14‐1673‐cv
Fin. Guar. Ins. Co. v. Putnam Advisory Co., LLC
In the
United States Court of Appeals
For the Second Circuit
August Term, 2014
No. 14‐1673‐cv
FINANCIAL GUARANTY INSURANCE COMPANY,
Plaintiff‐Appellant,
v.
THE PUTNAM ADVISORY COMPANY, LLC,
Defendant‐Appellee.
Appeal from the United States District Court
for the Southern District of New York.
No. 12‐cv‐7372 ― Robert W. Sweet, Judge.
ARGUED: NOVEMBER 17, 2014
DECIDED: APRIL 15, 2015
Before: KEARSE, STRAUB and RAGGI, Circuit Judges.
FIN. GUAR. INS. CO. V. PUTNAM ADVISORY CO.
Appeal from the judgment of the United States District Court
for the Southern District of New York (Robert W. Sweet, Judge),
granting defendant‐appellee’s motion to dismiss for failure to state a
claim. The District Court dismissed plaintiff‐appellant’s fraud claim
on the ground that the complaint did not adequately plead loss
causation, and dismissed plaintiff‐appellant’s negligence claims on
the ground that the complaint did not allege facts sufficient to
establish a special relationship between the parties. For the reasons
set forth below, we hold that the District Court erred in dismissing
the complaint for failure to state a claim. We therefore VACATE the
judgment of the District Court and REMAND for further
proceedings.
SANFORD I. WEISBURST (Peter E. Calamari, Sean P.
Baldwin, Paul P. Hughes, on the brief), Quinn
Emanuel Urquhart & Sullivan LLP, New York,
New York, for Plaintiff‐Appellant.
THOMAS A. ARENA (Sean M. Murphy, Robert C.
Hora, Ian E. Browning, on the brief), Milbank,
Tweed, Hadley & McCloy LLP, New York, New
York, for Defendant‐Appellee.
STRAUB, Circuit Judge:
Plaintiff‐Appellant Financial Guaranty Insurance Company
(“FGIC”) appeals from a judgment of the United States District
Court for the Southern District of New York (Robert W. Sweet,
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FIN. GUAR. INS. CO. V. PUTNAM ADVISORY CO.
Judge), dismissing its second amended complaint (“SAC”) for
failure to state a claim. See FGIC v. Putnam Advisory Co., LLC, No. 12
CIV. 7372, 2014 WL 1678912 (S.D.N.Y. Apr. 28, 2014). FGIC filed this
action against Defendant‐Appellee Putnam Advisory Company,
LLC (“Putnam”) for fraud, negligent misrepresentation, and
negligence. FGIC contends that Putnam misrepresented its
management of a collateralized debt obligation (“CDO”) called
Pyxis ABS CDO 2006‐1 (“Pyxis”) in order to induce FGIC to provide
financial guaranty insurance for Pyxis. According to FGIC’s
complaint, Putnam stated that it would select the collateral for Pyxis
independently and in the interests of long investors (i.e., investors
who profit when the investment succeeds), but in fact permitted the
collateral selection and acquisition process to be controlled by a
hedge fund, Magnetar Capital LLC (“Magnetar”), which maintained
significant short positions in Pyxis (i.e., investments that would pay
off if Pyxis defaulted). In sum, FGIC alleges that Putnam
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FIN. GUAR. INS. CO. V. PUTNAM ADVISORY CO.
misrepresented the independence of its management of a structured
finance product, which, upon default, caused FGIC millions of
dollars in losses.
On April 28, 2014, the District Court dismissed FGIC’s fraud
claim on the ground that the complaint did not adequately plead
loss causation, and it dismissed FGIC’s negligence claims on the
ground that the complaint failed to allege a special or privity‐like
relationship between FGIC and Putnam. For the reasons set forth
below, we find that FGIC has sufficiently alleged both its fraud and
negligence‐based claims. Accordingly, we VACATE the judgment
of dismissal and REMAND to the District Court for further
proceedings.
BACKGROUND
The allegations contained in FGIC’s complaint have been
comprehensively set forth in the District Court’s opinion below. See
FGIC, 2014 WL 1678912, at *1‐7. We nevertheless provide a brief
recitation of the most pertinent factual allegations, which are
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FIN. GUAR. INS. CO. V. PUTNAM ADVISORY CO.
presumed to be true for purposes of considering a motion to dismiss
for failure to state a claim.
I. The Pyxis CDO
This case arises out of Putnam’s role as collateral manager of
the Pyxis CDO. A CDO is a special purpose vehicle that purchases,
or assumes the risk of, a portfolio of assets. To buy their portfolio of
assets, CDOs raise money from investors by issuing notes and
equity interests. The assets that comprise the CDO generate cash,
which is then paid out to the CDO’s investors. Investors in a CDO
are not necessarily all subject to the same level of risk. Rather, CDO
notes may be issued in “tranches” representing different levels of
risk and potential reward. Generally, senior tranches carry the
lowest risk, whereas investors in the equity tranche assume the
greatest risk in the event of a default.
Pyxis was a “hybrid” CDO, in that its $1.5 billion portfolio
included both “cash” assets (i.e., assets that Pyxis actually
purchased) and “synthetic” assets (i.e., assets created through
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FIN. GUAR. INS. CO. V. PUTNAM ADVISORY CO.
transactions that referenced securities not actually owned by Pyxis).
About 23% of Pyxis’s assets were cash assets and 77% were synthetic
assets created by credit default swaps that referenced other asset‐
backed securities. In these credit default swaps, Pyxis sold credit
protection to counterparties in exchange for premium payments to
Pyxis. If the assets referenced in the swaps performed well, Pyxis
would enjoy the premium payments without having to make credit
protection payments. If the assets performed poorly, however, Pyxis
would have to make credit protection payments to the credit default
swap counterparty, potentially up to the full notional amount of the
referenced obligation.
Calyon Corporate and Investment Bank (“Calyon”), the
structuring bank1 for Pyxis, paid premiums to Pyxis under a credit
1 A bank structuring a CDO transaction is responsible for financing and
facilitating the purchase of the CDO’s assets, constructing the CDO, and
interacting with rating agencies. See Loreley Fin. (Jersey) No. 7, Ltd. v. Credit
Agricole Corporate and Inv. Bank, Index No. 650673/2010 (N.Y. Sup. Ct. June 9,
2011); J.A. 1151‐61.
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FIN. GUAR. INS. CO. V. PUTNAM ADVISORY CO.
default swap in exchange for protection payments in the event that a
portfolio asset experienced a “credit event,” such as a default or
failure to pay a defined obligation. For most of the specified assets,
Calyon acted only as an intermediary, meaning that the ultimate
short positions were held by other market participants.
II. Putnam’s Representations and the Pyxis Guaranty
In July 2006, Calyon contacted FGIC to solicit credit protection
for the Pyxis CDO. Under the deal that Calyon proposed
to FGIC, FGIC was to insure all payments owed by its
subsidiary FGIC Credit Products LLC under a credit default swap
which would provide credit protection on the $900 million “super
senior” Pyxis tranche (“the Pyxis Guaranty”). Without the Pyxis
Guaranty, Pyxis would not have closed. Calyon represented that the
CDO would be managed by Putnam, which would select the Pyxis
asset portfolio independently, in good faith, and in the best interests
of the investors.
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FIN. GUAR. INS. CO. V. PUTNAM ADVISORY CO.
FGIC alleges that it and investors were heavily dependent on
Putnam’s experience, independence, and integrity as collateral
manager. Putnam represented to FGIC, orally and in writing, that it
was an experienced and reputable collateral manager and that it
would select the assets for the Pyxis portfolio diligently and
independently. Putnam provided documents, such as a 52‐page
marketing pitchbook and an offering memorandum, containing
extensive representations about Putnam’s role as a “global leader in
asset management” and the rigorous selection process by which it
would select the assets for the Pyxis portfolio. SAC ¶¶ 69‐71, 86‐87;
J.A. 210, 217.
Putnam made similar representations to FGIC in the course
of FGIC’s extensive due diligence for Pyxis, which included an on‐
site review of Putnam’s operations at Putnam’s Boston offices.
During a face‐to‐face meeting of representatives from FGIC and
Putnam, Putnam represented that it would select and manage the
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FIN. GUAR. INS. CO. V. PUTNAM ADVISORY CO.
assets in the Pyxis portfolio and described in detail its expertise and
strategy for doing so. In a follow‐up call, Putnam again made clear
that it would select and manage the assets for Pyxis and that it had
considerable experience in the residential mortgage‐backed
securities (“RMBS”) market, particularly in the market for subprime
RMBS, of which the Pyxis portfolio would primarily be composed.
Putnam represented that it performed extensive due diligence with
respect to prospective RMBS investments, including conducting on‐
site visits to most of the servicers of the loans underlying these
investments, and, more importantly, that it maintained ongoing
interactions with all servicers to keep tabs on their servicing strategy
and performance. [Id.] As a result of these representations, FGIC
provided the Pyxis Guaranty.
III. Magnetar’s Alleged Scheme
FGIC contends that, contrary to its representations, Putnam
abdicated control of the selection of Pyxis’s assets to Magnetar, a
hedge fund that had a financial interest in Pyxis’s failure.
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FIN. GUAR. INS. CO. V. PUTNAM ADVISORY CO.
According to the SAC, in early 2006, the hedge fund Magnetar
worked with collateral managers to launch a series of CDOs. By
supplying the funds for the equity tranche, the riskiest stake,
Magnetar made it possible to secure investors (and insurers like
FGIC) willing to take long positions in those CDOs. But unlike an
ordinary investor, Magnetar purchased the equity tranche of Pyxis
and other similar CDOs not because it thought the CDO was a
sound investment but because the investment permitted Magnetar
to simultaneously bet against the more senior tranches in the same
deal. These short positions were much greater (often six‐to‐one)
than Magnetar’s long equity position. In other words, Magnetar
stood to gain significantly more if the CDO failed than if it
succeeded.
As collateral manager of Pyxis, Putnam was responsible for
selecting the assets for inclusion in the portfolio, monitoring the
credit status of the underlying assets, reinvesting payment proceeds
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FIN. GUAR. INS. CO. V. PUTNAM ADVISORY CO.
from maturing assets, and making substitutions in the portfolio of
assets. But, according to the SAC, Putnam was well aware of
Magnetar’s “hedged equity” strategy of betting against the assets
included or referenced in Pyxis, and Putnam allowed Magnetar to
secretly control the composition of those assets. FGIC alleges that
Magnetar made a “behind the scenes” arrangement with Calyon, of
which Putnam was aware, requiring Calyon or Putnam to notify
Magnetar of any proposed acquisition for the Pyxis portfolio and
giving Magnetar veto rights over any such proposed acquisition.
SAC ¶ 95; J.A. 221. Magnetar also designated which collateral it
wanted to include in the Pyxis portfolio, which Putnam
accommodated. For example, the SAC alleges that in July 2006,
James Prusko of Magnetar emailed Carl Bell at Putnam to suggest
that Putnam increase the synthetic portion of Pyxis by entering into
more credit default swaps referencing low‐rated RMBS, which
would allow Magnetar to short more of the Pyxis assets. Prusko
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FIN. GUAR. INS. CO. V. PUTNAM ADVISORY CO.
explained that it was “very hard to get off sizable CDO CDS trades
unless they’re done against a deal, and this is a natural delta hedge
against our equity.” Bell wrote back: “Got it. So when we find a
deal we want to buy, we shouldn’t put in an order with the
syndicate desk but have Calyon broker a synthetic trade between
you and [Pyxis] at an agreed upon level?” Prusko replied: “That
would be preferable . . . .” SAC ¶ 98 (alteration in complaint); J.A.
223.
FGIC alleges that Magnetar’s long position on Pyxis by the
time Pyxis defaulted was approximately $21 million. Magnetar’s
short position on the CDOs in which it invested averaged
approximately 7% of the aggregate assets of those CDOs. If Pyxis
were an average Magnetar CDO, therefore, Magnetar’s short
position on Pyxis, a $1.5 billion CDO, would have totaled $105
million.
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FIN. GUAR. INS. CO. V. PUTNAM ADVISORY CO.
For its role in cooperating with Magnetar’s scheme, Putnam
received a fixed fee of fifteen basis points (i.e., 0.15% of the
outstanding principal of Pyxis each year) and an additional
“incentive” fee of five basis points. Due to Pyxis’s size, this was a
substantial sum; Putnam’s fixed fee was $2.25 million for the first
year alone, and by 2012, Putnam had received cumulative total fees
of $5,707,429. The SAC also alleges that Putnam saw Pyxis as an
opportunity to “establish a foothold in the market” for managing
similar CDOs in the future. SAC ¶¶ 6, 51; J.A. 186, 203. Indeed,
Putnam was selected by Magnetar to serve as collateral manager for
a second Pyxis CDO, Pyxis ABS CDO 2007–1, which closed a few
months after Pyxis.
IV. Magnetar’s Control Over the Pyxis Portfolio and Pyxis’s
Default
FGIC alleges that the assets Magnetar directed Putnam to
include in the Pyxis portfolio were, on their face, more likely to
default than the assets Putnam would have selected had it acted
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FIN. GUAR. INS. CO. V. PUTNAM ADVISORY CO.
independently. Putnam invested half of Pyxis’s cash allocated to
CDO investments in four other Magnetar CDOs, even though there
were over two hundred asset‐backed CDOs issued in 2006 alone in
which Putnam could have invested.
According to the SAC, Putnam concealed the extent to which
Pyxis sold protection on the ABX Index of low‐rated RMBS. The
ABS Index is an independent benchmark designed to measure the
overall value of mortgages made to borrowers with subprime or
weak credit. Magnetar pushed Putnam to circumvent the limit
represented to Pyxis investors on investment in the ABX Index to a
level more than three times the specified concentration limit, which
increased the risk profile of the Pyxis portfolio. Putnam also
provided FGIC with a “target portfolio” for Pyxis that included $145
million of prime RMBS, but then, without alerting FGIC, replaced all
of the prime RMBS with subprime RMBS, which were more likely to
default.
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FIN. GUAR. INS. CO. V. PUTNAM ADVISORY CO.
On April 30, 2008, only eighteen months after Pyxis closed,
Fitch Ratings Ltd. downgraded the credit rating of the Pyxis Super
Senior tranche from AAA to C. Ultimately, Pyxis defaulted and
FGIC incurred liability of up to $900 million under the Pyxis
Guaranty.
V. Proceedings in the District Court
FGIC sued Putnam for fraud, negligent misrepresentation,
and negligence. After FGIC filed the SAC, Putnam moved to
dismiss the complaint for failure to state a claim. The District Court
granted Putnam’s motion to dismiss. The District Court held that
FGIC had failed to state a claim for fraud because the SAC did not
contain sufficient allegations to plausibly indicate that “Magnetar’s
alleged control of the collateral selection process for Pyxis caused
FGIC’s losses, as opposed to the global financial crisis.” FGIC, 2014
WL 1678912, at *10. The District Court also dismissed FGIC’s
negligent‐misrepresentation and negligence claims on the ground
that the SAC did not contain allegations sufficient to establish a
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FIN. GUAR. INS. CO. V. PUTNAM ADVISORY CO.
“special relationship” between FGIC and Putnam. Id. at *13.
Putnam timely appealed.
DISCUSSION
We review de novo a District Court’s grant of a motion to
dismiss under Rule 12(b)(6) for failure to state a claim, “accepting all
factual allegations in the complaint as true and drawing all
inferences in the plaintiff’s favor.” Walker v. Schult, 717 F.3d 119, 124
(2d Cir. 2013). “To survive a motion to dismiss, a complaint must
contain sufficient factual matter, accepted as true, to state a claim to
relief that is plausible on its face.” Ashcroft v. Iqbal, 556 U.S. 662, 678
(2009) (internal quotation marks omitted). To state a plausible claim,
the complaint’s “[f]actual allegations must be enough to raise a right
to relief above the speculative level.” Bell Atl. Corp. v. Twombly, 550
U.S. 544, 555 (2007).
We begin by rejecting Putnam’s argument, raised for the first
time on appeal, that FGIC lacks standing to sue. Putnam contends
that FGIC did not allege a cognizable injury in fact. This point
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FIN. GUAR. INS. CO. V. PUTNAM ADVISORY CO.
merits little discussion because, “[a]t the pleading stage, general
factual allegations of injury resulting from the defendant’s conduct
may suffice” to establish standing. Lujan v. Defenders of Wildlife, 504
U.S. 555, 561 (1992); see Baur v. Veneman, 352 F.3d 625, 631 (2d Cir.
2003) (“[A]t the pleading stage, standing allegations need not be
crafted with precise detail, nor must the plaintiff prove his
allegations of injury.”). FGIC satisfies this requirement by alleging
that it “was required to pay out a huge sum” pursuant to its
insurance policy and that it “lost millions” as a result of Pyxis’s
default. SAC ¶¶ 1, 90, J.A. 185, 219. FGIC therefore has standing to
bring this action.
FGIC challenges the dismissal of its complaint for failure to
state a claim. With respect to its fraud claim, FGIC contends that it
alleged facts sufficient to establish loss causation. FGIC argues, in
the alternative, that it is not required to plead loss causation under
New York law because (1) it is seeking rescission based on fraud and
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FIN. GUAR. INS. CO. V. PUTNAM ADVISORY CO.
(2) New York Insurance Law § 3105 does not require an insurer to
establish loss causation in a claim for fraud in the inducement of an
insurance contract. FGIC also argues that the District Court erred in
dismissing its negligent‐misrepresentation and negligence claims for
failure to sufficiently allege a special relationship between it and
Putnam.
We agree with FGIC that, even if loss causation must be
pleaded, its allegations are sufficient to state claims for fraud,
negligent misrepresentation, and negligence. We therefore vacate
the judgment of the District Court.
I. Fraud Claim
To state a claim for fraud under New York law, a plaintiff
must allege (1) a material misrepresentation or omission of fact;
(2) which the defendant knew to be false; (3) which the defendant
made with the intent to defraud; (4) upon which the plaintiff
reasonably relied; and (5) which caused injury to the plaintiff. See
Crigger v. Fahnestock & Co., 443 F.3d 230, 234 (2d Cir. 2006); Wynn v.
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FIN. GUAR. INS. CO. V. PUTNAM ADVISORY CO.
AC Rochester, 273 F.3d 153, 156 (2d Cir. 2001) (per curiam). On this
appeal, we primarily focus on the fifth element, causation. To
satisfy that element, a plaintiff must allege both that the
“defendant’s misrepresentation induced plaintiff to engage in the
transaction in question (transaction causation) and that the
misrepresentations directly caused the loss about which plaintiff
complains (loss causation).” Laub v. Faessel, 745 N.Y.S.2d 534, 536
(1st Dep’t 2002) (citations omitted); see, e.g., Amusement Indus., Inc. v.
Stern, 786 F. Supp. 2d 758, 776 (S.D.N.Y. 2011) (applying New York
law). There is no dispute here that FGIC has sufficiently pleaded
transaction causation, as the SAC contains repeated allegations that
but for Putnam’s fraudulent misrepresentations, FGIC would not
have entered into the transaction. See, e.g., SAC ¶ 11; J.A. 188
(“[H]ad FGIC known the truth about Pyxis . . . it would never have
agreed to issue the Pyxis Guaranty.”).
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FIN. GUAR. INS. CO. V. PUTNAM ADVISORY CO.
Loss causation, on the other hand, “is the causal link between
the alleged misconduct and the economic harm ultimately suffered
by the plaintiff.” Lentell v. Merrill Lynch & Co., 396 F.3d 161, 172 (2d
Cir.) (quoting Emergent Capital Inv. Mgmt., LLC v. Stonepath Grp., Inc.,
343 F.3d 189, 197 (2d Cir. 2003)) (internal quotation marks omitted),
cert. denied, 546 U.S. 935 (2005). To plead loss causation, FGIC must
allege that the “subject of the fraudulent statement or omission was
the cause of the actual loss suffered.” Id. at 173 (emphasis omitted)
(quoting Suez Equity Investors, L.P. v. Toronto‐Dominion Bank, 250
F.3d 87, 95 (2d Cir. 2001)); see Laub, 745 N.Y.S.2d at 536 (explaining
that loss causation is the “fundamental core of the common‐law
concept of proximate cause”).
A. Sufficiency of Loss Causation Allegations
A claim for common law fraud is subject to the particularity
pleading requirements of Federal Rule of Civil Procedure 9(b),
“which requires that the plaintiff (1) detail the statements (or
omissions) that the plaintiff contends are fraudulent, (2) identify the
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FIN. GUAR. INS. CO. V. PUTNAM ADVISORY CO.
speaker, (3) state where and when the statements (or omissions)
were made, and (4) explain why the statements (or omissions) are
fraudulent.” Eternity Global Master Fund Ltd. v. Morgan Guar. Trust
Co. of N.Y., 375 F.3d 168, 187 (2d Cir. 2004) (internal quotation marks
omitted). The District Court did not apply the heightened pleading
standards of Rule 9(b) to FGIC’s loss causation allegations, but on
appeal, Putnam argues that Rule 9(b) should apply. We have not yet
resolved whether allegations as to loss causation must be pleaded
with the specificity required by Rule 9(b). Acticon AG v. China N. E.
Petrol. Holdings Ltd., 692 F.3d 34, 37–38 (2d Cir. 2012); see Dura
Pharm., Inc. v. Broudo, 544 U.S. 336, 346 (2005) (assuming, but not
deciding, that loss causation allegations are governed by ordinary
notice pleading standards).
We need not decide the question today because we find that
FGIC’s loss causation allegations are sufficient even under the
heightened pleading standards of Rule 9(b). FGIC has alleged
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particular facts that, when considered as a whole, plausibly allege
that Putnam’s alleged misrepresentations and omissions caused at
least some of the economic harm it suffered. These allegations
include that:
Had Putnam selected the Pyxis collateral itself, as it
represented it would do, and had it not acquiesced in
Magnetar’s control of collateral selection, Pyxis would not
have defaulted as quickly as it did, and may well not have
defaulted at all. At a minimum, any losses incurred by
Pyxis would have been substantially smaller than they
were. Thus, FGIC’s liability for losses incurred by Pyxis
would either not have been incurred at all, or would have
been substantially smaller.
The purpose of Magnetar’s control of the collateral
selection process was to ensure that the assets selected for
inclusion in the Pyxis portfolio would be likely to default.
Many of the assets selected for the Pyxis portfolio by
Magnetar, on their face, were more liable to default than
the assets Putnam would have selected had it acted
independently. For example, Putnam’s original target
portfolio for Pyxis included $145 million of prime RMBS.
At Magnetar’s direction, Putnam replaced these assets in
the final portfolio with $145 million of subprime RMBS.
The Magnetar‐selected assets in the Pyxis portfolio
defaulted more quickly than other assets in the Pyxis
portfolio. Based on a preliminary analysis of the
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performance of assets in the Pyxis portfolio for which FGIC
has evidence that Magnetar directed selection, all
Magnetar‐selected assets had defaulted by March 2009,
and their average life before default was just 1.5 years. By
contrast, the average life before default of the Pyxis
collateral for which FGIC does not have direct evidence of
Magnetar’s control was 1.85 years.
In general, Magnetar’s CDOs defaulted in greater numbers,
and defaulted much more quickly, than comparable CDOs.
As of April 2012, all 18 of Magnetar’s 2006‐vintage
mezzanine CDOs had defaulted while only 72% of 2006‐
vintage non‐Magnetar mezzanine CDOs had defaulted. As
of December 2008, when Pyxis defaulted, 94% of
Magnetar’s 2006‐vintage mezzanine CDOs had defaulted,
while only 40% of 2006‐vintage non‐Magnetar mezzanine
CDOs had done so.
Over $95 million of the Magnetar‐selected assets defaulted
before the financial crisis took hold. The default of these
assets substantially contributed to Pyxis’s collapse and to
FGIC’s losses under the Pyxis Guaranty.
At this preliminary stage, accepting all factual allegations as true
and drawing all reasonable inferences in FGIC’s favor, the SAC
alleges a causal connection between Putnam’s fraudulent
misrepresentations and FGIC’s losses under the Pyxis Guaranty
such that FGIC “would have been spared all or an ascertainable
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portion of that loss absent the fraud.” Lentell, 396 F.3d at 175. The
District Court found the SAC’s allegations deficient in part because
the “pool of assets alleged to be controlled by Magnetar represented
roughly 11% of the $1.5 billion collateral pool, and the SAC does not
allege how the selection of safer assets in this 11% pool would have
prevented a default.” FGIC, 2014 WL 1678912, at *11. The District
Court also determined that FGIC’s allegations did not allow for an
inference of loss causation because “[e]ven if the Magnetar‐selected
assets in the Pyxis portfolio defaulted more quickly than other
assets, there is nothing in the SAC that alleges that this . . . was
sufficient to cause Pyxis to default ahead of any market‐wide
downturn or isolates Pyxis’ default in any reasonable manner from
the market downturn.” Id.
In so concluding, however, the District Court misapplied the
standard on a motion to dismiss. The purpose of the loss causation
element is to require a plaintiff “to provide a defendant with some
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indication of the loss and the causal connection that the plaintiff has
in mind,” not to make a conclusive proof of that causal link. Dura,
544 U.S. at 347; see id. (explaining that the requirement is not
intended to “impose a great burden” on a plaintiff). At this stage of
the proceedings, FGIC is not required to establish that the collateral
it has identified as selected by Magnetar was the exclusive cause of
its losses; rather, it need only allege sufficient facts to raise a
reasonable inference that Magnetar’s overall involvement caused an
ascertainable portion of its loss. In addition, the assets identified in
the SAC are only those that, without the benefit of discovery, FGIC
claims to have evidence that Magnetar selected. FGIC alleges that
Magnetar exercised control over the entire collateral selection
process. See, e.g., SAC ¶ 4; J.A. 186.
Nor is FGIC required to allege that its losses were caused
solely by Putnam’s misrepresentations to satisfy its but‐for pleading
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obligations.2 “Of course, if the loss was caused by an intervening
event [here, the market downturn] . . . the chain of causation will not
have been established. But such is a matter of proof at trial and not
to be decided on a Rule 12(b)(6) motion to dismiss.” Emergent
Capital, 343 F.3d at 197. At this preliminary stage, accepting all
factual allegations in the SAC as true and drawing all reasonable
inferences in FGIC’s favor, FGIC has plausibly alleged that Putnam’s
misrepresentations caused at least some of its losses.
2 That Pyxis defaulted around the time of a global financial crisis was central to
the District Court’s loss causation analysis. Certainly, when a “plaintiff’s loss
coincides with a marketwide phenomenon causing comparable losses to other
investors, the prospect that the plaintiff’s loss was caused by the fraud” is
lessened. See Lentell, 396 F.3d at 174. We observe that there may be
circumstances under which a marketwide economic collapse is itself caused by
the conduct alleged to have caused a plaintiff’s loss, although the link between
any particular defendant’s alleged misconduct and the downturn may be
difficult to establish. See, e.g., Fin. Crisis Inquiry Comm’n, The Financial Crisis
Inquiry Report 190–95 (2011) (concluding that the role of synthetic CDOs and
distorted incentives of CDO managers and hedge funds “contributed
significantly” to the financial crisis); Permanent Subcomm. on Investigations of
the S. Comm. on Homeland Sec. & Govt’l Affairs, 112th Cong., Wall Street and the
Financial Crisis: Anatomy of a Financial Collapse (2011). Because the SAC does not
contain factual allegations to this effect, we take no view as to whether such
circumstances are presented here.
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B. Sufficiency of Other Fraud Allegations
On appeal, Putnam asserts other, separate grounds on which
to affirm the District Court’s judgment: that the SAC fails to allege a
strong inference of fraudulent intent and fails to plead an actionable
misrepresentation or omission. These arguments are meritless and
warrant little discussion.
Putnam contends that FGIC does not provide a “plausible
explanation for why Putnam would engage in a billion‐dollar
fraud.” Brief for Defendant‐Appellee at 38. The SAC specifically
alleges, however, that Putnam was motivated to cooperate with
Magnetar’s scheme in exchange for unusually lucrative collateral
management fees and additional business. See SAC ¶¶ 6, 46‐52, 110‐
12; J.A. 186, 201‐03, 227‐28. Although Putnam argues that these fees
did not provide a financial incentive to commit fraud, such an
argument raises a factual dispute that is inappropriate for resolution
on a motion to dismiss.
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FIN. GUAR. INS. CO. V. PUTNAM ADVISORY CO.
We also reject Putnam’s argument that FGIC fails to allege an
actionable misrepresentation or omission by Putnam. As described
above, FGIC has alleged that Putnam represented that it would
select and manage the assets for the Pyxis portfolio independently
and in the interests of long investors, representations that FGIC
contends were false.
II. Negligence Claims
FGIC also argues that the District Court erred in dismissing its
negligent‐misrepresentation and negligence claims for failure to
sufficiently allege a special or privity‐like relationship between FGIC
and Putnam. FGIC’s negligence‐based claims require that it
establish that Putnam owed it a “duty to speak with care.” Kimmell
v. Schaefer, 89 N.Y.2d 257, 263‐64 (1996). Under New York law, such
a duty exists in the commercial context when “the relationship of the
parties, arising out of contract or otherwise, is such that in morals
and good conscience the one has the right to rely upon the other for
information.” Id. at 263 (quoting Int’l Prods. Co. v. Erie R.R. Co., 244
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FIN. GUAR. INS. CO. V. PUTNAM ADVISORY CO.
N.Y. 331, 338 (1927)); see Anschutz Corp. v. Merrill Lynch & Co., 690
F.3d 98, 114 (2d Cir. 2012) (explaining that New York law strictly
limits negligent‐misrepresentation claims to “situations involving
actual privity of contract between the parties or a relationship so
close as to approach that of privity” (internal quotation marks
omitted)).
It is undisputed that there was no actual contractual privity
between FGIC and Putnam. FGIC contends that Putnam
nevertheless owed it a duty of care under this Court’s holding in
Bayerische Landesbank v. Aladdin Capital Mgmt. LLC, 692 F.3d 42, 59‐61
(2d Cir. 2012). In Bayerische, we held that an investor in a CDO
could bring a negligence action against the defendant CDO manager
in the absence of any contractual privity. In examining the scope of
the “orbit of duty” to third parties, we stated that “a plaintiff must
establish that (1) the defendant had awareness that its work was to
be used for a particular purpose; (2) there was reliance by a third
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FIN. GUAR. INS. CO. V. PUTNAM ADVISORY CO.
party known to the defendant in furtherance of that purpose; and
(3) there existed some conduct by the defendant linking it to that
known third party evincing the defendant’s understanding of the
third party’s reliance.” Id. at 59 (citing Credit Alliance Corp. v. Arthur
Andersen & Co., 65 N.Y.2d 536, 551 (1985)). We reasoned that
Bayerische had sufficiently alleged that the CDO manager “was
aware that its work as Portfolio Manager would be relied on by
Bayerische, a non‐party to the contract” and that Bayerische had
relied on the CDO manager’s representations, made during a
meeting at the CDO manager’s offices in New York, that it would
“competently and effectively protect Bayerische’s interests.” Id.
at 60.
The District Court distinguished Bayerische, finding “the
investing relationship” between the CDO manager and the third‐
party notes holder in Bayerische to be “much closer in scope and
shared goals than the one a guarantor of a transaction has with a
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FIN. GUAR. INS. CO. V. PUTNAM ADVISORY CO.
CDO manager.” FGIC, 2014 WL 1678912, at *13. We disagree. Just
as in Bayerische, FGIC alleges that Putnam repeatedly represented
that it would select and manage the assets for the Pyxis portfolio
independently and in the interests of long investors, which were
aligned with FGIC’s interests. Before FGIC agreed to insure credit
protection on Pyxis, it met with Putnam representatives at Putnam’s
offices in Boston. FGIC alleges that it relied on representations
made by Putnam in issuing the Pyxis Guaranty, and that, without
the credit protection it provided, Pyxis would not have closed. We
find, therefore, that the SAC plausibly alleges facts evincing
Putnam’s understanding that FGIC would “rely on [Putnam’s] care
and competence in managing” the Pyxis portfolio. Bayerische, 692
F.3d at 60.
Further, to the extent the District Court read Bayerische to
recognize a special relationship only where “the end and aim” of the
transaction was to benefit the plaintiff, FGIC, 2014 WL 1678912, at
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FIN. GUAR. INS. CO. V. PUTNAM ADVISORY CO.
*13, we here clarify that the “end and aim” language in Bayerische is
a useful rephrasing of the three elements of the special‐relationship
test, but is not an independent requirement. See Bayerische, 692 F.3d
at 60 (discussing three elements and stating “[p]ut another way,
plaintiff must show that the benefit to the non‐party was the end
and aim of the transaction” (internal quotation marks omitted)); see
also Sykes v. RFD Third Ave. 1 Assocs., LLC, 15 N.Y.3d 370, 373 (2010)
(discussing three elements for special relationship and omitting
mention of “end and aim”).
The District Court also noted that statements in the written
materials provided to FGIC by Putnam “expressly disclaim any
creation of a special duty.” FGIC, 2014 WL 1678912, at *12. The
Pyxis pitchbook states that Putnam was not “acting as a financial
advisor” or in a “fiduciary capacity” and the Pyxis offering
memorandum urges investors to “rely on their own examination of
the co‐issuers and the terms of the offering, including the merits and
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FIN. GUAR. INS. CO. V. PUTNAM ADVISORY CO.
risks involved.” Id. These disclaimers do not preclude the finding
of a special relationship between FGIC and Putnam. First, FGIC’s
claims are not premised on Putnam’s acting as a fiduciary or
financial advisor to FGIC. FGIC alleges that Putnam fraudulently
represented that it would select the collateral for Pyxis and that it
would do so independently and in good faith. As these disclaimers
do not disclose the possibility that Putnam would cede control of the
collateral selection process to other market participants with
interests adverse to long investors, they “fall well short of tracking
the particular misrepresentations alleged” by FGIC. Caiola v.
Citibank, N.A., N.Y., 295 F.3d 312, 330 (2d Cir. 2002) (holding, in
context of securities fraud claim, that general disclaimers did not bar
plaintiff from relying on defendant’s oral statements); cf. HSH
Nordbank AG v. UBS AG, 941 N.Y.S.2d 59 (1st Dep’t 2012) (affirming
dismissal of claim where plaintiff alleged defendant bank
misrepresented risk involved in transaction but contractual
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FIN. GUAR. INS. CO. V. PUTNAM ADVISORY CO.
documents were “replete with detailed disclosures” of risks
involved and defendant’s conflicts of interest).
Second, the disclaimers, which urge investors to conduct an
“examination” of the terms of the offering, only underscore the
significance of Putnam’s representations within those offering
documents, which FGIC alleges were themselves fraudulent. See
SAC ¶¶ 86‐87; J.A. 217. Given that a determination of whether a
special relationship exists is a “factual inquiry,” FGIC’s allegations
are sufficient to survive a motion to dismiss. Suez, 250 F.3d at 104
(reversing dismissal of negligent‐misrepresentation claim where
conflict between alleged oral representations and disclaimer could
not “be resolved on the pleadings”). Accordingly, we hold FGIC has
plausibly alleged a special relationship between itself and Putnam,
sufficient to state claims for negligent misrepresentation and
negligence.
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FIN. GUAR. INS. CO. V. PUTNAM ADVISORY CO.
CONCLUSION
For the foregoing reasons, we vacate the District Court’s
dismissal of the complaint and remand for further proceedings.
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