Structured Finance Litigation Update

by Quinn Emanuel Urquhart & Sullivan, LLP
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Waivers Not Always a Bar to Claims: Judge Scheindlin of the Southern District of New York dealt a blow to defendants in securities fraud cases in an October 29, 2010 decision in King County v. IKB Deutsche Industriebank. The court denied defendant Morgan Stanley’s motion to dismiss, holding that fraud claims against Morgan could proceed despite liability and reliance waivers in securities disclosures because “the information required to confirm or disprove the validity of the [representations] was peculiarly within Morgan Stanley’s knowledge.” The court also rejected Morgan Stanley’s argument that, because it had no direct contact with the plaintiffs during the marketing or sale of the securities, it could not possibly be responsible for any misstatements the plaintiffs relied upon. Invoking the so-called “group pleading doctrine,” which permits third parties intimately involved in a fraud to be treated as insiders with primary liability rather than as secondary actors shielded from liability for aiding and abetting federal securities fraud under Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164 (1994), the court held that Morgan Stanley had been so intimately involved in the structuring, marketing and rating of the securities at issue that it was responsible for statements made in the securities filings.

The court also allowed allegations of common law fraud to proceed, finding that the plaintiffs had sufficiently pled a claim that Morgan Stanley, due to its actual knowledge of the alleged fraud and provision of “substantial assistance” to further the alleged scheme, had aided and abetted the primary fraud alleged against IKB and the ratings agencies. The plaintiffs originally brought a class action against IKB, a German bank, its CEO, and the rating agencies alleging fraud in connection with the collapse of Rhinebridge, a structured investment vehicle created, managed, and issued by IKB. Morgan Stanley, the co-arranger and placement agent on Rhinebridge, was added as a defendant in an amended complaint filed in June. The plaintiffs allege that the defendants fraudulently misrepresented the value of Rhinebridge and its debt securities, and were aware that the high credit ratings presented to investors were fraudulent and the mortgage-backed assets were likely to default. Judge Scheindlin denied motions to dismiss filed by IKB and the ratings agencies earlier this year. See King County v. IKB Deutsche Industriebank, AG, No. 09-cv-8387 Slip Op. (S.D.N.Y. Oct. 29, 2010).

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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