15-4092-cv
Veleron Holding, B.V. v. Morgan Stanley, et al.
UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
SUMMARY ORDER
RULINGS BY SUMMARY ORDER DO NOT HAVE PRECEDENTIAL EFFECT. CITATION TO A SUMMARY ORDER
FILED ON OR AFTER JANUARY 1, 2007, IS PERMITTED AND IS GOVERNED BY FEDERAL RULE OF
APPELLATE PROCEDURE 32.1 AND THIS COURT’S LOCAL RULE 32.1.1. WHEN CITING A SUMMARY
ORDER IN A DOCUMENT FILED WITH THIS COURT, A PARTY MUST CITE EITHER THE FEDERAL APPENDIX
OR AN ELECTRONIC DATABASE (WITH THE NOTATION “SUMMARY ORDER”). A PARTY CITING A SUMMARY
ORDER MUST SERVE A COPY OF IT ON ANY PARTY NOT REPRESENTED BY COUNSEL.
1 At a stated term of the United States Court of Appeals for
2 the Second Circuit, held at the Thurgood Marshall United States
3 Courthouse, 40 Foley Square, in the City of New York, on the
4 6th day of June, two thousand seventeen.
5
6 PRESENT: DENNIS JACOBS,
7 DEBRA ANN LIVINGSTON,
8 RAYMOND J. LOHIER, JR.,
9 Circuit Judges.
10
11 - - - - - - - - - - - - - - - - - - - -X
12 VELERON HOLDING, B.V.,
13 Plaintiff-Appellant,
14
15 -v.- 15-4092-cv
16
17 MORGAN STANLEY, MORGAN STANLEY CAPITAL
18 SERVICES INCORPORATED, MORGAN STANLEY
19 & CO. INCORPORATED, and MORGAN STANLEY
20 & CO. LLC,
21 Defendants-Appellees.*
22
23 - - - - - - - - - - - - - - - - - - - -X
24
25
* The Clerk of Court is respectfully directed to amend the official
caption to conform with the above.
1
1 FOR APPELLANT: AARON H. MARKS, Ronald R. Rossi,
2 Emilie B. Cooper; Kasowitz,
3 Benson, Torres & Friedman LLP, New
4 York, NY.
5
6 FOR APPELLEES: NEAL KUMAR KATYAL, Morgan L.
7 Goodspeed; Hogan Lovells US LLP,
8 Washington, DC.
9
10 Jonathan D. Polkes, Adam B. Banks;
11 Weil, Gotshal & Manges LLP, New
12 York, NY.
13
14 Appeal from the judgment of the United States District Court
15 for the Southern District of New York (McMahon, J.).
16 UPON DUE CONSIDERATION, IT IS HEREBY ORDERED, ADJUDGED AND
17 DECREED that the judgment of the district court be AFFIRMED.
18 Plaintiff Veleron Holding, B.V., appeals from the judgment
19 of the United States District Court for the Southern District
20 of New York (McMahon, J.), entered pursuant to jury verdict with
21 respect to a statutory claim and pursuant to a Rule 12(b)(6)
22 dismissal with respect to a contract claim. We assume the
23 parties’ familiarity with the underlying facts, procedural
24 history, and issues presented for review.
25 The plaintiff, Veleron, is a special purpose investment
26 vehicle indirectly owned by an industrial conglomerate owned
27 by Russian billionaire Oleg Deripaska. Veleron was formed to
28 make a $1.5 billion dollar investment in a Canadian auto parts
29 company called Magna. The investment went bad in the 2008
30 financial crisis.
31 In September 2007, the French bank BNP Paribas agreed to
32 finance Veleron’s Magna investment. Under a “Credit
33 Agreement,” Veleron borrowed $1.229 billion from BNP; and under
34 a “Pledge Agreement,” Veleron pledged to BNP the 20 million
35 shares of Magna it purchased with that money (and with over $300
36 million of equity contributed by a Veleron parent) as collateral
37 for the loan. Veleron pledged no other security, and no other
38 entity guaranteed the loan, so BNP had no recourse in a default
2
1 except to liquidate the pledged collateral and pursue Veleron
2 for any outstanding deficiency.
3 The defendants are several Morgan Stanley entities
4 (collectively “Morgan Stanley”). Morgan Stanley was not a party
5 to the Veleron-BNP agreements and never did any business directly
6 with Veleron. BNP did, however, enter into an agreement with
7 Morgan Stanley by which Morgan Stanley would be responsible for
8 8.1% of any loss to BNP if Veleron defaulted and the collateral
9 fell short.1 Morgan Stanley separately entered into an agreement
10 to be BNP’s disposal agent to liquidate the collateral if the
11 need arose.
12 In its recitals, the “Agency Disposal Agreement” between
13 BNP and Morgan Stanley describes the Credit Agreement and Pledge
14 Agreement from which BNP’s authority to seize and liquidate the
15 collateral is derived; and it includes Morgan Stanley’s
16 acknowledgement that BNP, “in enforcing its security under the
17 Pledge Agreement, is obligated to seek the best price available
18 in the market for transactions of a similar size and nature at
19 the time of sale, and Morgan Stanley agrees to use all reasonable
20 [efforts] to comply with such terms.” App. 1826. That
21 agreement’s operative provisions do not, however, make direct
22 reference to Veleron.
23 The Credit Agreement allowed BNP to demand immediate payment
24 if the price of Magna stock dropped beneath a specified margin
25 between the outstanding debt and the value of the collateral.
26 In September 2008, the value of Magna stock plummeted; on
27 September 29, BNP made a $92.5 million margin call; the next
28 day BNP increased the demand to $113.8 million.
29 Morgan Stanley attempted to cover its own exposure to
30 further declines in the price of Magna shares (stemming from
31 its 8.1% share of the credit risk) by shorting Magna stock on
32 September 30 and October 1. Morgan Stanley avers that its short
33 positions did not fully hedge against its risk, and it still
34 stood to lose money.
1
BNP entered into similar credit derivative transactions with
several other major financial firms to hedge against its risk in the
Veleron agreements.
3
1 On October 2, BNP sent Veleron an acceleration notice,
2 warning that the collateral would be liquidated if Veleron did
3 not pay immediately. When Veleron did not pay, BNP directed
4 Morgan Stanley to liquidate the pledged collateral. On October
5 3, Morgan Stanley launched an “Accelerated Book Build” and sold
6 all of the Magna stock over a single day, netting $748 million
7 and leaving a deficiency of $79 million. Veleron disputed the
8 deficiency, arbitration ensued in London, and the dispute was
9 settled for $25 million.
10 Veleron filed this suit against many parties; but all that
11 remains for purposes of this appeal are claims against Morgan
12 Stanley for breach of contract and for violations of § 10(b)
13 of the Securities Exchange Act of 1934 (15 U.S.C. § 78j(b)),
14 and SEC Rule 10b-5.
15 Veleron alleges that Morgan Stanley breached the Agency
16 Disposal Agreement by liquidating the Magna stock in an
17 unreasonable or negligent way. Although Veleron was not a party
18 to that agreement, it argues that it was an intended third-party
19 beneficiary. The district court rejected that argument and
20 dismissed the breach claim pursuant to Rule 12(b)(6).2
21 Veleron’s securities fraud claim survived to jury trial.
22 Veleron alleged that by taking a short position on Magna stock,
23 Morgan Stanley traded on material nonpublic information in
24 violation of a duty to Veleron, depressed the price of Magna
25 stock, and thereby reduced the proceeds of liquidation and
26 increased Veleron’s deficiency by as much as $12.6 million.
27 Before trial, the parties submitted competing jury
28 instructions. Morgan Stanley’s proposed instructions required
29 Veleron to show that (1) Morgan Stanley owed Veleron a duty of
30 trust and confidence; (2) Veleron conveyed material, nonpublic
2
Veleron also alleged that Morgan Stanley breached the Pledge
Agreement between BNP and Veleron--although Morgan Stanley was not
a party to that agreement. Veleron’s theory was that BNP had delegated
its decision-making to Morgan Stanley, effectively making Morgan
Stanley its nominee, and that Morgan Stanley could therefore breach
the agreement to which it was not a party. The district court rejected
that argument and Veleron does not raise it on appeal, abandoning
the claim.
4
1 information to Morgan Stanley; (3) Morgan Stanley traded on that
2 information in breach of its duty; (4) Morgan Stanley acted with
3 scienter; and (5) Veleron suffered an economic loss proximately
4 caused by Morgan Stanley’s trading. Veleron’s proposed
5 instructions omitted the fourth and fifth of these elements.
6 The district court agreed with Morgan Stanley’s enumeration of
7 elements and Veleron did not object.
8 During deliberations, a note from the jury asked whether
9 Veleron “need[ed] to prove Morgan Stanley had an intent to
10 specifically defraud Veleron?” App. 1749. After consulting
11 the parties, the district court answered “yes,” but
12 “specifically in the sense that the material, nonpublic
13 information must be misappropriated from Veleron.” App.
14 1753-54. Shortly thereafter, the jury returned a unanimous
15 verdict for Morgan Stanley, concluding that Morgan Stanley had
16 not acted with scienter.
17 Veleron argues on appeal that (1) the district court erred
18 by dismissing its breach of contract claim because it was a
19 third-party beneficiary under the Agency Disposal Agreement,
20 and (2) the jury instruction on scienter and the response to
21 the jury’s question were plainly erroneous.
22 We review de novo the district court’s dismissal of a claim
23 under Rule 12(b)(6). Bayerische Landesbank v. Aladdin Capital
24 Mgmt. LLC, 692 F.3d 42, 51-52 (2d Cir. 2012).
25 We review for plain error jury instructions that went
26 without timely objection. Henry v. Wyeth Pharm., Inc., 616 F.3d
27 134, 152–53 (2d Cir. 2010).
28 1. Veleron was not a party to the Agency Disposal
29 Agreement, and it therefore cannot enforce the agreement unless
30 it was an intended third-party beneficiary. A purported
31 third-party beneficiary must establish “(1) the existence of
32 a valid and binding contract between other parties, (2) that
33 the contract was intended for [the plaintiff’s] benefit, and
34 (3) that the benefit to [the plaintiff] is sufficiently immediate
35 . . . to indicate the assumption by the contracting parties of
36 a duty to compensate [the plaintiff] if the benefit is lost.”
37 Mandarin Trading Ltd. v. Wildenstein, 944 N.E. 2d 1104, 1110
38 (N.Y. 2011) (quotation marks removed).
5
1 Neither the text nor the surrounding circumstances of the
2 Agency Disposal Agreement “clearly evidence” that Morgan Stanley
3 and BNP intended to benefit Veleron. See Bayerische Landesbank,
4 692 F.3d at 52. The agreement describes the Credit Agreement
5 and Pledge Agreement, and it identifies Veleron in that
6 recitation; but references to Veleron are all by way of
7 background. The agreement does not make clear reference to any
8 duty owed to Veleron. The only obligation that might
9 potentially qualify is the putative “best price” obligation in
10 the Agency Disposal Agreement. However, this provision does not
11 reference any specific duty in the agreements between Veleron
12 and BNP, and, on appeal, Veleron was unable to clearly direct
13 us to one. Nor does Veleron point to compelling evidence
14 supporting third-party beneficiary status on the basis of the
15 circumstances surrounding the Agency Disposal Agreement.
16 In the absence of such evidence, several provisions that
17 do appear in the Agency Disposal Agreement operate to limit
18 third-party beneficiary status. The agreement includes an
19 express anti-assignment clause, which “suggests an intent to
20 limit the obligation of the contract to the original parties[,]”
21 Subaru Distribs. Corp. v. Subaru of Am., Inc., 425 F.3d 119,
22 125 (2d Cir. 2005), an inurement clause (“This Agreement shall
23 be binding upon and [i]nure to the benefit of each party to this
24 Agreement . . . .”), and a merger clause specifying that all
25 terms of the agreement are set out in the text of the agreement
26 itself, which together tend to limit the class of potential
27 beneficiaries. Absent contrary evidence, these clauses
28 undermine any inference that BNP and Morgan Stanley intended
29 to create a third-party beneficiary.
30 Therefore, we affirm the district court’s dismissal of
31 Veleron’s third-party beneficiary contract claim.
32 2. Veleron challenges the jury instruction on scienter and
33 the answer given to the jury’s question about specific intent.
34 Because Veleron did not object contemporaneously, review is
35 deferential: to win on appeal, Veleron must show that the
36 instructions were plainly erroneous. It does not sustain that
37 burden.
6
1 The trial was conducted on a misappropriation theory of
2 insider trading in violation of the Securities Exchange Act.
3 To prove such a claim, a plaintiff must establish that the
4 defendant possessed material, nonpublic information; that the
5 defendant owed a duty to the plaintiff to keep such information
6 confidential; that the defendant breached this duty by trading
7 on the basis of that information; and that the defendant acted
8 with scienter. United States v. Gansman, 657 F.3d 85, 90-91 &
9 n.7 (2d Cir. 2011); see also Ernst & Ernst v. Hochfelder, 425
10 U.S. 185, 201-14 (1976) (discussing the scienter requirement
11 in § 10(b) actions). Veleron presented evidence that BNP’s
12 margin calls and Veleron’s inability to meet them with timely
13 payment constituted the material nonpublic information on which
14 Morgan Stanley traded when it shorted Magna. Morgan Stanley
15 presented evidence and argument that it had no duty to Veleron
16 to keep such information confidential, or, if it did, it did
17 not know that it did and therefore acted without scienter.
18 Veleron points out that the Second Circuit applies a
19 “knowing possession” standard to show breach: a defendant who
20 trades while in knowing possession of material, nonpublic
21 information presumptively trades “on the basis” of such
22 information. United States v. Teicher, 987 F.2d 112, 120-21 (2d
23 Cir. 1993). If a defendant trades while in knowing possession
24 of inside information, Veleron contends, scienter is
25 established, and the district court’s instruction on scienter
26 (in particular, its allowance of good faith) was therefore
27 plainly erroneous. This analysis, however, collapses two
28 distinct elements: scienter and breach of duty. Under the
29 “knowing possession” standard, trading while in knowing
30 possession of inside information is sufficient to establish that
31 the trades were made on the basis of the inside information--and
32 therefore that any duty to maintain that information in
33 confidence (if there is one) was breached. But it does not
34 establish awareness of a duty.
35 The district court’s instruction on scienter allowed that
36 “[g]ood faith on the part of Morgan Stanley is a complete defense
37 to a contention that Morgan Stanley acted with a culpable state
38 of mind.” App. 1733. Since “[e]stablishing a culpable state
39 of mind is part of proving the case,” the district court
40 instructed that “the burden is on Veleron to prove by a
7
1 preponderance of the evidence that Morgan Stanley acted with
2 the requisite scienter” and “did not act in good faith.” App.
3 1733-34.
4 Veleron argues that the burden should have been placed on
5 Morgan Stanley to prove good faith, but does so by assuming that
6 good faith is an affirmative defense to be raised after the
7 plaintiff has proved the elements for liability. However, proof
8 of scienter is part of the affirmative case. Generally, it is
9 “[a] mental state consisting in an intent to deceive, manipulate,
10 or defraud.” Black's Law Dictionary (10th ed. 2014). Good
11 faith is scienter’s opposite. While the district court could
12 have been clearer in articulating the nature of Veleron’s burden,
13 Veleron makes no persuasive argument that the district court’s
14 instruction was “obviously wrong in light of existing law.”
15 United States v. Youngs, 687 F.3d 56, 59 (2d Cir. 2012)
16 (describing plain error in the criminal context).
17 Veleron fares no better with the district court’s answer
18 to the jury’s question whether Veleron “need[ed] to prove Morgan
19 Stanley had an intent to specifically defraud Veleron?” App.
20 1749. The district court answered that Veleron did need to prove
21 such specific intent “specifically in the sense that the
22 material, nonpublic information must be misappropriated from
23 Veleron.” App. 1754. Veleron fails to show that this answer
24 was plainly erroneous.
25 Accordingly, and finding no merit in appellant’s other
26 arguments, we hereby AFFIRM the judgment of the district court.
27 FOR THE COURT:
28 CATHERINE O’HAGAN WOLFE, CLERK
8