SUSAN ILLSTON, District Judge.
Currently before the Court are defendant Deutsche Bank Securities, Inc.'s motions to dismiss and to strike, defendants Rating Agencies' motion to dismiss and defendant Fitch Ltd.'s motion to dismiss for lack of personal jurisdiction. (Dkt. ## 122, 125, 127 and 131.) Based on the pleadings submitted and arguments made, the Court GRANTS in part and DENIES in part DBSI's motion to dismiss; DENIES DBSI's motion to strike; DENIES the Rating Agencies' motion to dismiss; and GRANTS Fitch Ltd.'s motion to dismiss.
On March 19, 2010, plaintiff The Anschutz Corporation ("TAC") filed an amended complaint against seven defendants: (1) Merrill Lynch & Co., Inc., (2) Merrill Lynch, Pierce, Fenner & Smith, Inc., (3) Deutsche Bank Securities, Inc., (4) Moody's Investors Service, Inc., (5) The McGraw-Hill Companies, Inc., (6) Fitch, Inc. and (7) Fitch Ratings, Ltd. The claims against the Merrill Lynch defendants, as well as the related claims against Moody's, have been transferred to the Southern District of New York by order of the Judicial Panel on Multidistrict Litigation. See MDL Transfer Order, Docket No. 90.
The claims brought by plaintiff against Deutsche Bank Securities Inc. (DBSI) are (1) violations of Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 10b-5, (2) violations of the California Corporate Securities Law of 1968, Cal. Corp.Code §§ 25500 and 25501, and (3) common law fraud. Currently before the Court are DBSI's motions to dismiss the FAC and strike portions of the same.
Plaintiff brings this action to recover damages and for other relief resulting from its purchase of auction rate securities ("ARS")
Between July 2006 and August 2007, plaintiff purchased the DBSI ARS through the San Francisco office of its agent, Credit Suisse. FAC ¶ 2. Plaintiff alleges that
Plaintiff's claims stem from the purchase of complex derivative-backed ARS from two trusts: The Pivot Master Trust and the Capstan Master Trust (Trusts). FAC ¶ 82. The Trusts were set up by DBSI for the sole purpose of issuing the securities involved in this case. Id. ¶¶ 82, 83. Plaintiff alleges that the Trusts used the proceeds from their offerings to acquire a series of Credit Linked Notes (CLNs) that had been issued by a special purpose vehicle (SPV) trust, also established by DBSI. Id. ¶ 83. The proceeds received by the SPV were invested in medium term notes or deposit accounts held by DBSI or an affiliate. Id. The SPV then entered into a series of credit default swaps (CDS) with Deutsche Bank AG, DBSI's parent company. Id. ¶ 84. A CDS is a contract between two parties through which one of the parties purchases protection or insurance against any losses associated with some specified "reference" entity. Here, Deutsche Bank AG purchased protection from the SPV that DBSI had established, and the medium term notes and deposit accounts purchased by the SPV served as collateral for the CDS transactions. Id. The "reference" securities were a portfolio of corporate bonds held by Deutsche Bank AG. Id. As such, plaintiff alleges that the SPV provided a form of insurance against the performance of the Deutsche Bank AG portfolio of bonds, "agreeing to compensate the Deutsche Bank AG office in the event the bonds were downgraded or otherwise failed to make payments of interest or principal." Id. Thus, in return for a "nominal `premium,'" Deutsche Bank AG received a guarantee that it would be made whole in the event that it suffered losses on its portfolio of corporate bonds, "offloading the risk from its balance sheet onto the shoulders of unsuspecting investors several steps down the chain." Id.
Plaintiff alleges that the interest rate range for the securities issued by the Trusts was narrowly circumscribed and tied to their ratings. Id. ¶ 90. DBSI structured these securities as ARS in order to market them as short-term, liquid notes rather than as "fixed-income notes with maturity dates some 10 years in the future." Id. ¶ 91. Plaintiff specifically alleges that because the interest rates were fixed at such a low range, the securities "would have been unsaleable without [DBSI's] undisclosed, manipulative, and deceptive practices" of fixing auctions to make the securities seem liquid, and that "no investor would have purchased long-term notes with a 10-year maturity date that paid only short-term interest rates." Id.
Relatedly, plaintiff explains that the ARS at issue were not available to the public in general. Instead, because these securities were unregistered, they were available only to a limited group of "qualified institutional buyers" (QIBs) like TAC. FAC ¶ 180. TAC, as an institutional buyer, sought to invest its working capital exclusively in short-term, investment-grade securities. Id. ¶ 186. TAC purchased the DBSI securities based on its
In order to create the appearance that the securities had sufficient liquidity to be marketed to institutional investors, plaintiff alleges that DBSI manipulated the market by placing support bids in every auction for the securities at issue, as well as for other ARS for which it served as the sole or lead broker-dealer, including the Camber Trust. FAC ¶¶ 31, 94-95, 102. DBSI also placed bids for the full amount of the issue of the auction. Id. ¶¶ 31, 102. Given its conduct supporting the auctions, DBSI knew that auctions would fail in the event that DBSI decided to stop placing bids, which it decided to do in July 2007 and did in August 2007, resulting in the collapse of the market for these securities. Id. ¶¶ 95-98, 105.
Plaintiff also alleges that because DBSI was the only broker-dealer which could participate in the auction for the securities held by the Trusts, it had full access to all bids to purchase and orders to sell which permitted it to place bids for its own account so as to influence the outcome of the auction. FAC ¶ 92. This sole access not only allowed DBSI to manipulate the auctions to make it appear as if there were sufficient third-party demand for the ARS, but also allowed DBSI to set the auctions' interest rates lower than they otherwise would have been, so that TAC and other investors earned less interest. Id. ¶¶ 4, 113.
Plaintiff asserts that DBSI engaged in this conduct without adequate disclosure to the market. FAC ¶ 111. Plaintiff notes that in May 2006, the Securities and Exchange Commission (SEC) initiated cease-and-desist proceedings against 15 investment banks — not including DBSI — for their conduct with respect to certain ARS auctions. Id. ¶ 36; see also In re Bear, Sterns & Co, Admin. 3-12310, Release Nos. 8684 et al. at 5 (SEC 5/31/06), available at www.sec.gov/litigation/admin/2006/ 33-8684.
Plaintiff alleges that the Rating Agency defendants hold themselves out to be independent "financial gatekeepers" of Wall Street. FAC ¶ 117. The SEC has identified these agencies as "nationally recognized statistical rating organizations" (NRSROs). Id. According to the SEC, the "`single most important criterion' to granting NRSRO status is that `the rating organization is recognized in the United States as an issuer of credible and reliable ratings by the predominant users of securities ratings.'" Id. ¶ 118. S & P and Fitch allegedly conduct extensive due diligence and independent analysis in order to accurately rate investments and have publicly announced that, "if they believed they had `inadequate information to provide an informed credit rating to the market, [they] would exercise [their] editorial discretion and [would] either refrain from publishing the opinion or withdraw an outstanding credit rating.'" Id. ¶¶ 119-120. The Rating Agencies, however, accept "huge payments from the investment banks in exchange for investment-grade ratings on undeserving instruments. According to numerous published reports and the testimony of high ranking former officers, the credit rating agencies received three to four times the fees for rating a structured finance security than they received for rating a corporate bond. Such fees were collected for 99.5 percent of the securities that the agencies rated." Id. ¶ 123.
For structured ARS, like the ones here, plaintiff alleges that the securities could not issue and the credit rating agencies would not get paid unless the Agencies provided a pre-determined AAA rating for the securities. Therefore, an alleged conflict of interest developed such that the Rating Agencies abandoned their independence and relaxed their rating criteria and procedures in order to secure the business of the investment banks in rating these types of securities. Id. ¶¶ 124-139.
Plaintiff alleges that, given the highly complex and esoteric nature of the structured ARS being issued by DBSI and similar investment banks, the Rating Agencies knew that institutional investors like TAC would necessarily rely on the ratings. Id. ¶¶ 140-143. Nonetheless, plaintiff alleges, "the rating agencies knowingly, or through gross negligence, assigned investment-grade ratings to the vast majority of structured finance securities, including the complex auction rate securities such as those at issue in this action, without regard to whether the underlying security deserved an investment-grade rating and notwithstanding their knowledge that investors would equate an investment-grade rating with liquidity." Id. ¶ 143.
With respect to the DBSI ARS at issue, plaintiff alleges that the Pivot Master Trust and Capstan Master Trust securities underwritten by DBSI were rated by S & P and Fitch. S & P "assigned these securities an AAA rating, its highest, which expresses the conclusion that `[t]he obligor's capacity to meet its financial commitment on the obligation is extremely strong.'" Id. ¶ 166. Fitch "also assigned an AAA rating to these securities, which is reserved for those securities `of the highest credit quality. "AAA" ratings denote the lowest expectation of credit risk. They are assigned only in cases of exceptionally strong capacity for payment of financial commitments. This capacity is highly unlikely to be adversely affected by foreseeable events.'" Id. ¶ 166. Plaintiff notes that these ratings were explicitly referenced in the Pivot Master Trust and Capstan Master Trust offering statements, and "these securities could not have been issued unless
Plaintiff argues that the AAA ratings assigned to the Trusts were false and misleading for at least three independent reasons:
1. The ratings assigned to these securities were based on a statistical analysis of the pool of reference securities that were the subject of the CDS between the SPV and Deutsche Bank AG, where the SPV was not required to make payments on the CDS until a certain percentage of the pool of reference securities suffered a "credit event." This percentage is referred to as the "attachment point." Id. ¶ 169. Plaintiff alleges that although not disclosed in the offering documents, DBSI "has subsequently represented that the attachment point was 7.8 percent in the case of the Pivot Master Trust securities and 9.75 percent in the case of Capstan Master Trust securities." Id. Plaintiff contends that under two "accepted industry statistical practices, and published default rates for the portfolio of reference securities subject to the CDS," the attachment points should have been significantly higher in order for the Trusts to warrant the AAA ratings they received from S & P and Fitch. Id. ¶ 170.
2. S & P failed to follow its "weak-link" ratings approach — where the credit rating assigned to a structured finance product can only be as high as the weakest link in the structured finance payment chain — because part of the interest on the securities was dependent on a series of "basis swaps" that were entered into with Deutsche Bank AG as swap counter-party. As such, the creditworthiness of the structured ARS at issue was "directly dependent on the creditworthiness of Deutsche Bank AG" which at the time was only AA-, and not AAA as required by the Trusts' offering statements. Id. ¶¶ 171-172.
3. The ratings assigned to the securities were false and misleading because S & P and Fitch knew that investors — including TAC — understood the AAA ratings to be a representation about the ready liquidity of these securities and the Rating Agencies were reckless or negligent in failing to learn that DBSI was artificially creating the market for the securities through its auction conduct and the market for the securities could not exist otherwise. Id. ¶¶ 174-175.
Under Federal Rule of Civil Procedure 12(b)(6), a district court must dismiss a complaint if it fails to state a claim upon which relief can be granted. To survive a Rule 12(b)(6) motion to dismiss, the plaintiff must allege "enough facts to state a claim to relief that is plausible on its face." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). This "facial plausibility" standard requires the plaintiff to allege facts that add up to "more than a sheer possibility that a defendant has acted unlawfully." Ashcroft v. Iqbal, ___ U.S. ___, 129 S.Ct. 1937, 1949, 173 L.Ed.2d 868 (2009). While courts do not require "heightened fact pleading of specifics," a plaintiff must allege facts sufficient to "raise a right to relief above the speculative level." Twombly, 550 U.S. at 544, 555, 127 S.Ct. 1955.
In deciding whether the plaintiff has stated a claim upon which relief can be granted, the court must assume that the plaintiff's allegations are true and must draw all reasonable inferences in the plaintiff's favor. See Usher v. City of Los Angeles, 828 F.2d 556, 561 (9th Cir.1987). However, the court is not required to accept as true "allegations that are merely conclusory, unwarranted deductions of fact, or unreasonable inferences." In re Gilead Scis. Sec. Litig., 536 F.3d 1049, 1055 (9th Cir.2008). If the court dismisses
Section 10(b) market manipulation claims, as other claims under the Exchange Act, must be pled with "exacting" particularity. Zucco Partners, LLC v. Digimarc Corp., 552 F.3d 981, 990 (9th Cir. 2009). DBSI argues that plaintiff's market manipulation claim is fatally deficient as TAC has failed to adequately allege: manipulative conduct by DBSI; justifiable reliance on the assumption of an efficient market free of manipulation; a strong inference of scienter on the part of DBSI; or loss causation. The Court will address each contention in turn.
Plaintiff argues that the alleged act which underlies its claim is the "communication of false information into the marketplace concerning the demand or value of a security." Oppo. at 11. Because market manipulation claims "can involve facts solely within the defendant's knowledge [ ...,] at the early stages of litigation, the plaintiff need not plead manipulation to the same degree of specificity as a plain misrepresentation claim." ATSI Communs., Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 102 (2d Cir.2007). Instead, a "manipulation complaint must plead with particularity the nature, purpose, and effect of the fraudulent conduct and the roles of the defendants." Id. Here, plaintiff does not rest on this somewhat relaxed burden, but instead identifies DBSI's scheme and facts that underlie it with particularity.
Plaintiff alleges that DBSI's scheme to affect the market was carried out by placing support bids in every auction for the securities and for the full amount of the issue each time. FAC ¶ 102; Oppo. at 12. It was this conduct, plaintiff pleads, that created and falsely sustained the market for the structured ARS. Id. ¶ 98. This conduct made the securities appear liquid, when they were not, and thereby artificially inflated the prices for the securities. Id. ¶¶ 91, 103. DBSI's conduct also depressed the interest rates for the securities. Id. ¶ 112. Had DBSI not placed support bids in every auction for 100% of the issue, plaintiff alleges that auctions would have failed and the market collapsed, id. ¶¶ 98, 105, which is what happened in August 2007 when DBSI stopped its practices. Id. ¶ 105. Plaintiff also alleges that DBSI had no legitimate interest in owning those securities, but was motivated by the desire to earn millions of dollars in underwriting fees and gain credit protection for Deutsche Bank AG. Id. ¶ 104. Finally, plaintiff identifies the date of each of the auctions in which DBSI engaged in manipulative bidding. Id., Appendix B. The Court finds that these specific allegations are sufficient to meet Rule 9(b)'s heightened pleading requirements, as they "specify what manipulative acts were performed, which defendants performed them, when the manipulative acts were performed, and what effect the scheme had on the market for the securities at issue." Baxter v. A.R. Baron & Co., 1995 WL 600720, *6, 1995 U.S. Dist. LEXIS 14882, *22 (S.D.N.Y. Oct. 6, 1995).
DBSI MTD at 6.
In particular, DBSI relies on In re UBS Auction Rate Secs. Litig., 2010 WL
This case differs from UBS in at least one material respect: Here, plaintiff alleges not only that DBSI participated in every auction but also bid for 100% of the issue at each auction.
DBSI's other cases are likewise inapposite. In In re Merrill Lynch Auction Rate Sec. Litig., 704 F.Supp.2d 378 (S.D.N.Y.2010), the Court dismissed a market manipulation claim where defendants disclosed not just that defendants "may" participate in ARS auctions but that they "routinely" did. The Court does not find this case persuasive here, because
Finally, both sides rely, for different purposes, on a 2006 cease-and-desist order issued by the SEC against 15 investment banks involved in the traditional ARS market. See FAC ¶ 36 & DBSI MTD at 3, n. 1. In that order the SEC found that certain banks "intervened in auctions by bidding for their proprietary accounts ... without adequate disclosures." SEC Order at 6. DBSI relies on the 2006 Order to argue that the SEC's order regarding other companies' conduct in the traditional ARS market should have put potential investors in the securities at issue here on notice that DBSI could be engaged in similar conduct. DBSI MTD at 3-5, 24-25. The Court, however, is not persuaded that the SEC order — which was not against DBSI and which did not address structured ARS similar to the ones at issue here — could as a matter of law disclose DBSI's alleged manipulative conduct. Cf. Dow Corning Corp. v. BB & T Corp., 2010 WL 4860354, 2010 U.S. Dist. LEXIS 124031 (D.N.J. Nov. 23, 2010) (fact that news articles, 2006 SEC Order, and prospectuses for ARS holdings "publicized the risk that auctions might fail and the practice of brokers to submit support bids to
Plaintiff argues that the SEC's conclusion in the order — that disclosures that broker-dealers "may" participate in the auctions when, in fact, they are certain to do so is materially misleading as a matter of law — should apply in this case. Oppo. to DBSI MTD at 17-18. DBSI disputes that the SEC actually reached this conclusion and argues that even if the SEC's order stands for the proposition plaintiff asserts, it was the product of a settlement, and, therefore, does not have the force of law. Reply at 3-4. The Court need not resolve this dispute at this juncture. The Court has concluded that plaintiff has adequately pled acts of market manipulation. Therefore what, if any, import should be given to the 2006 Order is a dispute for a later date.
In a market manipulation case, plaintiff must allege "reliance on an assumption of an efficient market free of manipulation." ATSI Communs., Inc., 493 F.3d at 101. DBSI argues that plaintiff cannot meet that pleading standard because plaintiff — a highly sophisticated investor which should have been aware of the SEC's 2006 cease-and-desist order — should have known that the ARS market was not an efficient one, but one subject to "inefficiencies" caused by the participation of broker-dealers like DBSI in the auctions. DBSI Reply MTD 6-8. DBSI relies primarily on the UBS decision discussed above. There, the Court found that plaintiffs could not state they justifiably relied on an efficient market because the disclosure in defendants' prospectuses that defendants "may" participate it the market and that such participation may affect auction clearing rates, as well as the SEC cease-and-desist order and related news stories, put the market on notice that the market was not efficient. In re UBS Auction Rate Secs. Litig., 2010 WL 2541166 at *22-24, 2010 U.S. Dist. LEXIS 59024 at *72-75.
As noted above, the issue of whether the PPMs for the Pivot and Capstan Trusts disclosed, or adequately disclosed, the alleged manipulation is not one about which reasonable minds cannot differ and, therefore, cannot be decided on this motion.
Finally, TAC also alleges that it was reasonable for it to rely on the appearance of an efficient market (and the related liquidity) for these particular structured ARS because TAC had previously purchased structured ARS from DBSI through the Camber Trust. FAC ¶¶ 106, 195. As none of the Camber Trusts auctions failed (since, unbeknownst to TAC, they were propped up by DBSI), TAC argues, it was further reasonable for it to rely on an assumption of an efficient market.
These particularized allegations are sufficient to survive the motion to dismiss.
"[T]o adequately plead scienter, the complaint must [ ] `state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.'" Zucco Partners, 552 F.3d at 991. The inquiry "is whether all of the facts alleged, taken collectively, give rise to a strong inference of scienter, not whether any individual allegation, scrutinized in isolation, meets that standard." Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322-23, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2007) (emphasis in original).
DBSI challenges plaintiff's scienter allegations by arguing that, at base, plaintiff's only scienter allegation is that the sole purpose of DBSI's scheme was to earn millions of dollars in underwriting fees. DBSI Reply MTD at 9-10.
Plaintiff initially notes that other courts have found that a desire to earn lucrative fees is sufficient to allege scienter. See, e.g., Abu Dhabi Commer. Bank v. Morgan Stanley & Co., 651 F.Supp.2d 155, 179-180 (S.D.N.Y.2009); see also Oppo. to DBSI MTD at. 22 n. 29 (citing cases). However, plaintiff argues that the aim of the scheme here was not only to allow DBSI to earn millions of dollars in fees but also to provide insurance against losses to Deutsche Bank AG's portfolio. FAC ¶ 84, 219. That is a significant difference between the traditional ARS at issue in the cases DBSI relies on and the case here. TAC's tracking of the complex transactions connecting the structured ARS at issue with "insurance" protection to Deutsche Bank AG, is particularized and not the sort of generalized allegation of participation in ARS in order to cover "other" losses that have been rejected by other courts. See, e.g., In re Citigroup Auction Rate Sec. Litig., 700 F.Supp.2d at 305.
The nature of the structured ARS at issue here also supports plaintiff's assertion that DBSI's participation in the market — placing bids in 100% of the auctions for 100% of the issue — cannot be explained by any "legitimate" investment aim on DBSI's part. Plaintiff alleges that DBSI provided itself protection from the market it created and sustained by allowing itself to "unwind" any securities it held in its own account and "exchange those holdings for the unimpaired and liquid collateral supporting the CDS." FAC ¶ 104. The ability to unwind its own investments in the structured ARS supports plaintiff's allegation that DBSI had no legitimate interest in holding securities for its own account. In sum, whether considered individually or collectively, plaintiff's allegations support a strong inference of scienter.
DBSI attempts to avoid TAC's specific allegations of loss causation by arguing that plaintiff's losses are really due to the global credit crisis that began in the summer of 2007. DBSI MTD at 20-22; DBSI Reply MTD at 10-11. As plaintiff alleges, however, DBSI artificially manipulated the market and without that manipulation, there would not have been sufficient interest in buying what turned out to be long-term investments at short-term rates. Oppo. at 25. Allegations that there never was sufficient investor demand for the DBSI securities, is sufficient to allege loss causation here. See also In re Initial Pub. Offering Sec. Litig., 297 F.Supp.2d 668, 674 (S.D.N.Y.2003) (finding that allegations of price inflation caused by market manipulation can establish loss causation). Moreover, even if the collapse in the global credit crisis caused some part of TAC's losses, in the Ninth Circuit, plaintiff is not required to show that defendant's conduct "was the sole reason for the investment's decline in value" in order to show loss causation. In re Daou Sys., 411 F.3d at 1025. Finally, TAC also specifically alleges that because of DBSI's fraudulent conduct, TAC purchased the securities at inflated prices and received less in periodic interest payments. FAC ¶¶ 91, 103. Plaintiff, therefore, has sufficiently alleged loss causation.
TAC also asserts a 10(b) claim under Rule 10b-5(b) based on DBSI's material omissions. Oppo. to DBSI MTD at 26-30. TAC bases its "omissions" claim on much of the same conduct that underlies its market manipulation claims. Id. at 26-27. In
DBSI argues that, based upon the totality of the allegations in the FAC, which allege omissions but also misrepresentation and market manipulation, plaintiff cannot establish an omissions case under Desai v. Deutsche Bank Sec. Ltd., 573 F.3d 931 (9th Cir.2009). There, the Ninth Circuit held that omissions claims under 10b-5(b) must be distinct from manipulation claims under 10b5-(a) and (c). The Court recognized that since, "`[a]ny fraudulent scheme requires some degree of concealment, both of the truth and of the scheme itself. We cannot allow the mere fact of this concealment to transform the alleged malfeasance into an omission rather than an affirmative act. To do otherwise would permit the Affiliated Ute presumption to swallow the reliance requirement almost completely.'" Id. at 941 (quoting Joseph v. Wiles, 223 F.3d 1155, 1163 (10th Cir.2000)). As such, the Ninth Circuit held that the Affiliated Ute presumption of reliance is not available in a case of mixed secret manipulation and omission claims. Id.
TAC attempts to distinguish Desai by arguing that here the market manipulation claim under Rule 10b-5(a) and (c) is based on different conduct than the omissions claim under Rule 10b-5(b): the former is based on DBSI's bidding for the full issue in every auction without any legitimate investment interest, while the latter is based on the PPMs' faulty and inadequate disclosure of DBSI's conduct in market. DBSI Reply MTD at 29, n. 39.
However, all such conduct was part of the same alleged scheme to manipulate the market for the structured ARS. As such, under Desai, plaintiff cannot rely on the Affiliated Ute presumption, and plaintiff has failed to allege direct reliance. DBSI's motion to dismiss is GRANTED with respect to plaintiff's omissions claim without leave to amend.
DBSI initially argues that plaintiff lacks standing to sue under the California Corporations Code because neither TAC nor DBSI is a California corporation and the only alleged connection to California is that TAC's broker purchased the structured ARS from its California office. However, the Court finds — consistent with its finding in denying DBSI's motion to transfer venue — that TAC's "injuries were caused at least in part by conduct within California." April 13, 2010 Order at 6. As such, plaintiff has standing to pursue these claims.
DBSI argues that TAC's claim under California Corporation Code 25501 (which is based on Corporation Code section 25401 for selling securities using untrue statements or omitting material facts), must be dismissed for lack of privity because TAC's purchases were made by Credit Suisse and not plaintiff. Claims under California Corporations Code section 25501 do require privity between the plaintiff and defendant, but privity is adequately alleged here. Plaintiff purchased the securities from the defendant, DBSI, and seeks to hold DBSI liable for its conduct. The fact that TAC's agent, Credit Suisse, made the purchases on TAC's behalf does not alter the existence of privity. See, e.g., Apollo Capital Fund LLC v. Roth Capital Partners, LLC, 158 Cal.App.4th 226, 253, 70 Cal.Rptr.3d 199 (Cal.App. 2007).
DBSI argues that plaintiff's claim under Section 25500 (which is based on Section 25400 for manipulating the market), must be dismissed because plaintiff has failed to allege the "high level" of scienter required for this claim. See, e.g., California Amplifier, Inc. v. RLI Ins. Co., 94 Cal.App.4th 102, 112, 113 Cal.Rptr.2d 915 (Cal.App. 2001) ("the purpose and intent of the willful participation requirement is to clarify and underscore the high level of scienter required for a violation of section 25500."). However, based on the discussion of scienter under Section 10(b), the Court concludes that TAC has adequately pled scienter for purposes of Corporations Code section 25500.
DBSI asserts that plaintiff's Exchange Act and Corporations Code claims are barred by the applicable two year statutes of limitations. See 28 U.S.C. § 1658(b); Cal. Corp.Code § 25506(b). For both sets of claims, the statutes of limitations begin to run on inquiry notice. See Merck & Co. v. Reynolds, ___ U.S. ___, 130 S.Ct. 1784, 1798, 176 L.Ed.2d 582 (2010); Deveny v. Entropin, Inc., 139 Cal.App.4th 408, 423, 42 Cal.Rptr.3d 807 (Cal. App.2006). DBSI argues that plaintiff's claims should be dismissed because by 2006, when the SEC issued the cease-and-desist order discussed above, TAC should have been on reasonable notice that the ARS auctions might fail, that an efficient ARS market might not exist, and that DBSI might participate in the ARS auctions for its own account. Plaintiff responds that the "truth" about the structured ARS market at issue did not start to emerge until the auctions failed in August 2007 and came fully to light in August 2008 when regulators publicized the findings of their investigations into DBSI's practices. FAC ¶¶ 9, 114-115.
DBSI's arguments on the statute of limitations are essentially the same as the ones made in its attempt to argue that the market manipulation had been disclosed and TAC could not allege reasonable reliance. See supra. For the same reasons that the Court found that TAC has sufficiently plead non-disclosed manipulative
Both parties agree that the elements of a California common law fraud claim are similar to the elements of a Section 10(b) claim. DBSI MTD at 31-32; Oppo. DBSI MTD at 34-35. DBSI contends that TAC has failed to allege "justifiable reliance" sufficient to withstand a motion to dismiss. DBSI Reply MTD at 15. For the same reasons that the Court found TAC has sufficiently plead reasonable reliance under Rule 10(b), the Court finds that TAC has plead justifiable reliance for its common law fraud claim.
Finally, DBSI moves to dismiss plaintiff's claim for punitive damages on the grounds that (1) punitive damages are not available under the federal securities law, and (2) plaintiff has failed to adequately plead elements of common law fraud, particularly justifiable reliance, so the claim for punitive damages under that cause of action cannot survive. As discussed above, the Court finds that TAC has adequately alleged a common law fraud cause of action. As punitive damages are available under that claim, DBSI's motion to dismiss on this ground is DENIED.
DBSI moves to strike portions of the FAC that refer to various investigations conducted by the New York Attorney General (NYAG) and the SEC, and the resulting settlement agreements. DBSI Notice of Motion to Strike (MTS) at 1-3. Federal Rule of Civil Procedure 12(f) provides that a court may, on its own or upon a motion, "strike from a pleading an insufficient defense or any redundant, immaterial, impertinent, or scandalous matter." The function of a Rule 12(f) motion to strike is to avoid the expenditure of time and money that arises from litigating spurious issues by dispensing of those issues before trial. Fantasy, Inc. v. Fogerty, 984 F.2d 1524, 1527 (9th Cir.1993), rev'd on other grounds, 510 U.S. 517, 114 S.Ct. 1023, 127 L.Ed.2d 455 (1994). Motions to strike are generally disfavored. Rosales v. Citibank, 133 F.Supp.2d 1177, 1180 (N.D.Cal.2001). In most cases, a motion to strike should not be granted unless "the matter to be stricken clearly could have no possible bearing on the subject of the litigation." Platte Anchor Bolt, Inc. v. IHI, Inc., 352 F.Supp.2d 1048, 1057 (N.D.Cal. 2004).
DBSI argues that the references to the NYAG and SEC investigations and resulting settlements should be stricken because these regulatory settlements cannot support plaintiff's allegations of scienter under Section 10(b). DBSI also argues that "the agreements were the result of private bargaining without any adjudication on the merits — no hearing or trial ever took place and no ruling or other form of decision was ever rendered. Because these regulatory settlements are irrelevant and inadmissible, they cannot have any `essential or important relationship to the claim for relief' nor can they be `necessary[ ] to the issues in question.'" Motion at 3 (quoting Fantasy, Inc., 984 F.2d at 1527).
Both plaintiff and DBSI rely on Glazer Capital Mgmt., LP v. Magistri, 549 F.3d 736 (9th Cir.2008). In Glazer, the Ninth Circuit looked to an SEC cease-and-desist order that had been imposed pursuant to a regulatory settlement in order to find that plaintiffs had adequately alleged falsity under Rule 10b-5. Id. at 742. However, the Court found that the cease-and-desist order "was not probative" of scienter, as "the admissions in these settlement agreements
Here, TAC does not rely on DBSI's regulatory settlements with the NYAG or the SEC as support for its scienter allegations. Opposition to Motion to Strike at 5, fn. 2. Further, the Ninth Circuit's discussion of the SEC cease-and-desist order in Glazer does not suggest that such settlements can never be relevant to scienter or other aspects of a Section 10(b) claim. Instead, in Glazer the Court found that reliance on the SEC order was simply "not sufficient" to infer scienter in that case. Id.
Here, the regulatory investigations and settlements may be relevant to issues in this case, for example, to the issue of notice sufficient to trigger the statute of limitations. As it cannot be said that the regulatory settlements and related documents "have no possible bearing on the subject of the litigation," Platte Anchor Bolt, Inc., 352 F.Supp.2d at 1057, DBSI's motion to strike is denied.
The Rating Agencies move to dismiss plaintiff's common law negligent misrepresentation claims, asserting a number reasons why their conduct is immune from liability. Each of the arguments is addressed in turn.
As an initial matter, the Court must decide whether New York or California law governs the negligent misrepresentation claims. The Rating Agencies — hoping to benefit from New York's Martin Act, which may preempt common law negligent misrepresentation claims — argue that New York law should apply to this case because the Rating Agencies are located in and disseminate their ratings information from New York. Plaintiff counters that California law should apply given California's significant interests in having its laws applied to the conduct at issue, which occurred in California when Credit Suisse purchased DBSI's securities on TAC's behalf.
"In a federal question action that involves supplemental jurisdiction over state law claims, we apply the choice of law rules of the forum state — here, California." Paulsen v. CNF Inc., 559 F.3d 1061, 1080 (9th Cir.2009). California courts employ a "governmental interest analysis" to assess whether California law or non-forum law should apply. Id. The governmental interest test requires a three-step analysis. Coufal Abogados v. AT & T, Inc., 223 F.3d 932, 934 (9th Cir.2000). First, the Court examines the substantive law of each jurisdiction to determine whether the laws differ as applied to the relevant transaction. Id. Second, "if the laws do differ, the court must determine whether a `true conflict' exists in that each of the relevant jurisdictions has an interest in having its law applied." Id. Third, if a true conflict exists, the Court must determine which forum's law would
Both sides admit that the first two prongs of the test are met. California and New York's laws are substantively different in terms of the elements of a negligent misrepresentation claim, and those differences create a "true conflict." Compare Agencies' MTD at 11-2 with Oppo. to Agencies' MTD at 14-15. With respect to the third prong, the Rating Agencies assert that New York's interests would be more impaired if California's law were applied to the negligent misrepresentation claims because they are New York-based entities who provide information about a securities market "centered" in New York. These entities expect New York law to apply to their conduct and as a result, "`consciously attempt to mold their conduct to legal norms, with the expectation that the legal consequences of their conduct will be predictable' and, as such, `[t]heir justified expectation that their conduct will be judged by the rules of jurisdictions in which they carry on their activities merits protection.'" Agencies' MTD at 13 (quoting Davis v. Costa-Gavras, 580 F.Supp. 1082, 1092 (S.D.N.Y.1984)). The Rating Agencies also argue that New York law has consistently acted to protect the free flow of information — "particularly financial information" like that provided by the Agencies — by tailoring special laws and protections for entities publishing information and opinions. Agencies' MTD at 12.
However, while the Rating Agencies operate out of New York, the information they publish is intended to reach and reaches throughout the United States. The Agencies cannot have a reasonable expectation that potential liability for their conduct will be determined solely under the laws of New York. More importantly, California also has a history of adopting, as well as tailoring, legal standards to safeguard the free flow of information. See, e.g., Cal.Code Civ. Proc. § 425.16 et seq. (California's anti-SLAPP statute); Cal. Const., art. I, § 2, subd. (b), and Evid. Code, § 1070 (California's reporter shield privilege). California has a strong interest both in deterring misconduct with respect to commercial speech, see, e.g., Kasky v. Nike, Inc., 27 Cal.4th 939, 119 Cal.Rptr.2d 296, 45 P.3d 243 (2002), and in the lawful sale of securities in California. See, e.g., Hall v. Superior Court, 150 Cal.App.3d 411, 417, 197 Cal.Rptr. 757 (Cal.App.1983) ("California's policy is to protect the public from fraud and deception in securities transactions.").
In sum, California has a significant interest in having its law applied to this case and that interest would be more impaired than New York's if New York law were applied to the negligent misrepresentation claims.
To state a negligent misrepresentation claim under California law, plaintiff must allege: "(1) the misrepresentation of a past or existing material fact, (2) without reasonable ground for believing it to be true, (3) with intent to induce another's reliance on the fact misrepresented, (4) justifiable reliance on the misrepresentation, and (5) resulting damage." Apollo Capital Fund LLC v. Roth Capital Partners, LLC, 158 Cal.App.4th 226, 243, 70 Cal.Rptr.3d 199 (Cal.App.2007).
The Rating Agencies' overriding argument is that their ratings cannot be subject to a common law negligent misrepresentation claim because the ratings are opinions and not statements of fact. See Agencies' MTD at 16-18; Agencies' Reply at 6-7. The Rating Agencies do not explain in any detail how their credit rating process works or how the "opinions" with respect to the Trusts here were formed. Instead they rely primarily on cases under Section 11 of the Securities Act of 1933, that have held that credit ratings for securities are opinions not statements of fact, and that to be actionable under Section 11 plaintiffs must allege that the opinions were not truly held at the time the ratings were issued. See In re IndyMac Mortgage-Backed Sec. Litig., 718 F.Supp.2d 495, 512 (S.D.N.Y.2010); see also N.J. Carpenters Health Fund v. Residential Capital, LLC, 2010 WL 1257528, 2010 U.S. Dist. LEXIS 32058 (S.D.N.Y. Mar. 31, 2010); N.J. Carpenters Health Fund v. DLJ Mortg. Capital, Inc., 2010 WL 1473288, 2010 U.S. Dist. LEXIS 47512 (S.D.N.Y. Mar. 29, 2010); Tsereteli v. Residential Asset Securitization Trust 2006-A8, 692 F.Supp.2d 387 (S.D.N.Y.2010); but see In re Wells Fargo Mortg. Backed Certificates Litig., 712 F.Supp.2d 958, 972-73 (N.D.Cal.2010) (allowing Section 11 claims to proceed based, in part, on alleged misstatements contained in ratings included in the offering materials).
The Agencies do not cite any cases applying California law to determine whether ratings such as the ones at issue here should be considered statements of opinion or representations of fact.
Moreover, even if considered opinions, California recognizes "two exceptions to the rule that expressions of opinion are not actionable .... The first is that an expression of opinion is actionable if the party expressing it does not honestly entertain that opinion. The second exception arises when the party making the false representation of opinion has superior knowledge or special information." Ogier v. Pacific Oil & Gas Dev. Corp., 132 Cal.App.2d 496, 506-07, 282 P.2d 574 (Cal. App.1955). Therefore, whether treated as a statement of material fact under Bily or considered an actionable opinion under Ogier, TAC may bring negligent misrepresentation claims against the Rating Agencies if plaintiff alleges that the Agencies did not honestly entertain the opinions about the ratings at the time they were issued.
Plaintiff's allegations here are much more detailed and specific than the ones at issue in the Section 11 cases relied on by the Rating Agencies. See, e.g., In re Lehman Bros. Sec. & Erisa Litig., 684 F.Supp.2d 485 (S.D.N.Y.2010) (an "inference that some employees believed that the ratings agencies could have used methods that better would have informed their opinions" insufficient "to support an inference that the ratings agencies did not actually hold the opinion about the sufficiency of the credit enhancements to justify each rating at the time each rating was issued"). These factually specific allegations also distinguish this case from In re Merrill Lynch Auction Rate Secs. Litig., 2011 WL 536437, 2011 U.S. Dist. LEXIS 14053 (S.D.N.Y. Feb. 9, 2011). There, the Court dismissed a negligent misrepresentation claim against agencies who rated structured ARS offerings because there were no factual allegations that the ratings were "`incorrect at the time offered.'" Id., at *12, 2011 U.S. Dist. LEXIS 14053 at *36 (quoting N.J. Carpenters Health Fund v. Residential Capital, LLC, 2010 WL 1257528, *1, 2010 U.S. Dist. LEXIS 32058, *6 (S.D.N.Y. Mar. 31, 2010)).
Plaintiff has also alleged that given the complex and esoteric nature of the structured ARS here, and the fact that the Agencies actually helped structure the securities, the Ratings Agencies had vastly superior knowledge of how the structured ARS in this case actually worked, see, e.g., FAC ¶¶ 124, 177. These allegations satisfy, for pleading purposes, the second exception to the rule that opinions are normally not actionable. See Bily, 3 Cal.4th at 408, 11 Cal.Rptr.2d 51, 834 P.2d 745; Ogier, 132 Cal.App.2d at 506-07, 282 P.2d 574.
Finally, the parties' dispute over whether the Agencies' credit ratings were a false misrepresentation with respect to the securities' "liquidity" cannot be resolved on this motion. Plaintiff asserts that "an investment-grade rating inherently denotes a measure of liquidity," Oppo. Agencies' MTD at 27, and the Agencies respond that their ratings express no fact or opinion about liquidity "in any terms," Agencies' Reply at 8. Whether consumers generally or QIBs specifically reasonably interpret the ratings at issue as a measure, in whole or in part, of a security's liquidity should be resolved by the trier of fact. Plaintiff's allegations that the two concepts are related is sufficient at this stage. See also Oppo. Agencies' MTD at 27-28 (citing to SEC rules and rule making proceedings which treat ratings as indicators of liquidity); Miller Decl. [Docket No. 151], Exs. A-C.
Therefore, whether the ratings for the structured ARS at issue here are considered statements of fact or opinions, given plaintiff's allegations, the Court determines that at this juncture they are actionable under California law.
Under California law, a defendant may be held liable for negligent misrepresentation "in the dissemination of commercial
Plaintiff alleges that the Rating Agencies have made a "specific undertaking" here, as the Rating Agencies were involved in structuring the securities at issue, knew that the securities had to be "investment-grade" to be marketed to QIBs, and knew that the select group of QIBs were the only entities who would be allowed to purchase them. FAC ¶¶ 130, 140-144, 167, 177, 180. The Ratings Agencies respond that because "thousands, and perhaps tens of thousands" of QIBs participate in this market, it is not a "circumscribed class" contemplated by Bily. However, although the class of QIBs might number in the thousands, it is still a circumscribed and identifiable group that the Ratings Defendants not only knew would have access to the ratings but who necessarily rely on the ratings in order to purchase investment grade securities. See, e.g., Nutmeg Securities, Ltd. v. McGladrey & Pullen, 92 Cal.App.4th 1435, 1445, 112 Cal.Rptr.2d 657 (Cal.App.2001) (class of potential "IPO underwriters" "sufficiently `narrow and circumscribed class of persons'" for purposes of a duty of care under Bily).
A negligent misrepresentation claim requires plaintiff to plead "actual,
Finally, reasonableness of reliance on a misrepresentation is ordinarily a question of fact. See, e.g., Guido v. Koopman, 1 Cal.App.4th 837, 843, 2 Cal.Rptr.2d 437 (Cal.App.1991). Whether reliance was justified in a particular circumstance "may only be decided as a matter of law if reasonable minds can come to only one conclusion based on the facts." Id. No such clear "conclusion based on the facts" is demonstrated here. Plaintiff has adequately alleged facts to support the allegations of reliance.
Negligent misrepresentation requires a plaintiff to allege that its damages were "proximately caused" by defendant's conduct. OCM Principal Opportunities Fund, L.P. v. CIBC World Markets Corp., 157 Cal.App.4th 835, 874, 68 Cal.Rptr.3d 828 (Cal.App.2007). Proximate causation involves only a "connection with or relation" between the losses and the "facts misrepresented." Id. A plaintiff is not required to show "that a misrepresentation was the sole reason for the investment's decline in value" in order to establish loss causation. Sparling v. Daou (In re Daou Sys.), 411 F.3d 1006, 1025 (9th Cir.2005). Instead, "`[a]s long as the misrepresentation is one substantial cause of the investment's decline in value, other contributing forces will not bar recovery under the loss causation requirement' but will play a role `in determining recoverable damages.'" Id. (quoting Robbins v. Koger
The Agencies argue that plaintiff cannot plead loss causation because it was the collapse of the ARS market, not the ratings, that caused plaintiff's harm. However, plaintiff's allegations that but for the Agencies' misleading ratings (which allegedly assured investors that the structured ARS securities would perform like AAA rated short term securities and money market alternatives, FAC ¶¶ 113, 142, 166), they would not have purchased the securities at issue, are sufficient at this pleading stage. See FAC ¶¶ 140, 182; see also St. Clare v. Gilead Scis., Inc., 536 F.3d 1049, 1057 (9th Cir.2008) ("But so long as the plaintiff alleges facts to support a theory that is not facially implausible, the court's skepticism is best reserved for later stages of the proceedings when the plaintiff's case can be rejected on evidentiary grounds."); King County v. IKB Deutsche Industriebank A G, 708 F.Supp.2d 334, 343 (S.D.N.Y.2010) ("To hold that plaintiffs failed to plead loss causation solely because the credit crisis occurred contemporaneously with [a special investment vehicle's] collapse would place too much weight on one single factor and would permit S & P and Moody's to blame the asset-backed securities industry when their alleged conduct plausibly caused at least some proportion of plaintiffs' losses."). Moreover, the fact that plaintiff's allegations pin the blame for their damages on both DBSI and the Ratings Agencies, does not undermine their loss causation allegations with respect to the Ratings Agencies, given the alleged inter-connected roles that the defendants played to create and support the market for the structured ARS at issue.
Finally, plaintiff also alleges lost interest income caused by the fact that after the market collapsed in 2007, plaintiff was stuck earning the low "fail rate" level of interest set by the securities' PPMs, which was lower than the interest rate which would have applied if the Rating Agencies had accurately rated the securities in the first instance. FAC ¶¶ 90, 183, 184; Oppo. Agencies' MTD at 35. These allegations are not implausible and support plaintiff's allegations of loss connected to the Rating Agencies' conduct.
For the foregoing reasons, the Court concludes that TAC has adequately alleged claims for negligent misrepresentation under California law.
The Rating Agencies argue that TAC's common law misrepresentation claims are completely preempted by the Credit Rating Agency Reform Act of 2006 (CRARA), 15 U.S.C. § 78o-7. The Agencies argue that the "preemptive scope" of the Act is found in two provisions. First, the provision of the Act granting the SEC exclusive authority to enforce the Act. 15 U.S.C. § 78o-7(c)(1) (Authorization Provision). Second, in exchange for registering as a NRSRO and submitting to the jurisdiction of the SEC under the statute, Congress provided that: "Notwithstanding any other provision of this section, or any other provision of law, neither the Commission nor any State (or political subdivision thereof) may regulate the substance of credit ratings or the procedures and methodologies by which any nationally recognized statistical rating organization determines credit ratings." Id., § 78o-7(c)(2) (Limitation Provision). Under this rubric, the Agencies assert, no state law claims based on the application of or a departure
While Congress may "expressly preempt" and displace state law, preemption can only be found where it is the "`clear and manifest purpose of Congress.'" Do Sung Uhm v. Humana, Inc., 620 F.3d 1134, 1148 (9th Cir.2010) (quoting Rice v. Santa Fe Elevator Corp., 331 U.S. 218, 230, 67 S.Ct. 1146, 91 L.Ed. 1447 (1947)). Moreover, in determining the reach of a preemption provision, the Court should adhere closely both to the intent of Congress and also to the general presumption against preemption of state law claims. See, e.g., Wyeth v. Levine, 555 U.S. 555, 129 S.Ct. 1187, 1194, 173 L.Ed.2d 51 (2009). Thus, when "the text of a pre-emption clause is susceptible of more than one plausible reading, courts ordinarily `accept the reading that disfavors pre-emption.'" Altria Group, Inc. v. Good, 555 U.S. 70, 129 S.Ct. 538, 543, 172 L.Ed.2d 398 (2008) (quoting Bates v. Dow Agrosciences LLC, 544 U.S. 431, 449, 125 S.Ct. 1788, 161 L.Ed.2d 687 (2005)).
With those considerations in mind, and adhering closely to the express language of the CRARA, the Court rejects the Rating Agencies' argument. As an initial matter, there is no indication in the text of the statute or its legislative history that Congress intended to wipe out all state law causes of action against rating agencies. The Authorization Provision gives the SEC exclusive authority to enforce the provisions of the CRARA and rules issued by the SEC,
In Reply, the Agencies raise a new preemption argument. They argue that TAC's reliance on the Superior Court decision in California Pub. Employees' Ret. Sys. v. Moody's Corp., No. CGC-09-490241,
Finally, even if the CRARA could be read to preempt common law causes of action based on allegations that NRSRO's apply deficient standards or inadequate procedures and methodologies in their credit ratings — and this Court does not conclude it does
For the foregoing reasons, the Rating Agencies' preemption argument is rejected.
The Rating Agencies' final argument is that plaintiff's claims against them are barred by the First Amendment. The Agencies rely on cases holding that specific types of ratings activity are predictive opinions that, by their nature, are too indefinite to imply a false statement of fact. See Agencies' MTD at 46-47; Agencies' Reply at 23-25. In each of the cases, the Courts' conclusions were based on a detailed
Here, plaintiff has specifically identified the alleged misstatements at issue, and nothing in the record at this stage suggests that the structured ARS ratings at issue are, in fact, predictive opinions by their nature "too indefinite" to imply a false statement of fact.
The argument that under the First Amendment, plaintiff must plead "actual malice" with respect to the alleged misstatements in this case is also rejected. In Compuware, the Court applied the "actual malice" standard to Compuware's defamation claim, which was based upon allegedly misleading information published by Moody's in a detailed credit report about Compuware. The actual malice standard applied in that case, however, only because Compuware was a public figure. Id., 499 F.3d at 525. There has been no showing here that the Trusts — who were the ones rated and who are not bringing defamation claims against the Rating Agencies — are "public figures."
Moreover, while other Courts have applied the actual malice standard to claims against rating agencies, they did so only where the ratings were matters of "public concern." In Abu Dhabi Commer. Bank v. Morgan Stanley & Co., 651 F.Supp.2d at 175, the Court held that credit ratings for a structured investment vehicle, that were only available to a limited group of investors, were not matters of public concern afforded the "actual malice" level of protection. Id. at 176; see also LaSalle Nat'l Bank v. Duff & Phelps Credit Rating Co., 951 F.Supp. 1071, 1096 (S.D.N.Y.1996) (rejecting actual malice protection where credit rating was "privately contracted for and intended for use in the private placement Offering Memoranda, rather than for publication in a general publication"); cf. In re Enron Corp. Sec., Derivative & "ERISA" Litig., 511 F.Supp.2d at 825 (S.D.Tex.2005) (concluding "that the actual malice standard should apply here because the nationally published credit ratings focus upon matters of public concern, a top Fortune 500 company's creditworthiness."). The Court in In re Nat'l Century Fin. Enters., 580 F.Supp.2d 630, 640 (S.D.Ohio 2008) reached the same conclusion where the ratings were disseminated only to "a select class of institutional investors with the resources to invest tens of millions of dollars in the notes." Id. Plaintiff's allegations, that the ratings at issue here were likewise only distributed to the select group of QIBs, satisfies the Court —
For the foregoing reasons, the Rating Agencies' Motion to Dismiss is DENIED.
Fitch Ratings, Ltd. (FRL) separately moves to dismiss the complaint against it for lack of personal jurisdiction under Rule 12(b)(1). "Although the defendant is the moving party on a motion to dismiss, the plaintiff bears the burden of establishing that jurisdiction exists." Rio Props., Inc. v. Rio Int'l Interlink, 284 F.3d 1007, 1019 (9th Cir.2002) (citation omitted). In adjudicating a personal jurisdiction motion, the Court must accept as true the uncontroverted allegations in the complaint, and where the motion is based on written materials, plaintiff need only make a prima facie showing of jurisdiction. Dole Food Co. Inc. v. Watts, 303 F.3d 1104, 1108 (9th Cir.2002).
The Court's exercise of personal jurisdiction must comport both with the state long-arm statute and with the constitutional requirements of due process. Omeluk v. Langsten Slip and Batbyggeri A/S, 52 F.3d 267, 271 (9th Cir.1995) (citing Chan v. Society Expeditions, Inc., 39 F.3d 1398 (9th Cir.1994)). California's long-arm statute confers jurisdiction over nonresident defendants to the extent permitted by the California or United States Constitution. See Cal.Code of Civ. Proc. § 410.10. Therefore, the jurisdictional inquiry collapses into a single analysis of due process. Absent traditional bases for personal jurisdiction (physical presence, domicile or consent), due process requires that the defendant have certain minimum contacts with the forum state such that the maintenance of the suit does not offend traditional notions of fair play and substantial justice. See International Shoe Co. v. Washington, 326 U.S. 310, 316, 66 S.Ct. 154, 90 L.Ed. 95 (1945).
The Court must determine whether sufficient minimum contacts between moving defendants and the forum state exist to allow the exercise of personal jurisdiction over them. In this regard, courts may exercise either general or specific jurisdiction over nonresident defendants. FDIC v. British-American Ins. Co., Ltd., 828 F.2d 1439, 1442 (9th Cir.1987). Here, plaintiff asserts that the Court has specific jurisdiction over the non-resident defendant. The Ninth Circuit has held that:
Dole Food, 303 F.3d at 1111.
To establish FRL's role in the ratings at issue, plaintiff relies on the written rating
FRL supports its Motion with the declaration of Kevin Kendra, the head of the group that rated the ARS in question. Mr. Kendra declares that: "Fitch, Inc. issued ratings for Pivot Master Trust Series 1, Capstan Master Trust Series 1, and Capstan Master Trust Series 2. The research and decisions relevant to these ratings occurred in New York and Chicago." Declaration of Kevin Kendra ¶ 5. Mr. Kendra also declared that he was "personally familiar with the form of rating letter sent in connection with the transactions at issue in this case" and that "Fitch, Inc. included in its ratings letters to Pivot Master Trust and Capstan Master Trust the boilerplate statement `Fitch means Fitch, Inc., Fitch Ratings, Ltd. and their subsidiaries including Derivative Fitch, Inc. and Derivative Fitch Ltd. and any successor or successors thereto' because the correspondence sent to the issuers here was a form letter in which such language is included as a matter of course." Id., ¶ 7. FRL also submits the declaration of David Samuel, the CFO of FRL, who declares that FRL is a London-based company organized under the laws of England and Wales that "primarily issues ratings for issuers and issuances in Europe (including the United Kingdom), the Middle East, Africa, and Asia." Declaration of David Samuel ¶ 3, 5. Mr. Samuel further declares that: "Based on a reasonable inquiry of persons in the current employ of Fitch Ratings Ltd., Fitch Ratings Ltd. did not rate Pivot Master Trust Series 1, Capstan Master Trust Series 1, or Capstan Master Trust Series 2." Id., ¶ 20.
Based on the evidence submitted, the Court finds that FRL should be dismissed for lack of personal jurisdiction. The only direct evidence provided by plaintiff to counter the Kendra and Samuel declarations is the rating letters themselves, that define "Fitch" to mean all Fitch entities and subsidiaries, including FRL. The Court agrees that this slim reed is insufficient to establish that FRL played a role in the ratings, especially in light of Mr. Kendra's declaration that the language relied upon by plaintiff is simply "boilerplate" language used in form letters and Mr. Samuel's declaration that FRL did not rate the securities at issue. See, e.g., Faro Techs., Inc. v. CimCore Corp., 2006 WL 4975982, *4-5, 2006 U.S. Dist. LEXIS 43404, *14-15 (M.D. Fla. June 26, 2006) (finding lack of jurisdiction where use of defendant's name on allegedly defamatory white paper was meant as trademark use and not intended to identify specific defendant).
For the foregoing reasons, FRL is DISMISSED without prejudice for lack of personal jurisdiction. If discovery establishes that FRL did play a role in rating the securities at issue, plaintiff may ask the Court to revisit this issue.
DBSI asks the Court to take judicial notice of the 2006 SEC cease-and-desist
The Rating Agencies ask the Court to take judicial notice of a complaint filed by the New York Attorney General, as well as congressional testimony. [Docket No. 133 & Exs. D-G of Erlich Decl.]. Plaintiff objects to the request with respect to "facts" asserted in Exhibit D and the Congressional testimony in Exhibit G. [Docket No. 145]. As above, the Court GRANTS the request with respect to the existence of the complaint filed by the New York Attorney General and GRANTS the request with respect to the existence of the congressional testimony. See 321 Studios v. MGM Studios, Inc., 307 F.Supp.2d 1085, 1107 (N.D.Cal.2004).
DBSI objects to exhibits D and E attached to the Declaration of David L. Schwartz in Support of Plaintiff's Opposition to DBSI's MTD [Docket No. 143] on the grounds of relevance. [Docket Nos. 161, 177]. The relevance objections are OVERRULED. DBSI also objects to exhibits E, F and G attached to the Declaration of David L. Schwartz in Opposition to DBSI's and the Rating Agencies' Requests for Judicial Notice [Docket No. 146] on the grounds of relevance. [Docket Nos. 162, 178]. The relevance objections are OVERRULED.
TAC requests that the Court take judicial notice of a press release issued by Deutsche Bank AG and a structured credit criteria report issued by Fitch Inc. and FRL. [Docket No. 152]. Fitch Inc. and FRL object to the request for judicial notice of only the structured credit criteria report, arguing that judicial notice of an entity's internal policies is not appropriate where the entity is not a public agency. [Docket No. 169]. The Court GRANTS judicial notice of the unobjected to press release and DENIES the request for judicial notice of the structured credit criteria report.
Fitch Inc. and FRL request the Court take judicial notice of Fitch's "terms of use" which was in effect in late 2007 and early 2008 arguing that the terms were incorporated by reference in the complaint through the FAC's reference to two Fitch, Inc. press releases. [Docket No. 170]. The Court finds that the terms of use were not referenced, or otherwise incorporated by reference into the FAC and are not otherwise properly subject to judicial notice. The request is DENIED.
TAC has also filed numerous requests for leave to file statements of supplemental authority. [Docket Nos. 182, 187, 205]. The Rating Agencies and DBSI have also filed motions for leave to file statements of recent decisions. [Docket No. 209, 213]. Those requests and motions are GRANTED.
For the foregoing reasons and for good cause shown, the Court hereby: