Page 4 - Litigation

S4 | MONDAY, JULY 14, 2014 | Litigation
| NYLJ.COM

Fraud
Pleading claims for losses that can be traced with

BY DAVID OWEN some specificity to a particularly alleged
AND ADAM MINTZ
practice.
W With Particularity
Rule 9(b) and the Connection Between
idespread losses suffered by many the Loss and the Alleged Practice.
investors during the financial cri- Although a traditional focus for a loss
sis have spawned more than a few
causation analysis, a key factor in the Rule
fraud claims based upon broadly alleged 9(b) assessment in both cases appears to
misconduct affecting many investments be the particular details that purport to
or transactions, and even entire lines of connect the improper practices alleged

business.1 Complaints have sought to to the plaintiff’s loss. As both opinions
portray defendants as rife with fraud, and suggest, an analysis of allegedly proxi-
invite an inference that plaintiff’s losses mate connections typically required to
are an inescapable part of that portrait. show loss causation will have obvious K
The loosely proffered connection to the relevance to the heightened requirements OC
plaintiff’s own loss, however, has in turn of Rule 9(b) where a plaintiff asserts that GST
led defendants to argue that such wide- broadly alleged practices harmed that BI
spread claims lack a particular connection plaintiff particularly.

to the plaintiff’s investment even if they are In support of the dismissal they
assumed to be true. Under Federal Rule of obtained, the defendants in Woori advo-
Civil Procedure 9(b), plaintiffs must allege cated a focus on the plaintiff’s failure to
fraud with particularity—a standard tra- offer any particular details that connected
ditionally met by alleging the specifics the injury it suffered to the alleged mis-
of “who, what, when, where and how.”2 conduct. “Woori has not alleged any con-
Recent cases suggest opportunities for nection between these [fraud] allegations
successful arguments on both sides
and the five CDOs it purchased from
of this contentious issue.
Citigroup.”9 The defendants in Woori

Two Recent Decisions. Two
thereby successfully argued that
Southern District of New York deci- Rule 9(b) requires a particularized
sions Dexia SA/NV v. Bear, Stearns nexus between the alleged mis-
& Co.3 and Woori Bank v. Citigroup4 conduct and the loss suffered by
illustrate the tension. In Dexia, the plaintiff—a loss-causation-
an investor sued defendants for like analysis. In general, loss-
fraud in connection with its pur- causation requires that “the
chase of $1.6 billion dollars in resi- damages suffered by plaintiff
dential mortgage-backed securities . be a foreseeable consequence

(RMBS). The investor alleged the of any misrepresentation or mate-
relevant offering documents rial omission.”10 The court in
made false representations Dexia, in contrast, deemed
regarding the quality and plaintiff to have connected
selection process of the the alleged deficiencies to
underlying loans. In sup-
the plaintiff’s investment
port of its complaint, it
and loss.11
cited evidence of defen-
Understanding the issue in

dants’ allegedly systematic
Woori and Dexia to be about the suf-
disregard of underwriting standards
ficiency of the alleged nexus between the
and due diligence practices but offered no evi- widespread fraud and the plaintiff’s loss
dence directly relevant to the RMBS at issue. illustrates how the requirements of Rule
Defendants moved to dismiss the complaint 9(b) do not pose an obstacle to plaintiffs claiming that defendant stated its RMBS Each case directly addressed an inves-
pursuant to Rule 9(b), arguing that the com- alleging a widespread fraud that is incon- and CDOs were “high grade” or “invest- tor’s effort to satisfy Rule 9(b) require-
plaint failed to allege fraud with particularity sistent with the purposes of the rule.
ment quality” despite knowing that they ments with respect to allegations of gener-
because plaintiff did not plead a connection Rule 9(b) imposes a heightened pleading contained “bad quality” or “toxic” assets. ally improper business practices. Typical
between the wrongful conduct alleged and standard to ensure the filing of legitimate As in Dexia, there were no allegations of many recent financial crisis cases, both

the speciic RMBS it purchased. Judge Jed S. claims based on a diligent understanding directly relevant to the CDOs at issue. And claims asserted that reports from the same
Rakoff denied defendant’s motion, holding of the facts.12 Ordinary loss-causation prin- as in Dexia, defendants moved to dismiss due diligence vendor Clayton Holdings
that plaintiff’s allegations in the complaint ciples that require a clear and proximate the complaint pursuant to Rule 9(b) for fail- should have made the defendants aware
“present a picture of defendants’ unsound connection between alleged misconduct ure to allege fraud with particularity. But, of the allegedly widespread fraud. In Dexia,
mortgage origination and securitization and damages are consistent with the tra- unlike in Dexia, Judge Laura T. Swain dis- Rakoff took the view that the plaintiff had
practices so pervasive that a reasonable ditional requirements of that rule. As then missed the complaint. The court acknowl- detailed the alleged widespread business
fact-inder could infer that those practices District Judge Gerard E. Lynch explained edged that the complaint “[painted] a practices with particularity. Because the
affected the securitizations at issue in this in In re Salomon Analyst AT&T Litigation, general picture of a business group alleg- scope of misconduct detailed in the com-
case.”for Rule 9(b) purposes it is insufficient to edly engaging in various forms of serious plaint was asserted to be “so pervasive,”
5
Meanwhile, in Woori an investor brought allege “a general atmosphere of conflicts misconduct that would call into question the court reasoned it is reasonable to
fraud claims against defendant for mis- of interest and institutional pressure for the integrity of its business operations,” infer that the alleged practices tainted
representing the values and risks asso- optimism.” If not, it “would throw open but noted plaintiff “fail[ed] to identify spe- the investment at issue. In Woori, Swain
ciated with $95 million of collateralized the floodgates to lawsuits regarding all cific statements or to provide information reached the opposite conclusion that
debt obligations (CDOs) it purchased. In opinions issued by [defendant] that later linking Citigroup’s alleged practices with generalized allegations about widespread
its complaint, plaintiff made generalized proved ill-advised, even in the absence of Woori’s actual purchases.”6 The court also business practices asserted in that case
allegations about defendant’s practices as the particularized allegations of fraud.”13 noted that “[t]he law of fraud and Rule 9(b) were missing a clear connection to plain-
they pertained to its entire CDO practice,
In effect, the requirement ensures that the do not, however, embrace claims founded tiff’s loss, and that “[t]he law of fraud

plaintiff has a legitimate complaint against on such atmospherics. Rather, fraud [p] and Rule 9(b) do not, however, embrace
the defendant it is suing and is not just one laintiffs must specify allegedly fraudulent claims founded on such atmospherics.”8
DAVID OWEN is a partner and ADAM MINTZ is an of countless undifferentiated individuals statements and proffer specific factual alle- Somewhere in between these two deci-
associate in Cahill Gordon & Reindel’s litigation affected by the financial crisis.
gations demonstrating their falsity in the sions there must be a basis upon which
department. EDWARD HILLENBRAND and WESLEY The principles animating Rule 9(b) context of the particular situation from to distinguish between claims for losses
LEWIS assisted in the preparation of this article.
requirements are, if anything, » Page S10
which the claim arises.”7
occurring in an “atmosphere” of fraud and