10b-5
on
omissions,
Emergent
343
pleads
"'knowledge
contradicting
F. 3d
scienter
of
facts
their
or
public
the
claiming
must
securities
also
fraud
establish
defendant's
alleged
under
that
it
10 (b)
§
reasonably
misrepresentations
or
and that the fraud caused the plaintiff's loss.
Capital Inv.
189,
195
Mgmt.,
(2d
LLC v.
Cir.
Stonepath Grp.,
2003).
"In
consider the entire context of the
such
as
sophistication
of
its
the
complexity
parties,
agreements between them."
Id.
-24
and
transaction,
and
the
Inc.,
assessing
reasonableness of a plaintiff's alleged reliance,
factors
it."
Reasonable Reliance and Loss Causation
Rule
relied
had
of
(quoting Novak, 216 F.3d at 308) .
A plaintiff
and
been aware
sufficiently
information
to
have
or so
that
a
must
defendant
obvious
Specifically,
defendant
the
the
[courts]
including
magnitude,
the
content
any
of
Case 1:10-cv-07497-VM Document 73
Filed 03/21/12 Page 25 of 64
First,
Reliance may be presumed in two circumstances.
ftin
the
case
of
omissions,
information
may
material."
Black v.
209
{2d Cir.
be
reliance
presumed
where
such
Finatra Capital,
2005}.
Second,
the
on
the
omitted
information
Inc.
is
418 F.3d 203,
1
"fraud on
the
market"
theory creates a presumption of reliance if the securities
were traded in an efficient market developed
theory,
Inc.
determined
by
all
Levinson
485
U.S.
l
quotation marks omitted};
F. Supp. 2d
Loss
an
"open and
market in which the price of securities are,
ll
v.
i. e.,
4721
available
is
Inc.
(S.D.N.Y.
2010)
particularity.") .
Sec.
not
causation
Instead,
a
{internal
Litig.
to
the
or the PSLRA.
753
Basic
1
376
(ftParmalat II").
subject
Litig.,
("Loss
{1988}
In re Parmalat Sec.
pleading standards of Rule 9 (b)
Citigroup
241-42
2241
508 (S.D.N.Y. 2005)
causation
information.
in
F.
Supp.
need
short
not
and
heightened
See In re
2d
be
206,
234
pled
with
plain
statement
suffices, as required under Rule 8 of the Federal Rules of
Civil Procedure (ftRule 8").
Loss causation requires a link
between the alleged misconduct
and the
harm suffered by the plaintiff,
and a plaintiff must claim
that
"the loss
caused
by
the
[was]
ultimate
economic
foreseeable and that the loss
materialization
-25­
of
the
concealed
[was]
risk."
Case 1:10-cv-07497-VM Document 73
Filed 03/21/12 Page 26 of 64
Lentell v. Merrill Lynch & Co.,
396 F.3d 161, 173
(2d Cir.
2005) .
6.
Control Liability
Liability for violations
of
20 (a)
§
of
the
Exchange
Act is derivative of liability for violations of
See Sec.
F.3d
&
1450 1
Exch.
Comm'n v.
1472
(2d
liabili ty upon
Cir.
First Jersey Secs.,
1996).
"every person who 1
Section
10 (b) .
§
Inc"
20 (a)
101
imposes
directly or indirectly 1
controls any person liable under any provision of
or of any rule or regulation thereunder
.
[§ 10(b)]
unless the
controlling person acted in good faith and did not directly
or
indirectly
violation
or
establish a
induce
cause
the
of
act
or
action. II
prima facie
acts
15
claim under
constituting
U.S.C.
20 (a)
§
7St.
§
1
a
the
To
plaintiff
must show "a primary violation by the controlled person and
control of the primary violator by the targeted defendant .
and
show
meaningful
that
sense
[a]
perpetrated
omitted)
C.
the
controlling
person
culpable participant []
II
Id.
(internal
was
in
in
some
the
fraud
quotation
marks
(alterations in original) .
COMMON LAW FRAUD
The elements of common law fraud under New York law
are:
(2)
"(1) a material misrepresentation or omission of fact;
made with knowledge of its falsity;
-26­
(3)
with an intent
Case 1:10-cv-07497-VM Document 73
to
defraud;
(4)
(5)
plaintiff,
reasonable
that
Haggerty v.
Ciarelli
Cir.
(citing
2010)
Filed 03/21/12 Page 27 of 64
reliance
on
damage
to
causes
Dempsey,
&
EUrycleia
374
F.
the
the
of
LP
the
plaintiff.
App'x 92,
Partners,
Kissel, LLP, 910 N.E.2d 976 (2009».
part
v.
94
II
(2d
Seward
&
"Because the elements
of common-law fraud in New York are substantially identical
to
those
applies.
governing
10 (b) ,
§
the
In re Optimal U.S. Litig.,
II
2011 WL 6424988
(S.D.N.Y.
2011)
identical
analysis
--- F. Supp. 2d ---,
(internal quotation marks
omitted) .
To state a claim for aiding and abetting fraud under
New York law, a plaintiff must plead facts showing (1)
the
existence
the
fraud;
of
and
a
(3)
fraud;
that
(2)
the
defendant's
defendant
knowledge
provided
assistance to advance the fraud's commission.
BankAmerica Corp.,
219 F.3d 79,
91
(2d Cir.
of
substantial
See Wight v.
2000).
"The
knowledge requirement of an aiding and abetting fraud claim
is satisfied by alleging actual knowledge of the underlying
fraud."
247,
252
JP Morgan Chase Bank v. Winnick,
(S.D.N. Y.
2005)
406 F.
(citation omitted).
provides substantial assistance only if
Supp.
2d
"A defendant
[she] affirmatively
assists, helps conceal, or by virtue of failing to act when
required to do so enables [the fraud]
256 (internal quotation marks omitted) .
-27­
to proceed."
Id. at
Case 1:10-cv-07497-VM Document 73
D.
Filed 03/21/12 Page 28 of 64
UNJUST ENRICHMENT "Under
requires
a
enriched,
good
New
York
law,
plaintiff
(2)
to
an
unjust
prove
enrichment
that
(1)
at plaintiff's expense,
and
conscience militate
against
claim
defendant
(3)
permitting
retain what plaintiff is seeking to recover.
was
equity and
defendant
to
Ashland Inc.
/I
v. Morgan Stanley & Co., 652 F.3d 333, 339 (2d Cir. 2011).
III. DISCUSSION
A.
OF BIG OLD LEMONS AND LEMONADE
As elaborated below, Dodona's theory of securities law
violations rests not upon a
manifestly demonstrates
on
a
series
whole,
of
single decisive action which
Goldman's
interrelated
represent
the
big
alleged wrongdoing,
events
picture
which,
of
viewed
fraudulent
but
as
a
conduct
Dodona portrays. To properly evaluate the underlying claims
and
defenses,
an
overview
of
Dodona's
essential
points
would be helpful at this juncture.
Foremost
investments
embedded
in
at
in
this
review
issue.
Dodona's
In
is
this
factual
the
origin
regard,
a
recitation
of
vital
is
the
issue
that,
when
created in 2007, Goldman's Hudson securities were designed
primarily
not
as
Goldman's
clients,
instruments
Goldman then faced:
but
its
to
meant
solve
enormous
-28­
a
to
huge
earn
returns
for
internal problem
financial
exposure
from
Case 1:10-cv-07497-VM Document 73
vast
Goldman's
investments.
holdings
Filed 03/21/12 Page 29 of 64
subprime
of
mortgage-backed
Goldman had acquired those assets pursuant to
its earlier strategy of going long on them at a time when
Goldman
bet
continue
to
that
the
residential
expand.
By
2007,
mortgage
as
the
market
performance
subprime mortgages deteriorated and the markets
soured,
would
for
of
them
Goldman sought to protect against its significant
long exposure and offset its risk by reversing course and
going
short
created
the
on
the
same
synthetic
type
CDOs
investment instrument that,
select group of
of
here
investments.
in
a
Rube Goldberg-like,
its own designers,
could clearly explain,
dispute,
It
thus
form
of
few but a
engineers and lawyers
let alone understand,
precisely how
it functions or exactly what it does.
As
purpose
described
of
several
transactions
Goldman
assets.
to
by Dodona,
were
would
key
clear
however,
components
enough,
aggressively
the
at
discard
operation and
of
least
its
the
Hudson
to
Goldman:
toxic
subprime
It would then take advantage of new opportunities
capitalize
on
its
flipped
strategy
to
go
short
on
subprime mortgage-backed securities it had reason to know
would then decline in value, by betting that the market for
them would continue deteriorating.
significant
fees
from
structuring
-29­
Goldman would also earn
and
selling
the
new
Case 1:10-cv-07497-VM Document 73
investments.
the
fine
facile,
Filed 03/21/12 Page 30 of 64
In short, Goldman would stand to profit from
art
of
financial
self-congratulatory
transubstantiation.
words
of
quoted by Dodona,
Goldman took some
transformed
into
another
them
Goldman
a
noted
Goldman
In
that
a
a
the
official
"big old lemons"
"lemonade."
official
In
similar
and
vein,
particular
bank
client was too smart to buy the load of "junk" Goldman had
produced.
To these ends, Goldman entities selected the subprime
mortgage assets
to serve as the portfolio supporting the
new instruments and served as broker-dealers, underwriters,
and liquidation agent.
Through a subsidiary, Goldman also
set itself up as the credit protection buyer in order to
take
the
position
guaranteeing that
opposite
the
CDO
Goldman would collect
investors
insurance
thus
I
in the
event the referenced RMBS it had selected (and marketed to
investors through the CDOs)
the
market
time.
for
performed poorly
them generally was
already
as
I
doing
in fact
at
the
Nevertheless, Goldman stated in one of its Marketing
Books that the Hudson CDO it had developed represented "a
consistent,
relative
programmatic approach to invest
value
opportunities
in
the
RMBS
in attractive
and
structured
product markets."
All Goldman needed for success of its
venture
"sophisticated"
was
large
-30­
investors
like
Dodona,
Case 1:10-cv-07497-VM Document 73
which
would
drink
up
the
Filed 03/21/12 Page 31 of 64
bittersweet
potion
despite
Goldman/s boilerplate warnings that investing in the Hudson
CDOs
was
speculative
and
involved
significant
risk.
Goldman thus managed to shift its significant subprime risk
over to its own clients.
On these alleged facts
Dodona asserts
I
engaged in fraudulent conduct.
Dodona/s theorYI
with the spirit of the securities laws
point: that when investors
securities
integrity
they do so
and
good
I
I
consistent
conveys an implicit
sophisticated or not
in reliance on the
faith
that Goldman
of
placing trust in their agents
I
the
purchase
l
reputation for
issuers
and
dealers
I
implied representations that
they would not engage in conduct which would place their
own interests ahead of those of their customers.
Goldman
I
on the other hand
dismiss
Dodona/s
arguing
that
complaint
even
if
I
in
here asks
its
everything
entiretYI
Dodona
actions
are
perfectly
normal
and
under prevailing law and industry standards.
not
persuaded
that
the
law
compels
Court
in
says
Goldman/s actions violated no laws - in effect
Goldman/s
the
is
essence
true
facts
alleged were
borne
-31­
out
at
unassailable
The Court is
Goldman/s
a
l
that all of
l
narrow
interpretation. On a fair reading of Dodona/s Complaint
the
to
trial
I
I
Goldman
if
IS
Case 1:10-cv-07497-VM Document 73
viewed
conduct,
Filed 03/21/12 Page 32 of 64
could
charitably,
be
found
not
only
reckless, but bordering on cynical.
B.
SECTION 10 b
AND RULE 10b-5 CLAIMS
Dodona claims
Corp.,
Ostrem,
that
and
GS&Co,
Herrick
omissions of material
fact
made
Ostrem,
and
violation of
1.
Herrick
§
Hudson
misrepresentations
2
and
§
10 (b)
and Rule 10b-S (b) ;
Hudson 1 Corp.,
committed
market
Hudson 2 Corp.,
manipulation
in
10(b) and Rule 10b-S(a) and (c).
Scienter
Since
omissions
Dodona
GS&Co,
Corp.,
in connection with the Hudson
CDO offerings in violation of
and that Goldman,
Hudson 1
to
both
and
the
the
plead
claim
claim
of
of
scienter,
misrepresentations
market
the
manipulation
Court
will
and
require
analyze
that
element first.
Dodona alleges
and
sold
the
that Defendants
Hudson
CDOs
with
the
structured,
intent
of
marketed,
reducing
Goldman's long exposure to subprime risk by betting against
them.
According to Dodona,
the Defendants knew that the
referenced RMBS would decline
in value and intentionally
selected RMBS which would perform poorly.
The Court finds
that Dodona has alleged particularized facts supporting a
strong inference of Defendants'
recklessness, at least, if
not motive and opportunity as well, and that "someone whose
-32
Case 1:10-cv-07497-VM Document 73
Filed 03/21/12 Page 33 of 64
intent could be imputed to the corporation acted with the
requisite
scienter,·
Pension Fund v.
Teamsters
Local
Dynex Capital Inc.,
445
Freight
531 F.3d 190,
195
Div.
(2d
Cir.2008).
a.
Recklessness
The Complaint alleges that Defendants knew that they
were
selling toxic assets
to
their clients and that
Hudson CDOs were unlikely to profit
investors.
At
the
this
preliminary stage of the proceedings, Dodona has pled with
sufficient particularity that Defendants had "knowledge of
facts or access to information contradicting their public
statements,
/I
Kalnit,
264
F. 3d at
142
(internal
quotation
marks omitted), and thus were reckless.
First,
the
documents,
Complaint
authored
by
quotes
Goldman
several
officials,
emails
and
acknowledging
that in late 2006, Goldman embarked on a program to reduce
its
long
exposure
Complaint
Goldman
did
contains
unload
to
subprime
detailed
significant
first part of fiscal year 2007.
Hudson CDOs
factual
subprime
Third,
allegations
risk
decision
circumstantially
to
reduce
supports
-33 ­
the
the timing of the
subprime
the
the
that
during
in December 2006 and February 2007
with Goldman's
which
Second,
mortgages.
coincides
risk,
allegation
a
that
fact
the
Case 1:10-cv-07497-VM Document 73
Filed 03/21/12 Page 34 of 64
Hudson CDOs were in line with and part of the subprime risk
reduction strategy.
Fourth,
the Complaint quotes several emails which tie
the Hudson CDOs,
or "move"
in particular,
subprime risk,
to the decision to reduce
and which indicate awareness on
behalf of at least some Goldman officers and employees that
the Hudson CDOs referenced assets
lose value.
that would most
likely
These include:
email dated October 11,
2006
to Herrick,
reflecting that Goldman employee Sarah Lawlor stated
with regard to Hudson 1 that Goldman client Allied
Irish Bank was "too smart to buy this kind of junk."
Herrick responded, "[v] ery interesting."
(Compl.,
110. )
• An
• An email dated October 26,
2006, from Arbind Jha to
several Goldman executives, including Goldman's CEO
and Ostrem and Herrick, stating: "Risk reduction is
primarily due to pricing of
$2bn Hudson Mez
synthetic CDO deal
(SPG Secondary desk bought
$325k/bp BBB and $350k/bp BBBRMBS
Subprime
protection) [.]"
Id., 56.)
• An email dated December 5,
2006, the same day as the
Hudson 1 offering, from Dan Sparks ("Sparks"), the
head of Goldman's mortgage department, to several
other
Goldman
executives,
reporting:
"Subprime
market getting hit hard.
. At this point we are
down $20mm today.
Structured exits are the way to
reduce risk. Our prior structured trade closes today
[presumably Hudson 1].
We are focusing on ways to
do it again much faster."
(rd., 60.)
• An email dated December 15,
2006 from Birnbaum that
was copied to Swenson and stated: "we've had good
traction moving risk through our franchise on a
variety of fronts: ABX, single names, super-senior,
Hudson 2."
Id., 64.)
-34­
Case 1:10-cv-07497-VM Document 73
Filed 03/21/12 Page 35 of 64
• An email dated December 20, 2006, from Stacey Bash­
Polley to Ostrem, Swenson, and Birnbaum, among
others, reporting that "[w]e have been thinking
collectively as a group about how to move some of
the risk.
While we have made great progress moving
the tail risks - ssr and equity - we think it is
critical to focus on the mezz risk that has been
buil t up over the past few months. Both through
sequential abacus ssr/equ trades and the hudson
deals (current and prior)."
Id. ~ 66.)
• An email dated January 26, 2007 from Sparks to
Thomas Montag, Goldman's head of trading and sales,
which said: "Need you to send message to peter
ostrem and darryl herrick telling them what a great
job they did. They structured like mad and travelled
the world, and worked their tails off to make some
lemonade from some big old lemons."
(Id. ~ 70.)
Fifth and finally,
of
GS&Co's
role
as
the Complaint alleges that, because
an
underwriter
and
more
generally
through Goldman's performance of due diligence and reliance
on Clayton, Defendants had access to nonpublic information
regarding
the
deteriorating
On
mortgages.
the ir
credit
own,
quality
allegations
of
subprime
regarding
due
diligence and underwriting might not satisfy the heightened
For example,
pleading standard of Rule 9(b) and the PSLRA.
it
is unclear
to what
allegedly
gathered
nonpublic i
as
Dodona
degree
from
due
the
information Defendants
diligence
acknowledges
in
the
was
fact
in
Complaint
I
the
performance of at least some of the RMBS referenced in the
Hudson
indices.
CDOs
could
be
tracked
Moreover,
an
"unsupported general claim of
-35­
through
the
public
ABX
the
Case 1:10-cv-07497-VM Document 73
existence
revealed
a
motion
of
confidential
company
[contrary information]
to
dismiss.
Filed 03/21/12 Page 36 of 64
reports
is insufficient to survive
San Leandro
II
that
Emergency Med.
Grp.
Profit Sharing Plan v. Philip Morris Cos., 75 F.3d 801, 812
(2d Cir. 1996).
However,
reducing
Goldman's sudden -
subprime
risk
and prescient -
supports
the
inference
possessed some unique insight i
it
infer
underwriter
that
diligence
material
GS&Co's
Goldman
nonpublic
("Citigroup,
knew the
as
performed
that
it
is not unreasonable to
provided
information
See In re Citigroup,
235
role
shift to
and
the
due
Defendants
supporting
Inc. Sec. Litig.,
that
with
decision.
753 F. Supp.
2d at
as the underwriter of the CDOs it held,
inputs
and assumptions
that
went
into
creating
these assets and thus was in the best position to recognize
the
threats
they
deteriorated.") .
faced
Thus,
as
the
strong
due
diligence
inference
[Defendants] .
II
that
mortgage
market
when considered together with the
rest of the factual allegations,
Goldman's
subprime
and
"the
the allegations regarding
underwriting
danger
was
do
support
known
the
to
Kalni, 264 F. 3d at 142 (internal quotation
marks omitted) .
The factual allegations in Dodona's Complaint are thus
distinguishable from those at issue in Landesbanke Baden­
-36­
Case 1:10-cv-07497-VM Document 73
Filed 03/21/12 Page 37 of 64
Wurttemberg v. Goldman, Sachs & Co.,
No.
10
Civ.
2011),
7549,
which
2011
WL
Defendants
--- F. Supp. 2d ----,
4495034
cite
as
(S.D.N.Y.
supporting
Sept.
28,
dismissal.
Landesbanke also concerned a RMBS-backed CDO, called "Davis
Square," which GS&Co underwrote and issued.
The plaintiff-
investor in Landesbanke, claiming common law fraud, alleged
that GS&Co knew that the underlying mortgages were riskier
than the offering circular disclosed and bet against Davis
Square
by
purchasing
dismissed
the
credit
complaint
default
because
swaps.
it
found
The
that
Court
general
allegations concerning Clayton's due diligence reports and
GS&Co's role in the mortgage securitization business failed
to support an inference that "Goldman knew in March of 2006
about
the
Square."
toxicity
of
the
mortgages
underlying
Davis
Id. at *5.
Although Dodona's Complaint does make some of the same
allegations
concerning
Goldman/GS&Co'S
due
Clayton's
diligence,
particularized allegations
about
how
reports
also
it
the
and
contains
Hudson CDOs
within Goldman's risk reduction program,
fit
and how at least
some of Goldman's officers were on notice that the Hudson
CDOs
were
"junk."
These
allegations
are
supported
by
quotes from Goldman-authored documents, complete with dates
and names.
See,
~,
In re Ambac Fin.
-37 ­
Grp.,
Inc.
Sec.
Case 1:10-cv-07497-VM Document 73
Litig.,
693 F.
sufficient
cited
Supp.
2d 241,
allegations
emails
and
of
memo
Filed 03/21/12 Page 38 of 64
268
(S.D.N.Y.
recklessness
received
by
2010)
(finding
where
complaint
defendants
indicating
knowledge of lowered underwriting standards).
Thus, in the
absence of any single, particular smoking-gun document, the
allegations in the Complaint collectively supply sufficient
circumstantial
evidence
from
which
the
Court
could
reasonably infer Defendants' recklessness. 1o
Defendants
argue
that
Dodona
is
improperly
"fraud by hindsight," Xerion Partners I,
Asset
2007)
Mgmt.,
.11
LLC,
474
F.
Supp.
2d
claiming
LLC v. Resurgence
505,
518
(S.D.N.Y.
As Defendants point out, it is impossible to know
for certain how a
incantation
allegation
of
of
market will perform.
fraud-by-hindsight
misrepresentations
and
will
However,
not
omissions
"[ t] he
defeat
that
misleading and false at the time they were made."
an
were
In re
Since Ostrem and Herrick were recipients of several of the emails
quoted above, the Complaint has alleged with particularity that they
knew that the Hudson CDOs were part of the risk reduction strategy, and
that Herrick, at least, was on notice that the Hudson CDOs contained
"junk" and "big old lemons," from which he diligently made "lemonade."
(Compl. "
70, 110.)
Thus, Dodona has adequately alleged that the
conduct of Ostrem and Herrick constituted recklessness.
In addition,
the Complaint alleges that the Hudson CDOs were created, directed, and
controlled by GS&CO and Goldman.
Scienter may therefore be imputed to
the Hudson SPEs.
See Teamsters Local 445 Freight Div. Pension Fund,
531 F.3d at 195.
10
Although the Complaint does cite several documents created after the
time frame at issue, it also contains sufficient factual allegations,
such as the emails quoted above, indicating that, at the time of the
Hudson CDO offerings I Defendants knew that the referenced RMBS were
highly risky and would perform poorly.
11
-38­
Case 1:10-cv-07497-VM Document 73
Bear Stearns Cos.,
Inc.
Filed 03/21/12 Page 39 of 64
Sec. , Derivative,
763 F. Supp. 2d 423, 487 (S.D.N.Y. 2011).
gap"
between
the
picture
that
ERISA Li tig. ,
&
There is a "vast
Defendants
presented
to
investors - of an admittedly risky investment, but one that
was not in any way extraordinarily risky that
Goldman
"junk"
and
Ambac,
F.
took
coupled
with
the
"lemons"
that
appears
in
Supp.
themselves -
2d at
269.
creating CDOs,
language
emails.
Indeed,
in
fact
maneuvered
Litig.,
to
753
F.
saw
avoid
itself,
selling -
the
risks
In
2d at 237
even
manipulative.").
factual
allegations
favorable
to
the
In
re
actions
indicate that "the
and,
re
in
Sec.
493 F.3d at 101
is
volumes
Therefore,
plaintiff,
Inc.
(finding that plaintiffs
in high
together
consequence,
Citigroup,
pled scienter via recklessness)i cf. ATSI,
(" [S] hort
See
selecting the referenced RMBS,
them."
Supp.
regarding
Defendants'
and then betting heavily against them company
and the actions
and
Dodona
not,
considering all
in
the
has
light
alleged
by
the
most
facts
supporting an inference of recklessness which is at least
as compelling - if not more so - as any opposing inference.
b.
Motive and opportunity
The
Complaint
allegation
that
could
also
Defendants
opportunity to perpetrate the
-39­
be
read
to
support
an
motive
and
alleged fraud because
they
possessed
a
Case 1:10-cv-07497-VM Document 73
"benefited
in
some
concrete
Filed 03/21/12 Page 40 of 64
and
personal
way
from
the
purported fraud."
Novak, 216 F.3d at 307-08.
At least one
other
this
WL
opinion
in
Court,
Dandong,
2011
5170293,
found that similar allegations raised a strong inference of
motive
and
opportunity.
In
Dandong,
the
plaintiff
had
invested in "credit-linked notes" which were supposed to be
invested
instead
in
of
low-risk
assets.
low-risk
assets,
invested their principal
Plaintiffs
defendant
alleged
Morgan
in certain synthetic
that
Stanley
CDOs which
Morgan Stanley had designed to fail so it could profit from
short positions on those same CDOs.
The Court found that
[Plaintiffs] have pled what amounts to self-dealing by
Morgan Stanley, insofar as Morgan Stanley was betting
against, or 'shorting,' the synthetic CDOs that it had
itself created.
The engineered fragility of the CDOs
and Morgan Stanley's position on both sides of the
deal adequately alleges motive.
Id. at *12.
Dodona,
more
than
like
a
the plaintiffs
typical
profit
in Dandong,
motive;
it
is
is
alleging
alleging,
in
essence, that Defendants engaged in self-dealing by abusing
their nonpublic knowledge and position of power to benefit
themselves.
The
Complaint
contains
factual
allegations
indicating that Defendants not only knew that the Hudson
CDOs were unlikely to be profitable and failed to disclose
this to investors, but also that they sought to profit from
-40­
Case 1:10-cv-07497-VM Document 73
that insight.
Goldman
For example,
should
related
Goldman CFO Viniar urged that
aggressively
assets
Filed 03/21/12 Page 41 of 64
distribute
"because
subprime-mortgage
will
there
be
very
good
opportunities as the market goes into what is likely to be
even greater distress and we want to be in position to take
advantage of them.
~
(Compl.
II
63.)
Similarly,
Birnbaum
"concluded that [Goldman] should not only get flat, but get
VERY short.
short
(Id.
II
position
on
~
57.)
the
Coupled with GSI's significant
Hudson
COOs,
these
statements
indicate motive and opportunity.
In sum,
the Court
finds
in its
"practical
judgment"
that the "whole factual picture painted by the [C]omplaint"
gives rise to a strong inference of scienter.
Slayton v.
American Express Co., 604 F.3d 758, 775 (2d Cir. 2010).
2.
Material Omissions
Dodona
Corp.,
claims
Ostrem ,
Defendants")
marketed
GS&Co
and Herrick
made
the
that
1
Corp.
(collectively,
omissions
Hudson
Hudson
I
of
material
and
COOs
I
the
fact
drafted
the
Hudson
2
"Marketing
when
they
Offering
Circulars.
Specifically, Dodona alleges that the Marketing
Defendants
did
not
disclose
to
investors
(1)
that
the
Hudson COOs were structured and issued as part of Goldman/s
strategy to reduce its exposure to subprime-mortgage risk
and to profit by betting against
41­
themi
and
(2)
that
the
Case 1:10-cv-07497-VM Document 73
Filed 03/21/12 Page 42 of 64
Marketing Defendants
did not
"genuinely believe
Hudson
have
realistic
CDOs
would
a
profitable for investors .
The
Complaint
cites
• /I
the
(Compl.
following
chance
~
that
of
the
being
176.)
statements
in
the
Marketing Book and the Offering Circulars as misleading:
•
"GSI will be the initial Credit Protection Buyer
(Id. ~ 175.)
II
• "Goldman has aligned incentives with the Hudson
program by investing in a portion of equity and
playing the ongoing role of Liquidation Agent."
(Id. ~~ 89, 122, 175.)
• The Hudson CDOs were designed "to create a
consistent, programmatic, approach to invest in
attractive relative value opportunities in the
RMBS and structured product market.1I
(Id. ~~ 85,
175. )
• "INFORMATION CONTAINED IN THIS OFFERING CIRCULAR
. . . DOES NOT OMIT ANYTHING LIKELY TO AFFECT THE
IMPORT OF SUCH INFORMATION."
Id. ~ 88, 96,
175. )
• Investing in the Hudson CDOs "IS SPECULATIVE" and
involves "SIGNIFICANT RISK."
Id. ~ 175.)
• "Various
potential
and
actual
conflicts
of
interest may arise from the overall activities of
the Credit Protection Buyer [GSI] , the overall
underwriting, investment and other activities of
the Liquidation Agent [GS&Co], the Senior Swap
Counterparty and the Collateral Put Provider,
their respective affiliates and its clients and
employees
and
from
the
overall
investment
activity
of
the
Initial
Purchaser
[GS&Co] ,
including in other transactions with the Issuer
[Hudson 1/2 Ltq] .
(Id.)
II
-42­
Case 1:10-cv-07497-VM Document 73
Filed 03/21/12 Page 43 of 64
Dodona's Complaint does not rest on allegations that
those
overt
statements
were,
standing
rather on the requirement that
speak,
alone,
"once a
false,
but
party chooses
to
it has a duty to be both accurate and complete."
Plumbers Union,
753 F. Supp. 2d at 180
omitted) .
marks
statements
say:
were
that
The
credit
of
what
Defendants'
Marketing
quality
of
that
alleges
misleading because
the
deteriorating
Complaint
(internal quotation
the
those
they did not
knew
of
referenced
the
assets,
believed that the Hudson CDOs had no realistic chance of
being profitable,
and that the
Hudson CDOs were part of
Goldman's risk reduction strategy.
PSLRA's
requirement
that
Dodona has thus met the
Complaint
a
alleging
misrepresentations "specify each statement alleged to have
been
misleading[]
[and]
statement is misleading."
However,
since
the
reason
15 U.S.C.
either
the Marketing Defendants
of
disclosures
the
or
omissions
publicly
them of that duty.
9
F.3d
at
267
available
why
allegations
the
of
the question remains
had a
alleged;
reasons
78u-4(b).
Dodona's
misrepresentation sound in omission,
whether
§
or
and,
duty
if
to disclose
so,
information
whether
discharged
See In re Time Warner Inc. Sec. Litig.,
("an
omission
-43 ­
is
actionable
under
the
Case 1:10-cv-07497-VM Document 73
securities law only when the
Filed 03/21/12 Page 44 of 64
[defendant]
is subject to a
duty to disclose the omitted facts"} .
a.
No Duty to Disclose Strategy
The Court finds that the Marketing Defendants had no
duty
to
disclose
that
the
Hudson
CDOs
were
"Goldman's
then-existing strategy to reduce
exposures
to
prof i t
subprime
mortgage-related
(Comp 1.
thereby.
~
l? 5 . )
its
and
risk-management
assets"
and
any
independent
obligations
that
"strategy,
statutory or
would
have
Defendants to reveal such a
long-term
or
II
how
20l0)
(failure
[0] bligations"
federal
absent a
lOb-Si"
is
to
meet
one
form
securities
law
Basic
Inc'
l
required
Nor are
the
See
Marketing
In re Morgan
592 F.3d 348 1 360 (2d Cir.
"[a]ffirmative
of
omission
liability).
duty to disclose
the
regulatory disclosure
strategy.
Stanley Info. Fund Sec. Litig.,
to
The Of fering Circulars
Hudson CDOs might fit into some overarching plan.
there
of
financial
and Marketing Book say nothing about Goldman's
investment
part
[d]isclosure
that
since
can
create
" [s]ilence
l
is not misleading under Rule
I
485 U.S.
at
239 n.l?,
the Marketing
Defendants' nondisclosure of the alleged strategy is not an
actionable omission.
-44 ­
Case 1:10-cv-07497-VM Document 73
b.
Filed 03/21/12 Page 45 of 64
Duty to state Risk Accurately and Completely
However, the issue of whether the Marketing Defendants
had a duty to disclose their "belief" that the Hudson CDOs
did not
"have a realistic chance of being profitable for
Reading the Complaint in
investors" is a closer question.
its entirety, it is clear that the alleged omission amounts
to an allegation that Defendants
the
risk,
of
which
they were
inaccurately represented
actually aware,
with investing in the Hudson CDOs.
contentions,
the
alleged
associated
Contrary to Defendants'
omission
therefore
is
more
substantial than a failure to disclose "mere disbelief" or
(DeL
"opinions."
the
Offering
representations
Marketing
statements
Partners,
662,
Br.
669
regarding
were
v.
had
as
made[.]"}i
a
risks
duty
and
to
understood
2008)
the
at
affirmative
investing,12
ensure
complete.
Ikanos Commc' ns,
(S.D.N.Y.
of
Inc.,
("[R]isk
Since
49}.)
contained
the
accurate
accurately characterize
risk,
(Docket No.
Circulars
Defendants
Inc.
at 17-19
that
See
538
F.
the
those
Panther
Supp.
disclosures
scope and specificity of
the
see also In re Am.
time
the
Int'l Grp.,
statements
Inc.
2d
must
the
are
2008 Sec.
According to Defendants, the Hudson CDO offerings were made pursuant
to the limited requirements of SEC Rule 144A ("Rule 144A"), 17 C.F.R. §
230.144A,
which exempts registration for sales of restricted or
controlled securities to "Qualified Institutional Buyers.
Rule 144A
does not require risk disclosures, but the Offering Circulars made them
anyway.
l2
II
-45­
Case 1:10-cv-07497-VM Document 73
Litig. ,
741
("[G]eneric
defendants
risk
from
2d
Supp.
F.
Filed 03/21/12 Page 46 of 64
511,
disclosures
liability
are
for
(S.D.N.Y.
531
inadequate
failing
to
2010)
to
shield
disclose
known
specific risks.").
Dodona has adequately alleged an actionable omission
because,
assuming it is right about the known risks,
the
risk disclosures in the Offering Circulars were inaccurate
and therefore misleading.
The Goldman-authored emails and
documents cited in the Complaint context
aware
of
of
scienter
a
buildup
indicate
of
discussed above in the
that
negative
the
Defendants
events
in
the
were
subprime
mortgage market, and knew the outlook for subprime-mortgage
related assets was gloomy.
Indeed, the Complaint indicates
that Goldman had determined in late
associated
with
subprime-related
enough to warrant a
maj or shift
addressing the risks,
boilerplate
2006
assets
that
were
in strategy.
the
risks
substantial
Yet,
in
the Offering Circulars provide only
statements
regarding
the
"SPECULATIVE"
and
risky nature of investing in securities, the possibility of
market downturns,
mortgage-backed
Defendants
were
and the risks generally associated with
assets.
aware
Given
of
Dodona's
singularly
allegations
prohibitive
that
risks
associated with the Hudson CDOs in particular,
it follows
that
accurately
such
boilerplate
disclosures
-46 ­
do
not
Case 1:10-cv-07497-VM Document 73
represent
Filed 03/21/12 Page 47 of 64
assessment
Defendants'
of
the
Halperin v.
eBanker USA. com,
Inc.,
Cir.
(holding
plaintiff
2002)
disclosure
language
that
statements
did
not
a
and
295
of
F.3d 352,
can
cautionary
expressly warn
risks. 13
359
overcome
language
or
did
if
not
2011
"boilerplate"
investment
have
WL
language
is
interests
i
in
"extremely
adverse
defeat plaintiffs'
CDO to fail)
5170293,
to
a
at
*12
prospectus
risky"
(2d
risk
"the
directly
relate to the risk that brought about plaintiffs'
Dandong,
See
loss");
(holding
that
cautioning
that
"may"
and
the
defendant
investors
was
insufficient
to
allegation that Morgan Stanley designed
In re Bear Stearns,
763 F.
Supp.
2d at 495
(" [T] 0 warn that the untoward may occur when the event is
contingent is prudent; to caution that it is only possible
for the unfavorable events to happen when they have already
occurred is deceit[.]" (internal quotation marks omitted)).
The extant Hudson SPEs argue that the Complaint fails to adequately
link any misstatements or omissions to them.
However, this argument is
unavailing because the Offering Circulars clearly indicate that the
Hudson SPEs "ACCEPT RESPONSIBILITY" for the information contained
therein.
(Donne Declo ex. A, at 19.)
Moreover, the "group pleading
doctrine" applies to this claim.
See In re Bear Stearns Cos., 763 F.
Supp. 2d at 485; In re Oxford Health Plans, Inc., 187 F.R.D. 133, 142
(S.D.N.Y. 1999) (group pleading doctrine allows plaintiffs to "rely on
a presumption that statements in prospectuses, registration statements,
annual reports, press releases, or other group-published information
are the collective work of individuals with direct involvement in the
everyday business of the company") (internal quotation marks omitted).
Since the Complaint alleges what amounts to a "tight weave of
connections between" all the Defendants, "[a)t this stage of the
litigation, any misstatements that could reasonably be found to have
issued from one, essentially issued from all. If
Anwar v. Fairfield
Greenwich Ltd., 728 F. Supp. 2d 372, 405 (S.D.N.Y. 2010).
13
-47­
Case 1:10-cv-07497-VM Document 73
That
said,
Defendants
Filed 03/21/12 Page 48 of 64
are
correct
that
the
Offering
Circulars and Marketing Book did not conceal that Goldman
was
short
on
disclosed
the
transactions.
multiple
times
that
The
Offering
an
GSI,
Circulars
affiliate
of
defendants GS&CO and a subsidiary of Goldman, was the "sole
Credit Protection Buyer" on the Hudson COOs.
ex.
A at
50 ,
ex.
Bat 47.)
another case in this Court,
Sachs,
that
790
the
F.
SEC
Supp.
had
2d
This
Sec.
147
stands
in contrast to
& Exch. Comm'n v. Goldman
(S.D. N. Y.
adequately
(Donne Decl.,
pled
2011),
that
which
Goldman
found
employee
Fabrice Tourre made material misrepresentations in an email
by
failing
to disclose
hedge
fund
Paulson
& Co.' s
short
position on a COO.
Nevertheless,
the
Circulars regarding GSI' s
disclosures
role,
in
the
Offering
which are admissions
that
Goldman was taking a huge bet against the Hudson COOs, were
somewhat undermined,
or at least downplayed,
elsewhere
was
that
GSI
the
"initial"
by statements
credit
protection
buyer, that the Hudson COOs were "attractive relative value
opportunities in the RMBS and structured product market,
or
that
"Goldman
has
aligned
incentives
with
program by investing in a portion of equity.
85,
89,
122, 175.)
II
the
1/
Hudson
(CompI.
~~
Nor do the disclosures regarding GSI's
short position jive with the boilerplate risk disclosures,
48­
Case 1:10-cv-07497-VM Document 73
Filed 03/21/12 Page 49 of 64
which do not indicate anything unusual about the offerings.
Ultimately,
an incomplete or misleading disclosure may be
just as damaging as total concealment.
c.
Reliance and Materiality
Since Dodona alleges omissions rather than affirmative
misstatements,
the element of reliance may be presumed if
the omissions were material.
See Stoneridge Inv. Partners,
LLC v. Scientific-Atlanta, 552 U.S. 148, 160
418 F.3d at 209.
omissions
are
(2008}i
With regard to materiality,
not
"so
the alleged
unimportant"
obviously
reasonable minds could not differ -
after all,
associated
typically
with
an
investment
are
concern for prospective investors.
ECA,
(internal quotation marks omitted)
741
F.
Supp.
2d
at
531
("The
i
Black,
see
purpose
553
the risks
of
primary
F. 3d at 197
In re Am.
of
that
the
Int' I,
federal
securities laws is to ensure that investors have sufficient
information to assess and avoid undue risks by refraining
from purchasing securities
that
carry greater risks
the investor is willing to bear."
omi tted) } .
At
this
stage
than
(internal quotation marks
in the
litigation,
Dodona has
sufficiently alleged the materiality of the omissions,
and
reliance may therefore be presumed.
Defendants
argue
that
the
Court
should
dismiss
Dodona's claim because Dodona was a sophisticated investor,
-49­
Case 1:10-cv-07497-VM Document 73
for
whom
reliance
on
the
See Emergent,
unreasonable.
sophistication
of
reasonableness
Filed 03/21/12 Page 50 of 64
alleged
343 F.3d at 195
parties
of
omission
factor
is
plaintiff's
reliance)
would
(finding that
assessing
J.n
Terra
i
be
Sec.
Asa
Konkursbo v. Citigroup, Inc., 740 F. Supp. 2d 441 (S.D.N.Y.
2010),
aff'd
Cir. Dec.
F.
7,
App' x
2011)
WL
2011
{"Sophisticated
6067260 {2d
investors
must
investigate the information available to them with the care
and prudence expected from people blessed with full access
to
(internal
information. "
According to Defendants,
publicly available
quotation
at
information concerning
In
22.)
omitted)).
investors had access to a "sea of
of the actual loans backing the
Br.
marks
particular,
the
performance
[referenced RMBS].
Defendants
(Def.
II
point
to
the
Offering Circulars' appendices, which contained information
on each referenced RMBS,
"including the credit scores and
average loan-to-value ratios of the borrowers whose loans
backed the RMBS,
CUSIP
number
the names of the loan servicers,
of
acquire extensive
each
RMBS,
which
information from
for each of the [referenced RMBS] ."
The
the
Complaint
nature
representations
of
enabled
investors
the public
Id. at 9.)
business
regarding
-50­
to
SEC filing
rather conspicuously avoids
Dodona's
and the
Dodona's
or
discussing
making
level
any
of
Case 1:10-cv-07497-VM Document 73
sophistication. 14
CDOS,
But
Filed 03/21/12 Page 51 of 64
in order
to
invest
in
the
Hudson
the Offering Circulars required Dodona to represent
and agree that it was a "Qualified Institutional Buyer" and
a
"sophisticated investor"
with
"access
necessary
and other information
in order to
(Donne Decl. ex. A,
make an informed investment decision."
at
Such representations
6-9.)
sophistication.
However,
is
it
"the
support
even assuming that Dodona
unclear
have
may
a
necessary
been
the
to
to
accessible
to
is
the
the
that Defendants point out,
such as
fraud
sophisticated
party
analyze have
much
than
"minimal
proffered
nothing
to
suggest
anything
that
seems like
diligence"
even for a sophisticated investor.
placed on guard about
fraud,
more
information
individual SEC filings
for each of the eighty or more referenced RMBS,
require
whether
alleged
The public
Id.
would
of
sophisticated,
Court
unmask
through minimal diligence."
it
finding
See Terra, 740 F. Supp. 2d at 449.
information
[would]
to such financial
"Defendants
investors
approximating
to
the
were
alleged
that they were practically faced with the facts,
or
14
Defendants submitted a "Confidential Offering Memorandum" apparently
published by Dodona as evidence that Dodona was sophisticated.
The
Court declines to consider that outside document as Dodona did not rely
upon it in drafting the Complaint. See Chambers, 282 F.3d at 153 ("[A]
plaintiff's
on the terms and effect of a document in drafting
the complaint
a necessary prerequisite to the court's consideration
of the document on a dismissal motion; mere notice or possession is not
enough [ . ] It) (emphasis in original) .
-51­
Case 1:10-cv-07497-VM Document 73
that
they
Dandong,
had
access
to
Filed 03/21/12 Page 52 of 64
truth-revealing
2011 WL 5170293, at *14
(" [E] ven
omitted)
a
(internal quotation marks
sophisticated
bevy of accountants,
information."
investor
financial advisors,
armed
with
a
and lawyers could
not have known that [the defendant] would select inherently
risky underlying assets
in
allegations
sophisticated
the
and
and short
it
should
alleged fraud at the time of the
information
are
discovery,
the
questions
Court
will
Dodona
was
uncovered
the
whether
Complaint,
whether
Based on the
them.")
have
investment using public
Thus,
of
fact.
not
hazard
a
guess
prior
to
regarding
Dodona's level of sophistication or the import of publicly
available information.
d.
Loss Causation
Finally, Dodona has made adequate allegations that the
alleged omissions caused the ultimate economic harm Dodona
suffered.
"absence
the
Dodona alleges that due to its reliance on the
of
Hudson
incurred
alleged
CDOs
~
information,"
artificially
when
lost
1 78 . )
adverse
at
damages
precipitously
(CompI .
material
they
value
inflated
suffered
and
were
it
would
-52­
not
"purchased
prices"
and
ratings
downgrades,
ultimately
liquidated.
Dodona claims that,
omissions,
it
were it not for the
have
purchased
the
Case 1:10-cv-07497-VM Document 73
securities,
or would not
Filed 03/21/12 Page 53 of 64
have
purchased them at
inflated
prices.
Although
Defendants
coincided with
the
argue
that
general market
Dodona's
downturn and
cannot be linked with the alleged fraud,
require
plaintiffs
to plead
facts
other non-fraud explanations.
IKE Deutsche
Industriebank AG,
"sufficient
708
F.
therefore
the law does not
King Cnty.,
II
losses
to
exclude
Washington v.
Supp.
2d
334,
342
(S.D.N.Y. 2010); see In re Bear Stearns, 763 F. Supp. 2d at
507
("[A]t
the
motion
to
dismiss
phase,
the
Securities
Complaint need not rule out all competing theories for the
drop
stock
in
determined
record [ . ] " ) .
by
the
trier
Indeed,
price;
of
that
fact
is
on
such an argument
confusion of cause and effect.
an
a
issue
fully
is
to
be
developed
"premised on a
The conduct that plaintiffs
allege,
if true, would make [Goldman] an active participant
in
collapse
the
of
markets in general,
Ambac,
[the
Hudson
CDOs]
and
the
financial
rather than a passive victim."
In re
693 F. Supp. 2d at 270; see In re Bear Stearns,
F. Supp. 2d at 504-05
(citing In re Ambac,
763
693 F. Supp. 2d
at 269).
Dondona has made allegations
sufficient
to
support a
reasonable inference that the omissions "bear upon the loss
suffered such that
[Dodona]
would have been spared all or
-53­
Case 1:10-cv-07497-VM Document 73
Filed 03/21/12 Page 54 of 64
an ascertainable portion of that
loss absent
the
fraud,"
Lentell v. Merrill Lynch & Co., 396 F.3d 161, 175 (2d Cir.
2005).
Thus,
since
other
elements
the
Complaint has
necessary
or
misrepresentations
a
for
10(b)
§
omissions,
pled each of
claim
claim
that
the
of
survives
Defendants' motions to dismiss.
3.
Market Manipulation
In addition to fraud by misrepresentation or omission,
Dodona
claims
that
Goldman
and
the
Marketing
Defendants
manipulated the market for the Hudson CDOs in violation of
§
10(b)
that
and Rule 10b-5(a) and
they
used
"manipulative
(c).
and
The Complaint alleges
deceptive
devices
and
practices" when they structured, issued and sold the Hudson
CDOs with the belief that the Hudson CDO securities would
not be profitable for investors, and the knowledge that the
Hudson CDOs were part of Goldman's subprime risk reduction
strategy.
(Compl. , 165.)
A claim for market manipulation cannot be based on a
misrepresentation or
omission
manipulative market activity.
Wilson,
activity
2011
to
WL
be
5515958,
at
manipulative,
-54­
alone,
but
See ATSI,
*8.
that
In
must
involve
a
493 F.3d at 101;
turn,
conduct
"for market
must
involve
Case 1:10-cv-07497-VM Document 73
misrepresentation
5515958,
at
*8
or
Filed 03/21/12 Page 55 of 64
nondisclosure.
(citing Santa
Fe
Wilson,
illS
Indus.,
430
U.S.
2011
WL
at
477
(" [N] ondisclosure is usually essential to the success of a
manipulative
involved
As
scheme. 1/) ) •
"intentional
or
long as
willful
the market
conduct
activity
designed
to
deceive or defraud investors by controlling or artificially
affecting
the
"sen (t]
false pricing signal to the market [,]"
a
price
within the bounds of
of
a
securities,"
deceptive
and
such
conduct
it falls
or manipulative
device.
ATSI, 493 F.3d at 100 (internal quotation marks omitted) .
Here,
offering,
Dodona
and
alleges
selling
that
the
the
Hudson
manipulative market activi ty .
act
of
CDOs
structuring,
was
itself
The Complaint alleges
a
that
these acts were manipulative because Defendants knew that
the Hudson CDOs were based on toxic assets that would not
likely
be
profitable
investors,
for
particularly risky RMBS to reference.
detail
that
the
Complaint provides
and
selected
Given the level of
about
how Goldman and
the Marketing Defendants structured and offered the Hudson
CDOS,
Dodona has
pled with
requisite
particularity
"what
15 In contrast to the omission claim under Rule lOb-5(b),
in the context
of market manipulation under Rule 10b-5 (a) and (c)
there is no need
for Dodona to allege (or prove) that the Defendants had a duty to
disclose
stemming
from
a
statutory requirement
or
an otherwise
misleading statement.
Instead, a claim of market manipulation involves
"secret
manipulation, 11
which
need
not
include
overt
misleading
statements.
In re Initial Pub. Offering Sec. Litig., 383 F. Supp. 2d
566 (S.D.N.Y. 2005).
I
-55­
Case 1:10-cv-07497-VM Document 73
manipulative
performed
were
acts
[and]
them,
can involve
knowledge;
the
when
facts
therefore,
plaintiff
degree
performed,
the
Id. at 102
performed
however,
Filed 03/21/12 Page 56 of 64
of
at
need
not
specificity
which
manipulative
(~A
early stages
plead
as
of
manipulation
a
acts
were
claim of manipulation,
solely wi thin the
the
defendants
plain
defendant's
litigation,
to
the
same
misrepresentation
claim./I) .
a.
Reliance on Efficient Market Assumption
However, in order for its market manipulation claim to
survive Defendants'
allege
motions
Dodona must
also
"reliance on an assumption of an efficient market
free of manipulation[.]/I
Parmalat
2005)
to dismiss,
Sec.
Litig,
("Parmalat I").
ATSI, 493 F.3d at 101; see In re
375 F.
Supp.
2d 278,
304
(S.D.N.Y.
Whether a market is efficient is a
question usually addressed when plaintiffs argue "fraud on
the
market,"
which
creates
a
rebuttable
reliance where the market is efficient. 16
445 Freight Div.
Pension Fund v. Bombadier,
196, 199-200 (2d Cir. 2008)
49) .
"fraud
In ATSI,
on
the
presumption
of
Teamsters Local
Inc.,
546 F.3d
(citing Basic, 485 U.S. at 242­
the Second Circuit essentially incorporated
market"
into
the
standard
for
market
16 It
does not appear that Dodona intended to argue "fraud on the
market."
The Complaint contains no discussion of market efficiency
and the parties' Rule 12 (b) (6) submissions are likewise mute on the
subject.
I
-56­
Case 1:10-cv-07497-VM Document 73
Filed 03/21/12 Page 57 of 64
manipulation by requiring that plaintiffs show "reliance on
ATSI,
an assumption of an efficient market."
493 F.3d at
99-103.
An efficient market is one that is "open and developed
in which anyone,
persons,
can
information
buy
(~,
or
or at
least a
sell [ , ] "
and
"for
price and volume)
Parmalat I, 375 F. Supp. 2d at 304
law
suggest
manipulation
Circuit
to
involving newly
trading
(internal citations and
In addition,
this
which
is widely available."
quotation marks omitted).
in
large number of
there is some case
that
issued
claims
securities
of
market
must
fail
See In
because primary markets are by nature inefficient.
re Initial Public Offering Sec. Litig., 471 F.3d 24, 42-43
(2d
Cir.
2006)
(holding
that
market
for
shares
of
an
initial public offering is not efficient, in the context of
fraud on the market)
[securi ties]
definition
omitted)
is
of
not
these
(" [A] primary market for newly issued
efficient
terms."
or
developed
(internal
under
quotation
any
marks
(alterations in original)).
"Whether a market is efficient is often a question of
fact,"
Parmalat
II,
376
F.
Supp.
2d
at
Dodona's
conclusory
allegations
regarding
inflated"
prices
not
to
market,"
do
suffice
plead
508.
However,
"artificially
an
"efficient
as that term is commonly understood in the case
57­
Case 1:10-cv-07497-VM Document 73
law,
Filed 03/21/12 Page 58 of 64
especially when the rest of the Complaint contradicts
such a
conclusion.
The
Complaint
does
not
allege
that
there was an open and developed market for the Hudson CDOs,
or
even
that
the
price
of
the
Hudson
CDO
securities
reflected "'all publicly available information, and, hence,
any material misrepresentations.'
Cromer Finance Ltd. v.
/I
Berger, 205 F.R.D. 113, 130 (S.D.N.Y. 2001)
485
U.S.
at
circumstances
the market.
that
Rather,
Complaint
Indeed,
./1
were
alleges
in which the Defendants essentially created
the Offering Circulars warn investors
(Donne Decl.,
thus
plainly
which
manipulation
Dodona purchased them.
3096,
the
"[t] here is currently no market for the
securities]
CDOs
246).
(quoting Basic,
2011 WL 744745
is
ex.
A,
the
at 42.)
product
presumably
why
The Hudson
of
Mar.
1,
Goldman's
investors
See In re Citigroup,
(S.D.N.Y.
[Hudson CDO
2011)
No.
like
08 Civ.
(dismissing
market manipulation claim where plaintiffs conceded market
was not efficient and publicly available documents revealed
that
market
interplay
of
was
"not
supply
necessarily
and
demand I
")
set
by
the
'natural
Ultimately,
•
then,
Defendants' alleged misconduct is more appropriately suited
for a claim of misrepresentations and omissions than market
manipulation,
which carries
with
58­
it
an
assumption
of
an
Case 1:10-cv-07497-VM Document 73
efficient
market.
Thus,
Filed 03/21/12 Page 59 of 64
Dodona's
allegation
of
market
manipulation must be dismissed.
C.
SECTION 20(a) CLAIM
Dodona
Hudson
claims
SPEs,
Specifically,
that
the
violated
Dodona
Defendants,
of
20(a)
§
alleges
that
except
the
Goldman,
for
Exchange
GS&CO,
the
Act.
Ostrem
and Herrick directed and controlled the alleged misconduct
of the Hudson SPEs.
As
discussed
above,
violation under
§
which
Hudson
includes
10 (b)
Dodona
has
pled
a
primary
against the Marketing Defendants,
1
Corp.
and
Hudson
2
Corp.
In
addition, the Complaint alleges that Goldman was the parent
company
Hudson
of
SPEs,
GS&CO,
and
which
that
underwrote
various
officers possessed scienter.
and
structured
the
Goldman
executives
and
It also alleges that Ostrem
and Herrick were in charge of structuring,
selling
the
Hudson
CDO offerings.
sufficiently pled that Goldman,
As
GS&CO,
marketing,
such,
Dodona
and
has
Herrick and Ostrem
each controlled at least one primary violator and that they
were in some meaningful sense culpable participants in the
alleged fraudulent omissions.
See Boguslavsky v.
Kaplan,
159 F. 3d 715, 720 (2d Cir. 1998)
(listing elements of prima
facie case of liability under
20 (a) );
§
see also Parmalat
II, 376 F. Supp. 2d at 517 (holding that Rule 8 governs the
-59­
Case 1:10-cv-07497-VM Document 73
Filed 03/21/12 Page 60 of 64
pleading standard for allegations of control pursuant to
20 (a),
which need not
claim of
20 (a)
§
be
§
Dodona's
extremely detailed).
liability therefore survives Defendants'
motions to dismiss.
D.
COMMON LAW FRAUD CLAIMS
Dodona
alleges
common
law
fraud
concealment against all Defendants.
that Dodona's
10 (b)
§
and Rule
and
fraudulent
For the same reasons
10b-5 claim of
fraudulent
misrepresentations survive as to the Marketing Defendants,
their common
also
survive
law fraud
as
to
and fraudulent
the
Marketing
concealment
claims
Defendants.
See
Fraternity Fund Ltd. v. Beacon Hill Asset Mgmt. LLC, 376 F.
Supp. 2d 385,
407
(S.D.N.Y.
2005)
("The elements of common
law fraud thus are largely the same as those of a Rule lOb­
S claim except that there is no requirement that the fraud
be
'in
connection
securities.''')
United
States
(S.D.N.Y.
requires
(quoting
Surgical
2008)
the
with
( "A
same
the
15
purchase
U.S.C.
Corp. ,
claim
587
for
showing
as
§
F.
or
sale
of
78j(b));
Nealy
v.
Supp.
579,
585
2d
fraudulent
that
for
concealment
fraudulent
misrepresentation, with the additional requirement that the
plaintiff must demonstrate that the defendant had a duty to
disclose material information. If) •
In addition,
the common
law fraud and fraudulent concealment claims survive as to
-60­
Case 1:10-cv-07497-VM Document 73
Filed 03/21/12 Page 61 of 64
Goldman, Hudson 1 Ltd. and Hudson 2 Ltd.
Defendants)
because
the
"group
(the non-Marketing
pleading
those defendants to the alleged omissions.
doctrine"
ties
See supra n.13.
Dodona also claims that Goldman, Hudson 1 Ltd., Hudson
1 Corp., Hudson 2 Ltd., Hudson 2 Corp., Ostrem and Herrick
The Complaint alleges
aided and abetted common law fraud.
that GS&Co
"could not have perpetrated its
the substantial assistance of Goldman,
the Hudson issuers
and defendants Ostrem and Herrick .
As discussed above,
GS&CO
committed
Complaint
Ostrem and Herrick,
"
(Comp I.
~
205.)
the Complaint has adequately pled that
an
contains
fraud without
underlying
allegations
Moreover,
fraud.
sufficient
to
infer
the
that
in their marketing and structuring of
the Hudson CDOs, had actual knowledge of the alleged fraud
and enabled or "substantially assisted" it.
Through Ostrem
and
be
Herrick,
knowledge
of
the
Goldman and the Hudson SPEs.
fraud
may
In addition,
imputed
to
it is evident
from the Complaint that GS&Co could not have committed the
alleged
fraud
without
the
substantial
assistance
of
its
parent corporation Goldman and Goldman executives,
such as
Ostrem
and
of
Hudson
SPEs,
Herrick,
or
which
were
without
created
the
involvement
for
that
very
Therefore, the Court declines to dismiss this claim.
-61­
the
purpose.
Case 1:10-cv-07497-VM Document 73
E.
Filed 03/21/12 Page 62 of 64
UNJUST ENRICHMENT CLAIM Finally,
Dodona
claims
that
Goldman
and
unjustly enriched at Dodona's expense.
that
this
claim must
fail
because
GS&CO
were
Defendants argue
Dodona
purchased
the
Hudson 1 securities from an intermediate party, rather than
any
of
the
enriched
argue
Defendants,
at
that
Dodona's
the
and
expense.
Hudson
2
unavailable
when
"a
In
securities
written purchase agreement,
is
thus
Defendants
addition,
were
not
Defendants
governed
by
a
and an unjust enrichment claim
valid
and
enforceable
governing the same subject matter exists."
Dev. Co., v. GE Fuel Sys., LLC,
WL 209110, at *8
were
(S.D.N.Y. 2012)
contract
Soroof Trading
--- F. Supp. 2d ----, 2012
(internal quotation marks
omitted) .
The
fact
that Dodona did not purchase
securities directly from Defendants
is
not
the Hudson 1
sufficient
to
defeat an unjust enrichment claim at the motion to dismiss
phase,
especially when,
as here,
the Complaint shows that
the timing of the Hudson 1 offering and Dodona's purchase
were
so
closely aligned and only one
separated GS&Co and Dodona.
intermediate party
See State Farm Mut.
. Ins.
Co. v. Rabiner, 749 F. Supp. 2d 94, 102 (E.D.N.Y. 2010)
establish
unjust
enrichment,
\\[t]he
benefit
to
(To
the
defendant . . . can be either direct or indirect."); Cox v.
-62­
Case 1:10-cv-07497-VM Document 73
Filed 03/21/12 Page 63 of 64
Microsoft Corp., 778 N.Y.S.2d 147, 149 (App. Div. 1st Dep't
2004) .
And although there is some indication in the Offering
Circulars
that
those
who
purchased
the
Hudson
CDO
securities would be required to do so pursuant to written
agreements, the Complaint contains no allegations regarding
any written contract.
While the Court anticipates that a
contract will materialize during discovery,
of
the
proceedings,
Dodona
enrichment.
-63 ­
has
properly
at this stage
pled
unjust
Case 1:10-cv-07497-VM Document 73
Filed 03/21/12 Page 64 of 64
III. CONCLUSION
Accordingly,
for
the
reasons
stated
above
it
1
is
hereby
ORDERED that the Motion
Goldman
L.
1
(Docket No.
48)
Sachs & Co., The Goldman Sachs Group
Ostrem,
Complaint
and Darryl
is
GRANTED
Herrik
K.
in
part
to
and
of defendants
1
Dismiss
DENIED
Inc.,
the
in
Peter
Amended
part ,
in
accordance with this Decision and Order; and it is further
ORDERED that the Motion
(Docket No.
53)
of defendants
Hudson Mezzanine Funding 2006-21 Corp. and Hudson Mezzanine
Funding 2006-21
Complaint
is
Ltd.
to Dismiss the Amended Class Action
GRANTED
in
part
and
DENIED
in
part 1
in
accordance with this Decision and Order.
SO ORDERED.
Dated: New York, New
21 March 2012 York
~~
/,
~
VICTORMARRERO
U.S.D.J.
-64­