DEXIA SA v DB Radkoff Decision

7/27/2019 DEXIA SA v DB Radkoff Decision

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5672UNITED STATES DISTRICT COURTSOUTHERN DISTRICT OF NEW YORKDEXIA SA/NV; DEXIA HOLDINGS, INC.;FSA ASSET MANAGEMENT LLC; DEXIACREDIT LOCAL SA,

P l a i n t i f f s ,-v

DEUTSCHE BANK AG; DEUTSCHE BANKSECURITIES, INC.; DB STRUCTUREDPRODUCTS INC.; ACE SECURITIES CORP.;and DEUTSCHE ALT-A SECURITIES INC.LLC,

Defendants .

- x

X

-------------- XTEACHERS INSURANCE AND ANNUITYASSOCIATION OF AMERICA,

i f f ,-v

DEUTSCHE BANK AG; DEUTSCHE BANKSECURITIES, INC.; DB STRUCTUREDPRODUCTS, INC.; ACE SECURITIESCORP.; and DEUTSCHE ALT-ASECURITIES, INC.,

Defendants .- - - - - - - - - -X

MEMORANDUM ORDERJED S. RAKOFF, U.S.D.J .

11 Civ. 5672 (JSR)

11 Civ. 6141 (JSR)

These two ac t ions are brought by, r espec t ly , DexiaSA/NV, Dexia Credi t Local SA, Dexia Holdings, Inc . , and FSA

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Case 1:11-cv-05672-JSR Document 52 Filed 01/04/13 Page 1 of 23


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Asse t Management LLC (co l l ec t ive ly , "Dexia"}; and th e r sInsurance and Annuity Associa t ion of America ("TIAA") aga ins tDeutsche Bank AG and seve ra l of i t s su b s i d i a r i e s . twoComplaints, toge ther near ly 300 pages in l ength , a l fourv io la t ions of New York Sta te law: 1} f raud; 2} f raudulentinducement; 3} a id ing and abe t t ing f raud; and 4} neg l igen tmisrepresenta t ion r e l a t i ng to 43 sepa ra t e res iden t mortgage-backed s e c ur i t s ("RMBS") in which th e p la in t i f f s t ed . The

Cour t consol ida ted these tw o ac t ions fo r purposes of discoveryand p r e t r i a l motions.

De moved to dismiss both Complaints t h e i re n t i r e ty pursuant to Rule 12(b} (6}, Fed. R. Civ. P. By bottom-l ine orde r dated February 6, 2012, t h i s Court granted the motionto dismiss the Complaints and dismissed the maj of th e casewithout judice to repleading. 1 The Court , however, dismissedwith pre jud ice those c la ims t ha t were based on loans notsponsored by defendant Deutsche Bank St ruc tu red Products . ThisMemorandum expla ins the reasons fo r those ru l and se t s aschedule fo r any fu r the r proceedings .

smissa l of the Complaints renders moot defendan t s 'mot to s t r i k e . Th e Court notes , however, t ha t in anyrep leaded complain t , th e Court would s t r i ke , pursuan t to Lipsky

- - - - - - - - - - - - - - - - - - - - - - - - - - - - ~ - ' 551 F.2d 887, 892-94 (2d Cir .a l ions inunresolved cases . See , 643 F. Supp.2d 382, 403 (S.D.N.Y. 2009) , a f f ' d , 387 F. App'x 72 (2d. Cir .2010}.

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In ru l ing on motions to dismiss under Rule 12(b) (6), th eCourt may cons ider the wel l -p leaded a l l ega t ions in th eComplaints as wel l as those documents " incorpora ted in [ theComplaints] by re fe rence" and "mat ters of which j ud i c i a l not i cemay be taken." SEC v. Apuzzo, 68 9 F.3d 204, 20 7 (2 d Cir . 2012)(quoting Chambers v. Time Warner, In c . , 282 F.3d 147, 152-53 (2dCir . 2002}}. In add i t ion , the Court may cons ider " l ega l lyrequi red publ ic disc losure documents f i l ed with th e SEC." ATSICommc'ns, Inc. v. Shaar Fund, Ltd . , 493 F.3d 87, 98 (2d Cir .2007) .

The per t inen t a l l ega t ions , viewed in th e l i g h t mostfavorable to the p l a i n t i f f s , a re as fo l lows . P l a i n t i f f sinves ted in 43 RMBS sold by the defendants . 2 Those 43 RMBS (the"Offerings"} were a l l r a ted investment-grade a t i s suance , withmany r a ted AAA. Dexia Compl. ~ ~ 36, 52; TIAA Compl. 30, 236.P l a i n t i f f s a l lege t ha t from 2005 to 2007, th e defendantsconcealed defec t s in the mortgage loan c o l l a t e r a l in theOffer ings , caused by the lax or ig ina t ion s tandards of the 26separa te o r i g i n a t o r s who or ig ina ted those loans . Dexia Compl. ~ ~36, 64 226; TIAA Compl. ~ ~ 30, 59 178.

2 Dexia purchased Cer t i f i ca te s i ssued in 32 Offer ings . DexiaCompl. 36. TIAA purchased Ce r t i f i c a t e s i ssued in 11 Offer ings .TIAA Compl. 30.

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Defendant Deutsche Bank S e c u r i t i e s , Inc . ("DBSI")underwrote the RMBS a l l of the Offe r ings . Dexia Compl. 24;TIAA Compl. 18. Defendant Deutsche Bank St ruc tu red Products ,Inc. ("DBSP"), was the "sponsor" fo r seven ty - f ive pe rcen t of th eOffer ings , and i n t h a t ro le , acqu i red mortgage loans fo rs e c ur i t i z a t i on by purchas ing them d i r e c t ly from loanor ig ina to rs . By purchas ing these loans from loanor ig ina to rs , DBSP assumed th e r i sk of defau l t on those loansbefore they were sold in to the s e c ur i t i z a t i on . The DBSPsponsored loans were pr imar i ly o r ig in a t ed by non-par ty DeutscheBank AG subs id ia r i e s DB Home Lending LLC and MortgageiT, Inc .Dexia Compl. ~ ~ 30, 33; TIAA Compl. ~ ~ 24, 27. For thoseOffer ings in which DBSP served as a sponsor, defendant s AceSecur i t i e s Corp. ("Ace") and Deutsche Alt-A Secur i t i e s Inc.{"DBALT") ac ted as "depos i to rs" by purchas ing the loans from thesponsor and plac ing them in a t r u s t . Dexia Compl. 33; TIAACompl. 27. For Offer ings in which DBSP was not the sponsor,DBSI as underwr i t e r was th e only defendan t d i rec t l y involvedthe Offer ing .

For those Offer ings t ha t were sponsored by DBSP, DBSPclaimed t h a t it only acqu i red loans from approved loan s e l l e r st h a t met DBSP's minimum requi rements . Dexia Compl. 3. DBSPa l so asse r t ed in a t l e a s t some of th e prospec t ive supplements{the "ProSupps"} t h a t " a l l of the Mortgage Loans" t h a t were

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inc luded in the Offering were vet ted by DBSP underwri te rs toensure tha t they met both DBSP's and the loan s e l l e r s 'underwri t ing gu ide l ines . Id . 325.

For a t l ea s t some 3 of the loans fo r which DBSP was th esponsor, th e ProSupp s ta ted as fol lows:

The Mortgage Loans were or ig ina ted by var ious t h i rdpar ty or ig ina to rs pursuant to the underwri t ings tandard descr ibed in th i s sec t ion and were reviewedby the Sponsor to ensure conformity with suchunderwri t ing s tandards . The Sponsor 's underwri t ings tandards a re pr imar i ly in tended to assess the a b i l i t yand wil l ingness of a borrower to repay th e debt of th emortgage loan and to eva lua te the adequacy of there la ted mortgaged proper ty as c o l l a t e r a l for themortgage loan . . In underwri t ing a mortgage loan,the Sponsor cons iders , among other th ings , amortgagor 's c re d i t h i s to ry , repayment a b i l i t y and debtserv ice- to - income r a t io . as wel l as the value ,type and use of the mortgaged prope r ty .

Dexia Compl. 70.In order to conduct th i s due d i l igence , th e defendants

cont rac ted with th i rd-pa r ty mortgage consu l tan t ClaytonHoldings, Inc . ("Clayton") . Dexia Compl. 4. Defendants knewt ha t more than one- th i rd of the loans t ha t Clayton sampled from2006 to 2007 contained "egregious" depar tures from th eor ig ina tors ' underwri t ing gu ide l ines . Id . ~ ~ 4 , 2 3 8 - 4 1 .

3 P l a i n t i f f s ' vague re fe rence to th e frequency of t h i s s ta tementin the ProSupps wi l l be discussed fu r the r below because it i sevidence of th e Complaints ' fa i lure to meet the s tandards s e tfor th in Rule 9(b) , Fed. R. Civ. P. In shor t , p la in t i f f s s t a t et ha t " [ f ]o r example" th i s "and/or s imi la r representa t ions" weremade in s ix ProSupps, in add i t ion to the ProSupp t ha t i sexp l i c i t l y quoted in the Complaint. Dexia Compl. 70.

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one of the Offer ings s t a t i ng , "DOESN'T THIS DEAL BLOW," to whichthe t rade r responded "yes it blows I am seeing 20 to 40%writedowns." Dexia Compl. 277. Lippman to ld t rade rs t ha tdefendant ACE was "horr ib le ," and he advised a t l e a s t oneinves to r tha t the inves to r should shor t tw o of the Offer ingst ha t were purchased by Dexia. Id .

Although defendants a s s e r t t ha t the Short ing Report waspubl ic and based on publ ic informat ion, one o f Lippman's t rade rswrote in an email , "[W]e have to make money. Customer happinessi s a secondary goal but we cannot lose s igh t of the t r ad ingdesk[ ' ] s o ther ro le of support ing new i s sue 6 and the customerf ranchise ." Dexia Compl. ~ ~ 10, 280. Lippman also wrote to oneinves to r who was i n t e r e s t i ng in shor t ing RMBS, " [p ] lease pleasedo not forward these emails out s ide of your f i rm. . I do notwant to be blamed by th e new i s sue people [a t Deutsche Bank] fo rdes t roying t h e i r business ." Dexia Compl. 280.

DBSI took a $10 b i l l i on shor t pos i t ion aga ins t RMBS sold bydefendants , inc luding some of those t ha t it sold to p la in t i f f s .This dea l was approved by sen io r Deutsche Bank execut ives andresu l t ed in "the l a rges t p r o f i t obtained from a s ing le pos i t ionin Deutsche Bank h i s to ry . " Id . ~ ~ 1, 9-12, 270-80. DeutscheBank execu t ives " to ld Lippman to make sure to update them on how

Defendants ' "new i ssue" business involved s e c ur i t i z ing ands e l l i ng RMBS and c o l l a t e r a l i z e d debt ob l iga t ions to c l i en t s l ikethe p l a i n t i f f s here . Dexia Compl. 280.

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th e t rade was going, keeping the t i gh t " on Lippman. Dexiacompl. 272.

Lippman's t r ader s documented t h e i r view of th e RMBS in the"Shor t ing Repor t , " a presen ta t ion labe led as "h igh lyconf iden t " and prepared no than September 2005. TheShort ing Report s t a t e s tha t it wa s "prepared by Deutsche Bank AGo r one of i t s a f f i l i a t e s . Decla ra t ion of Demian Ordway, Oct.21, 2011 ("Ordway Decl . " ) , Ex. 34 ( the "Shor t ing Repor t ") . TheShort ing Report high l igh ted a p a r t i c u l a r r i sk fac to r in theloans: the debt- to- income ("DTI") r a t i o s of the borrowers ofmany of th e ad jus tab le ra te mortgage loans was i n c o r r e c t l yca lcu la ted a t the i n i t i a l " teaser" r a t e s r a the r than a t thefu l ly indexed r a t e s . Dexia Compl. 258-69. The Short ingReport concluded t ha t a borrower with a DTI r a t io above 50%would 1 not be able to a f fo rd to repay h is loan, andconcluded t ha t co r rec t ly -ca lcu la t ed DTI r a t fo r RMBS,including some of those in the Offer ings , exceededt h a t l im i t by a s ign i f i c a n t margin. Id . ~ ~ 258-69.

Many of the Of exper ienced del inquency ra te s of over f i f t y percent , Dexia Compl. ~ 5 2 , and the Ce r t i f i c a t e s fo r theOffer ings a re a l l now r a ted as "junk." Compl. 13; TIAACompl. 300.

The Cour t turns f t to the cla ims f raud, f raudu len tinducement, and a id ing and abe t t ing f raud. In orde r to make ou t

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a cla im fo r f raud under New York law, the p l a i n t i f f s mustp laus ib ly lege "a mat misrepre sen ta t ion of a fac t ,knowledge of i t s f a l s i t y , an i n t e n t to induce r e l i an ce ,j u s t i f i a b l e r e l i ance by p la in t i f f and damages."Par tners , LP v. Seward & ! ? s e l , LLP, 12 N.Y.3d 553, 55 9 (2009) .The p l a i n t i f f s must plead the same elements in orde r to make ou ta claim f raudulent inducement.S.A. v. America Movil S.A.B. de C.V., 17 N.Y.3d 269, 276 (2011)

(a p l a i n t i f f a l leg ing f raudulent inducement must "es t ab l i sh thebas elements of f raud . " ) . To s t a t e a claim fo r a id ing andabe t t f raud p l a i n t i f f s must a l l eg e (1 ) the exis tence of anunder ly ing fraud, (2) knowledge of the f raud, and (3 )su b s t a n t i a l ass i s tance in the commission of the f raud . VTechHoldings, Ltd.my. Pricewaterhouse Coopers , LLP, 348 F. Supp. 2d255, 269 (S.D.N.Y. 2004) (emphasis added) .

For each of these three cla ims, p l a i n t i f f s a l so must meetthe heightened pleading requirements of Federa l Rule of Civ i lProcedure 9(b) , which app l ies to any claim t ha t "sounds in

," Rombach v. Chang, 355 F.3d 164, 166, 170 71 (2d Cir .2004) , including cla ims fo r a id ing and abe t t ing f raud. Lernerv. Flee t Bank N.A., 459 F.3d 273, 292-93 (2d . 2006).

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The ques t ion of whether Rule 9(b) app l i e s to t h e n eg l i g en tmi s rep re s en t a t i o n claim i s s l i g h t l y more compl ica ted . 7 Althoughth e Second C i rc u i t has not y e t determined whether Rule 9(b)ap p l i e s to n eg l i g en t mi s rep re s en t a t i o n c la ims , see E t e rn i t yGlobal Master Fund Ltd. v . Morgan Guar. T ru s t Co. of N.Y. , 375F.3d 168, 188 (2d Ci r . 2004), d i s t r i c t co u r t s in t h i s D i s t r i c thave ro u t i n e l y concluded t h a t th e Rule i s app l i cab le ton eg l i g en t mi s rep re s en t a t i o n cla ims t h a t a re premised on

f r au d u len t conduc t . See, e . g . , E l l i n g t o n Cred i t Fund, Ltd. v .Se lec t P o r t f o l i o Serv ic in g , I n c . , 837 F. Supp. 2d 162, 200(S.D.N.Y. 2011); Naughr ight v . Weiss , No. 10 Civ. 8451, 2011 WL5835047, a t *7 (S.D.N.Y. Nov. 18, 2011); B e t t i n g e r v . Doueck,No. 10 Civ. 7653, 2011 WL 2419799, a t *5 (S.D.N.Y. June 3,2011); Maalouf v . Salomon Smith Barney, I n c . , No. 02 Civ. 4770,2003 WL 1858153, a t *4, *8 n. 10 (S.D.N.Y. Apr. 10, 2003) .

P l a i n t i f f s seek to analog ize to In re Refco, In c . Sec.L i t i g . , 503 F. Supp. 2d 611, 631-32 (S.D.N.Y. 2007), where t hen-

7 In order to s t a t e a cla im fo r n eg l i g en t mi s rep re s en t a t i o n ,p l a i n t i f f s must p lead "(1) th e defendan t had a duty , as a r e s u l tof a s p e c i a l r e l a t i o n s h ip , to give c o r r e c t in fo rmat ion ; (2 ) th edefendan t made a f a l se r e p re s e n t a t i o n t h a t he o r she should haveknown was i n c o r r e c t ; (3) the in format ion supp l ied in th erep re sen ta t ion was known by th e defendan t to be des i red by th ep l a i n t i f f fo r a s e r i o u s purpose ; (4) the p l a i n t i f f in tended tor e ly and a c t upon it; and (5) th e p l a i n t i f f reasonab ly r e l i e d onit t o h i s o r h er det r iment . " Hydro In v es t o r s , In c . v. T ra fa l g a rPower, I n c . , 227 F.3d 8, 20 (2d Cir . 2000) .

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d i s t r i c t Judge Lynch held t ha t i f a claim brought under Sect ion

a l

11 of the Secur i t i e s Act 8 d not over lap with a fraud c andwas in s tead based on d i s t i n c t a l l ega t ions , the claim need no tcomply with Rule 9(b) . The Court need not decide whether toadopt ca tegor i ca l ru l e applying Rule 9(b) to a l l neg l igen tmisrepresenta t ion c la ims , because even i f the Court were toanalogize from Refco to t h i s neg l igen t misrepresenta t ion cla im,the f raud and negl igent misrepresenta t ion cla ims here arel a rge overlapping and are pr inc ipa l ly based on th e same

ions o f , in essence , f raudulent conduct . There fore , a tl e a s t as the Complaints are cur ren t ly pled, the neglmis sen ta t ion cla ims must meet th e s t r i c t u r e s of Rule 9(b) .

In shor t , a l l the cla ims in both Complaints must complywith Rule 9(b) . Turning the re fo re to the ru le i t s e l f , Rule 9(b)i n s t ruc t s t ha t "a par ty must s t a t e with p a r t i c u l a r i thecircumstances cons t i tu t ing f raud o r mistake./I Fed. R. c iv . P.9(b) . In orde r to sa t i s fy Rule 9(b) , a complain t must "(1)

i fy the s ta tements t ha t the p la in t i f f contends weref raudulent , (2) ident i fy th e speaker , (3) s t a t e where and whenthe s tatements were made, and (4) expla in why the s ta tementswere f raudulent ." Shie lds v. Ci ty t rus t Bancorp, Inc . , 25 F.3d1124, 1128 (2d r . 1994). Because none of the four cla ims8 Fraud i s not an element of a Sec t ion 11 cla im, and a p la in t i f fneed only a l l negligence to s t a t e a claim under Sect ion 11.Refco, 503 F.3d a t 631.

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meets the requirements of t ha t ru l e , th e Complaints must bedismissed, but , except as noted below, without pre jud ice torep lead ing .

Fi r s t , p l a i n t i f f s have not a l leged any miss ta tements fo r 16of the 43 Offer ings a t i s sue in these cases . Ins tead , for these16 Offer ings , p l a i n t i f f s a s s e r t t h a t t he re were unspec i f i edf raudu len t s ta tements in the "Offer ing Mater ia l s , " which include" r e g i s t r a t i on s ta tements , term shee ts , prospec tuses , d r a f tprospectus supplements, prospectus supplements and o thermate r ia l s and communicat ions." Dexia Compl. 2; TIAA Compl.2. Pl a i n t i f f s contend t h a t the Complaints " iden t i fy var ioustop ics , and then expla in t h a t th e misrepre sen ta t ions on [thosetopics] are subs tan t ia l ly s imi la r . " P l a i n t i f f s ' Memorandum o fLaw in Opposi t ion to Defendants ' Motion to Dismiss ("Pl . Mem.")a t 24. But, th i s alone i s i n s u f f i c i e n t under the p a r t i c u l a r i t yrequirements of Rule 9(b) . In fac t , cour t s have dismissed f raudcla ims fo r f a i l i ng to spec i fy where in a s in g l e , lengthydocument the a l leged ly f a l se s ta tement was l oca t ed . See, e . g . ,In re Alca te l Sec. L i t i g . , 382 F. Supp. 2d 513, 534 (S.D.N.Y.2005) ( f ind ing t h a t the complain t did not meet the p lead ingstandards of Rule 9(b) o r the PSLRA). Yet, fo r these s ix teenOffer ings , the p l a i n t i f f s have no t a l leged where themissta tements were loca ted in the s e t of l eng thy Offer ing

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Mater ia l s fo r each of those RMBS o r exac t ly what themisrepresenta t ions were.

Pl a i n t i f f s argue t h a t they do no t need t o po in t t o spec i f i cs ta tements once they have a l leged t ha t s imi la r s ta tements weremade in the o t h e r ProSupps by t h a t same o r i g i n a t o r because " theprospec tus language across of fe r ings by a s ing le underwr i t e r i sl a rge ly b o i l e rp l a t e . " P l. Mem. a t 24 n. 19 (c i t ing PERS ofMiss. v. Merr i l l Lynch & Co., In c . , No. 08 Civ. 10841, 2011 WL

3652477, a t *15 (S.D.N.Y. Aug. 22, 2011)) . But, unl ike th es i t ua t ion in PERS, p l a i n t i f f s ' a s se r t i o n t h a t th e r e levan tlanguage here i s b o i l e rp l a t e i s not accura te , for the re weremate r i a l d i f fe rences among the ProSupps. For example, theyd i f f e r in t h e i r cau t ionary language . THus, a 2007 ProSupp inone of the Offer ings s t a t e s :

Recent ly , the r e s ide n t i a l mortgage market in theUnited Sta tes has exper ienced a v a r i e t y ofd i f f i c u l t i e s and changed economic condi t ions t h a t mayadverse ly a f f e c t th e performance and market value ofyour s e c ur i t i e s . Delinquencies and lo s ses with re spec tto r e s ide n t i a l mortgage loans gene ra l ly have increasedin recent months, and may con t inue t o inc rea se ,pa r t i c u l a r ly in the subprime s ec to r . . In add i t ion ,numerous r e s ide n t i a l mortgage loan or ig ina to rs t h a to r ig in a t e subprime mortgage loans have r ecen t lyexperienced se r ious f i n an c i a l d i f f i c u l t i e s and, insome cases , bankruptcy . Those d i f f i c u l t i e s haver esu l ted in p a r t from dec l in ing markets fo r mortgageloans as wel l as from cla ims fo r repurchases ofmortgage loans previous ly so ld under prov i s ions t h a trequ i re repurchase in th e event of ea r ly paymentd e f au l t s , or fo r ma te r i a l breaches of r ep resen ta t ionsand warran t i es made on the mortgage loans , such asfraud c la ims .

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Ordway Decl . Ex 15, ProSupp, DB-ALT 2007-AR2. But thecaut ionary language in o ther of ProSupps i s mat lyd i f f e r e n t .

As to the o ther twenty-seven Offer ings , p la in t i f f s a l sof a i l to s t a t e with p a r t i c u l a r i the a l leged miss tatements andwhere they appear in the Offer ing Mate r i a l s . As j u s t oneexample, Dexia Complaint re fe r s to a s ta tement in one of th eProSupps, quoted above, where DBSP discussed the re underwri t ingt ha t it would under take as sponsor and th e s tandards t ha t itwould employ in t h a t re -underwri t ing process to ensure t ha t th eloans complied with DBSP's and the or ig ina to r s ' underwr i t ings tandards . But in the Dexia Complaint , p i f f s only provideone of t h i s s ta tement in a ProSupp and a s s e r t t h a t" [ f ] o r example, Deutsche Bank made t h i s and /o r s im i la rr ep resen ta t ions in the fer ing Mater ia l s regard ing the loansacquired by DBSP fo r s e c ur i t i z a t i on in the ACE 2006-ASPl, ACE2006-ASP4, ACE 2006 ASP6, ACE 2007-ASP1, ACE 2007-ASP2, and ACE2007-HE5 RMBS." Dexia Compl. 70 (emphases added) . This i sp l a i n l y i n s u f f i c i e n t under Rule 9(b) .9

9 I f a l l of the s ta tements in the ProSupps were indeed iden ti f f would have a b e t t e r argument. But, the ProSupps werenot i de n t i c a l . For example, some ProSupps s t a t e d t ha tions to underwri t ing c r i t e r i a would make up anf i can t por t ion of the loans , and o ther s s t a t e d t ha tions would be a s i gn i f i can t por t ion of the loans .Dexia Compl. 70 with Dexia Compl. 221. And, as discussed

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An ad d i t i o n a l def iency in p a r t i c u l a r i t y i sp l a i n t i f f s have fa i l ed to a l l ege the da tes on which theypurchased s e c ur i t i e s th e Offer ings . See Gross v. Divers i f i edMortgage Inves to rs , 43 1 F. Supp. 1080, 1088 (S.D.N.Y. 1977)("[T]he p l a i n t i f f has fa i l ed to plead the na ture amount ofs e c ur i t i e s purchased and the spec i f i c da tes of the t r ansac t ionsas requi red by Rule 9(b) . " ) . This i s espec ia l ly important int h i s case because appears t h a t p l a i n t i f f s ' investments intwenty-eight of the fo r ty three Offer ing s occurred before theProSupps were even i ssued. See Memorandum Law in Support ofDefendants ' Mot to Dismiss ("Def. Mem.") a t 26 & n .18 .

P l a i n t i f f s now argue t h a t they r e l i e d on d r a f t ProSuppst ha t were s ubs t a n t i a l l y s imi la r to the f 1 vers ions . See P l.Mem. a t 33. But, even i f t ha t i s t rue , Complaints did no tcomply with 9(b) . In the Complaints, p l a i n t i f f s a l legedt ha t they based on " r e g i s t r a t i on s ta tements , termshee t s , prospec tuses , d r a f t prospec tus supplements, prospec tussupplements and o ther mate r ia l s and communications" conta in ingfa l se s ta tements . Dexia Compl. ~ ~ 2 , 346; TIAA Compl. 2. It i st rue t h a t the term d r a f t prospec tus supplements i s inc ludedt h a t long list of mater ia l s . But, i n t i f f s must a l lege t h i s

ty in the Complaints; they cannot simply a s s e r ti th

above, th e ProSupps wri t t en in 2007 began to inc lude warningsabout problems in the subprime market .

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t ha t th i s i s the case in t h e i r b r i e f . The Complaints do nota l lege t ha t th e dra f t s and f i na l vers ions of the ProSupps arei d e n t i c a l and they do not i den t i fy any spec i f i c miss ta tements inth e d r a f t ProSupps. This kind of vague pleading i s exact ly whati s prohib i ted by Rule 9(b) . The Court i s mindful of th ed i f f i cu l t y in br inging a f raud s u i t involving 43 separa teo f fe r ings , espec ia l ly cons ider ing the ever t igh ten ing pleadings tandards t ha t p l a i n t i f f s must meet in orde r to survive a motionto dismiss . 10 Nonetheless , t ha t cannot excuse compliance withthe c l e a r mandates of Rule 9(b) .

Final ly , the Complaints lack p a r t i c u l a r i t y because they donot always s t a t e who i s respons ib le for par t i cu l a r s ta tements .As discussed above, to meet th e p a r t i c u l a r i t y requirements of9(b) , th e Complaints must i den t i fy the "speaker" of thefraudu lent s ta tement . Shie lds , 25 F.3d a t 1128. Pla in t i f f s donot cons i s t en t ly meet t h i s requirement . For example,immediately a f t e r s ta t ing t ha t DBSP sponsored e ig h t of th e 11RMBS purchased by TlAA, and t ha t ACE and DB-ALT served as thedepos i tors fo r those 8 RMBS, p l a i n t i f f s al lege , " [ i ]mpor tant ly ,Deutsche Bank provided the informat ion t ha t TlAA used to decide10 To the extent t ha t the p l a i n t i f f s seek to re ly on ra t ingsagencies or appra i sa l cla ims, those asse r t ions e i t he r re ly onunproven a l l ega t ions from o ther complaints t ha t would be s t ruckin an amended complain t , or they re ly on th e same f raudulents tatements from the ProSupps discussed above. Again, thoses ta tements f a i l to meet the p a r t i c u l a r i t y requirements of Rule9 (b) .

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whether to purchase the s e c ur i t S ." T IM Compl. 27 (emphasisadded) . The TIM Complaint does not s t a t e which en t i t y it i sr e f e r r i n g to , or whether t h i s ion app l ies to a l l elevenRMBS o r j u s t the e igh t sponsored by DBSP. Although in somecases it i s poss ib l e to i d e n t i which ent i ty the p l a i n t i f f s arer e f e r r i n g to , and th e Court might not have dismissed fo r lack ofpar t i cu l a r i t y based on s problem alone, when combined withthe o ther problems discus above, t h i s se rves as an i ona l

reason fo r dismiss ing the Complaints.Having determined t ha t di smissa l i s necessary under Rule

9(b) , the Cour t must then determine whether the di smissa l shouldbe with o r withou t j ud ice . The defendants ask the Cour t todismiss both Complaints in t h e i r en t i r e t y with pre jud ice . Whendismiss ing a case on Rule 9(b) grounds, however, a cour t mustnot deny a p la in t i f f leave to amend unless " the p la in t i f f hasac ted in bad t h o r th e amendment would be f u t i l e . " v.Pf ize r , Inc . , 267 F.3d 181, 191 (2d Cir . 2001).

Here, the Cour t cannot conclude t ha t both Complaints shouldbe dismissed in t h e i r e n t i r e ty with pre jud ice because it i s notc l e a r a t t h i s s t ha t amendment would be f u t i l e as to thoseOffer ings by DBSP. For the seventy f pe rcen t ofOffer ings sponsored by DBSP, DBSP purchased the loans a t thebeginning of the process and bore the sk of s fo r t h a tloan . Clayton then conducted due d i l igence on a sample of the

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loans purchased by DBSP. See, e . g . , Dexia Compl. ~ ~ 4, 240,245. DBSP a lso made s p ec i f i c rep re sen ta t ions t h a t it hadreviewed the loans to ensure t h a t the loans conformed withDBSP's underwri t ing s tandards as wel l as the o r i g i n a t o r ' sunderwri t ing guide l ine s , and t h a t DBSP had conducted "qua l i tycon t ro l procedures , inc lud ing a f u l l re -underwri t ing of a randoms e l ec t i o n of mortgage loans to assure a s se t qua l i ty . " See,e . g . , Dexia Compl. 65, 70, 72.

Well -pleaded and p a r t i c u l a r i z e d Complaints based on thoseOffer ings might wel l be able to s t a t e a cla im, pa r t i c u l a r ly inl i g h t of 1) th e Clayton f ind ings t h a t a t l e a s t 30% of the loansin the DBSP-sponsored Offer ings had "egregious" d e f i c i en c i e s ; 2)the Shor t ing Repor t , es p ec i a l l y t h a t r e p o r t ' s spec i f i cdiscuss ion about the del inquenc ies t h a t might r e s u l t from th ef a i l u re to ca l cu l a t e DTI us ing the fu l ly - indexed r a t e , seeShor t ing Repor t a t 35-37; and 3) DBSI's l a rge s h o r t pos i t ion onRMBS.11

Moreover, Lippman and h i s t r ad e r s a l so had very negat iveviews about some of th e DBSP-sponsored Offer ings in t h i s case ,descr ib ing one Offer ing as "a p ig ," and s t a t i ng t h a t ano ther" s t inks , though I d i d n ' t mention i t . " Dexia Compl. 277; TlAA

11 The defendan t s ' a s se r t i o n t h a t they a l so l o s t money with t h e i rlong pos i t ion on RMBS i s not p ro p e r l y before the Cour t a t t h i ss tage , and moreover, even i f it were, t h i s f ac tu a l di spu te wouldnot be p ro p e r fo r r eso lu t ion a t t h i s s t age .

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Compl. 227. In addi t ion , Lippman advised a t l ea s t oneinves to r tha t he should take a shor t pos i t ion on tw o of theOffer ings . Dexia Compl. 277.

Defendants argue t ha t Lippman wa s only one t rade r , and,fur thermore, t ha t h is opinion was wide ly-publ ic ized and based onpubl ic informat ion. But Lippman was kept on a " t i gh t l eash ,"the defendants made a $10 b i l l i on shor t pos i t ion on the bas i s ofLippman's ana lys i s , and Lippman was ca r e f u l about whom he sharedh is informat ion with in order to keep th e "CDO machine" hummingalong. Dexia Compl. 229. Every page of the Short ing Reports ta ted both tha t it was " s t r i c t l y pr iva te and conf iden t ia l " andt ha t conf iden t ia l t rea tment was reques ted by DBSI. Short ingReport a t 1-73. As one of Lippman's t rade rs wrote , "[W]e haveto make money. Customer happiness i s a secondary goal but wecannot lose s igh t of th e t r ad ing de s k[ ' ] s o ther ro le ofsupport ing new i s sue and the customer f r anch ise . " Dexia Compl.

Lippman also wrote to one inves to r who wasin te res ted in shor t ing RMBS, " [p] lease please do not forwardthese emails out s ide of your f i rm. . I do not want to beblamed by the new i ssue people [a t Deutsche Bank] for des t royingt h e i r bus iness . " Dexia Compl. 280. Therefore , the p l a i n t i f f scan re ly on Lippman and the Short ing Report in t h e i r amendedcomplaints . Accordingly, al though these claims cannot beeva lua ted on the meri t s u n t i l th e Complaints are pleaded with

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par t i cu l a r i t y , it i s from c l e a r t ha t amendment would befu t i l e with r espec t to th e DBSP-sponsored Offer ings .

With r espec t to Offer ings no t sponsored by DBSP,however, amendment would be f u t i l e . Fi r s t , the l ega t ionsre l a t ed to those Off a re based in s i g n i f pa r t ona l l eg a t i o n s l i f t e d from o ther compla in t s , and the Cour t hasa l ready s t a t e d t ha t would s t r i ke those a l ions in anyAmended Complaint to th e ex ten t t h a t they a re simply copied from

unproven a l l ega t ions in unresolved cases . See supra , n .1 .Second, the l ega t ions re la ted to these Offer ings a re fa r

too a t tenua ted to s t a t e a claim. The Court does agree with thep l a i n t i f f s t h a t Janus Capi ta l Group, Inc . v. F i r s t Deriva t iveTraders , 131 S. Ct. 2296 (2011), does not apply to th e s t a t e lawf raud c See A l l s t a t e , 824 F. Supp. 2d a t 1186 (holdingt h a t Janus does not apply to New York f c la ims) . Butp l a i n t fs concede t ha t f raud l i a b i l i t y only l i e s if a par ty"makes,ll "authorizes , l l o r "causes ll a fa l se s ta tement to be made.See P l. Mem. a t 22 (quoting A l l s t a t e , 824 F. Supp. 2d a t 1186)For twenty f ive percent of the Offe , th e Orig ina to rsthemselves crea ted the i s su ing t r u s t and ac ted as sponsor anddepos Unlike the DBSP-sponsored Offer ings , where th edefendan ts and t h e i r subs id ia r i e s were involved in or ig ina t ing ,sponsoring, depos i t ing , and underwr i t ing , only DBSI {serving as

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the underwr i t e r ) par t ic ipa ted in the non DSBP-sponsoredr ings .

Even i f an amended complaint could somehow p laus ib ly a l l eget ha t the defendants caused the fa l se s ta tements to be made, thefa l se s ta tements fo r these Offe are fa r d i f fe ren t fromthose a l leged with respect to DBSP-sponsored Offer ings . Thea l leged fa l se s ta tements fo r these Of are p r imar i ly t ha tthe loans complied with the ' underwri t ingguidel ines , but the or ig ina to rs are not par t i e s here . For theOffer ings t ha t DBSP sponsored, DBSP spec i f i ca l l y promised toundertake a re -unde rw r i t i ng ss to ensure t ha t the loanscomplied with the or ig ina to r s ' s tandards as wel l as DBSP/s owns tandards . Moreover, DBSP was aware from the Clayton reviews ofthose loans t ha t many of loans had "egregious" def ic iencBy con t ras t , fo r these Offerings DBSP d id not promise t ha t itwould re -underwri te to ensure compliance, and it didnot do so . In fac t , DBSP was not involved wi th these loans orOfferings in any way. Because DBSI had only a l imi ted andat tenuated ro le in these Offer ings (and no o ther defendant s wereinvolved a t a l l ) , even i f the p la in t i f f s could a l a fa l ses ta tement caused by one of the defendants , they would not beable to plaus ib al lege t ha t the defendant s had r e qu i s i t esc ien ter or the p la in t i f f s j u s t i f i ab ly r e l i on these

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r ep resen ta t ions . 12 The i nab i l i t y to plead these elements wouldrender fu t i l e any amendment with r espec t to the non DBSPsponsored Offer ings . : 3

There are a mul t i of o ther i s sues ra i sed by bothpar t i e s , bu t when f with Complaints tha t do no t meet therequirements of Rule 9(b), the Court need not and w i l l not reachthe meri t s of those i s sues a t th i s t ime. The Court the re fo rereaf f i rms i t s bottom 1 orde r and dismisses the Complaints

without prejudice as to those Offer ings sponsored by DBSP, andwith prejudice as to those Offer ings not sponsored by DBSP. I fthe p la in t i f f s wish to replead the Complaints on the bas i s ofthe Offerings t ha t were sponsored by DBSP, they must do sowithin 30 days of the da te of t h i s Memorandum Order, fol lowingwhich the pa r t should promptly te lephone Chambers to schedulefu r the r proceedings .

SO ORDERED. Dated: New , New York

12 This should no t be read to imply t ha t the p la in t i f f s wouldnecess be unable to plead j u s t i f re l i ance as to theDBSP-sponsored Offer ings . As discussed a t length above,defendants played a much more ac t ro le in the DBSP-sponsoredOffer ings and had a fa r deeper knowledge of the loans and loandef ic ienc s in those Offer ings . fore , re l i ance on themore led s ta tements fo r those Offer ings may have beenj u s t i f i ed . The Court cannot and wi l l not ru le on th i s i s sueu n t i l Complaints are pled with i cu l a r i t y .13 The l i t y to plead j u s t i f e re l i ance would be f a t a l notonly to the f raud c la ims, but also to the neg l igen tmi ion c la im.

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January ~ , 2013 JED S. RAKOFF, U.S.D.J .

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DEXIA SA v DB Radkoff Decision