Abu Dhabi Commercial Bank et al v. Morgan Stanley & Co. Incorporated et al
OPINION AND ORDER. For the reasons stated above, plaintiffs have shown cause as to why their negligent misrepresentation claims against Morgan Stanley should not be dismissed. (Signed by Judge Shira A. Scheindlin on 10/5/2012) (lmb)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
ABU DHABI COMMERCIAL BANK, KING
COUNTY, WASHINGTON, SEI
INVESTMENTS COMPANY, SEI
INVESTMENT STRATEGIES, LLC, THE
BANK OF N.T. BUTTERFIELD & SON
LIMITED, SFT COLLECTIVE INVESTMENT
FUND, DEUTSCHE POSTBANK AG,
GLOBAL INVESTMENT SERVICES
LIMITED, GULF INTERNATIONAL BANK
B.S.C., NATIONAL AGRICULTURAL
COOPERATIVE FEDERATION, STATE
BOARD OF ADMINISTRATION OF
FLORIDA, COMMONWEALTH OF
PENNSYLVANIA PUBLIC SCHOOL
EMPLOYEES' RETIREMENT SYSTEM,
BANK SINOPAC, BANK HAPOALIM B.M.,
COMMERZBANK AG, and KBL EUROPEAN
PRIVATE BANKERS S.A.,
- againstMORGAN STANLEY & CO.
INCORPORATED, MORGAN STANLEY &
CO. INTERNATIONAL LIMITED, MOODY'S
INVESTORS SERVICE, INC., MOODY'S
INVESTORS SERVICE LTD., STANDARD
AND POOR'S RATINGS SERVICES and THE
McGRAW HILL COMPANIES, INC.,
OPINION AND ORDER
08 Civ. 7508 (SAS)
SHIRA A. SCHEINDLIN, U.S.D.J.:
Plaintiffs are institutional investors asserting claims of fraud, aiding
and abetting fraud, and negligent misrepresentation against Morgan Stanley & Co.
Incorporated and Morgan Stanley & Co. International Limited (together, “Morgan
Stanley”) — the arranger/placement agent of the Structured Investment Vehicle
(“SIV”) in which plaintiffs invested — and the agencies that rated the notes issued
by the SIV. In my August 17, 2012 summary judgment Opinion and Order, I
dismissed plaintiffs’ fraud claims against Morgan Stanley because: (1) plaintiffs
had not identified any actionable misstatement attributable to Morgan Stanley; and
(2) the existence of an actionable misstatement attributable to Morgan Stanley was
an essential element of plaintiffs’ fraud claims against it. Although Morgan
Stanley had not yet moved for summary judgment on plaintiffs’ negligent
misrepresentation claim, I ordered plaintiffs to show cause as to why their
negligent misrepresentation claims against Morgan Stanley should not be
dismissed in light of my finding that Morgan Stanley made no actionable
misstatement to plaintiffs. This Order to Show Cause presented a simple question:
under New York law, may a plaintiff maintain a negligent misrepresentation claim
against a defendant to whom no actionable misstatement can be attributed?
Because the answer to this question is “yes,” plaintiffs’ negligent misrepresentation
claim against Morgan Stanley is not dismissed.
Familiarity with the facts and the procedural history is assumed.
As the Court’s Order to Show Cause presented a limited question of
law, the applicable legal standard is the same as that for a motion to dismiss
pursuant to Federal Rule of Civil Procedure 12(b)(6). In deciding such a motion, a
court must “accept all factual allegations in the complaint as true, and draw all
reasonable inferences in the plaintiff’s favor.”1 The court evaluates the sufficiency
of the complaint under the “two-pronged approach” suggested by the Supreme
Court in Ashcroft v. Iqbal.2 First, a court “‘can choose to begin by identifying
pleadings that, because they are no more than conclusions, are not entitled to the
assumption of truth.’”3 “Threadbare recitals of the elements of a cause of action,
supported by mere conclusory statements, do not suffice” to withstand a motion to
Wilson v. Merrill Lynch & Co., 671 F.3d 120, 128 (2d Cir. 2011).
556 U.S. 662, 678-80 (2009).
Hayden v. Paterson, 594 F.3d 150, 161 (2d Cir. 2010) (quoting Iqbal,
556 U.S. at 679). Accord Ruston v. Town Bd. for Town of Skaneateles, 610 F.3d
55, 59 (2d Cir. 2010).
dismiss.4 Second, “[w]hen there are well-pleaded factual allegations, a court
should assume their veracity and then determine whether they plausibly give rise to
an entitlement for relief.”5 To survive a Rule 12(b)(6) motion to dismiss, the
allegations in the complaint must meet a standard of “plausibility.”6 A claim is
facially plausible “when the plaintiff pleads factual content that allows the court to
draw the reasonable inference that the defendant is liable for the misconduct
alleged.”7 Plausibility “is not akin to a probability requirement;” rather,
plausibility requires “more than a sheer possibility that a defendant has acted
The New York Court of Appeals’ most recent description of the
elements of a negligent misrepresentation claim follows:
It is well settled that “[a] claim for negligent misrepresentation
requires the plaintiff to demonstrate (1) the existence of a special
or privity-like relationship imposing a duty on the defendant to
Iqbal, 556 U.S. at 678 (citing Bell Atl. Corp. v. Twombly, 550 U.S.
544, 555 (2007)).
Id. at 679. Accord Kiobel v. Royal Dutch Petroleum Co., 621 F.3d
111, 124 (2d Cir. 2010).
Twombly, 550 U.S. at 564.
Iqbal, 556 U.S. at 678 (quotation marks omitted).
Id. (quotation marks omitted).
impart correct information to the plaintiff; (2) that the information
was incorrect; and (3) reasonable reliance on the information.”9
In a prior opinion, I conducted an extensive analysis of the relationship between
Morgan Stanley and plaintiffs and determined that plaintiffs had sufficiently
alleged the existence of a “special relationship” between the parties.10 Plaintiffs
now argue that even if the ratings cannot be attributed to Morgan Stanley, Morgan
Stanley may nonetheless be liable for “impar[ting] [in]correct information to
[them].”11 For the reasons set forth below, plaintiffs are correct.
The description of the elements of negligent misrepresentation set
forth in Mandarin Trading Ltd. v. Wildenstein does not include any requirement of
an affirmative misrepresentation by a defendant.12 Thus, there is support for
plaintiffs’ position that under New York negligent misrepresentation law, the
question is not whether an affirmative misrepresentation can be attributed to a
Mandarin Trading Ltd. v. Wildenstein, 16 N.Y.3d 173, 180 (2011)
(quoting J.A.O. Acquisition Corp. v. Stavitsky, 8 N.Y.3d 144, 148 (2007)).
See May 4 Order (Docket No. 404), referring to King County,
Washington v. IKB Deutsche Industriebank AG, No. 09 Civ. 8387, --- F. Supp. 2d --, 2012 WL 1592193, at *12 (S.D.N.Y. May 4, 2012), reconsideration denied,
Nos. 09 Civ. 8387, 08 Civ. 7508, --- F. Supp. 2d ---, 2012 WL 2160285 (S.D.N.Y.
June 7, 2012).
See Plaintiffs’ Response to Order to Show Cause Regarding Negligent
Misrepresentation Claims, at 10-12 (quoting Mandarin Trading, 16 N.Y.3d at
See Mandarin Trading, 16 N.Y.3d at 180.
defendant, but whether a defendant breached a duty to provide a plaintiff with
accurate information. In Century Pacific, Inc. v. Hilton Hotels Corp., I noted that
“Courts have found a special relationship and duty, for example, where defendants
sought to induce plaintiffs into a business transaction by making certain statements
or providing specific information with the intent that plaintiffs rely on those
statements or information.”13 Morgan Stanley argues that Century Pacific — as
well as many of the other cases cited by plaintiffs — are inapposite as they deal
only with the “duty” element of a negligent misrepresentation claim and not the
“misrepresentation” element.14 The flaw in Morgan Stanley’s argument is that it
focuses only on the word “duty” while ignoring the scope of that duty. A
defendant whose duty to a plaintiff consisted only of the obligation to make no
affirmative misrepresentations can be liable only if it made such a
misrepresentation. However, a defendant whose duty consisted of an obligation to
provide accurate information to a plaintiff may be liable for negligently providing
inaccurate information even if that information originated from third parties.
Century Pac., Inc. v. Hilton Hotels Corp., No. 03 Civ. 8258, 2004 WL
868211, at *8 (S.D.N.Y. Apr. 21, 2004) (citing, inter alia, Kimmell v. Schaefer, 89
N.Y.2d 257, 264-65 (1996)) (emphasis added).
See Memorandum of Law in Support of Defendant Morgan Stanley &
Co. Incorporated’s and Morgan Stanley & Co. International Limited’s Reply to
Plaintiffs’ Response to Order to Show Cause (“Def. Mem.”), at 4.
Here, plaintiffs allege that Morgan Stanley had a duty to provide plaintiffs with
accurate information, and that it breached its duty by providing inaccurate ratings
generated by the rating agency defendants.15
Further, because a negligent misrepresentation claim may be based on
the breach of a duty to provide accurate information, it may be premised on an
omission. For example, in Ellington Credit Fund, Ltd. v. Select Portfolio
Servicing, Inc., Judge Richard Sullivan held that:
Under New York law, a duty to disclose material facts arises in
one of three ways: (1) where the parties stand in a confidential
fiduciary relationship, (2) where one party possesses superior
knowledge, not readily available to the other, and knows that the
other is acting on the basis of mistaken knowledge, or (3) where
a party to a business transaction has made a partial or ambiguous
statement, on the theory that once a party has undertaken to
mention a relevant fact to the other party it cannot give only half
of the truth. [A] breach of a duty to disclose can constitute an
element of various torts such as . . . negligent misrepresentation
based on omission, or breach of fiduciary duty . . . .16
Thus, because Morgan Stanley had a sufficiently-alleged “special relationship”
with plaintiffs, and because Morgan Stanley allegedly had superior non-public
See Ninth Amended Complaint for Common Law Fraud, Negligent
Misrepresentation, Negligence, Breach of Fiduciary Duty, and Aiding and Abetting
(“NAC”), ¶¶ 219-227.
Ellington Credit Fund, Ltd. v. Select Portfolio Servicing, Inc., 837 F.
Supp. 2d 162, 201 (S.D.N.Y. 2011) (citing Lerner v. Fleet Bank, N.A., 459 F.3d
273, 292 (2d Cir. 2006); Brass v. American Film Techs., Inc., 987 F.2d 142, 150
(2d Cir. 1993)) (emphasis added).
information upon which it knew plaintiffs would rely, Morgan Stanley can be
liable for negligent misrepresentation.17
Morgan Stanley argues that this Court already rejected the possibility
that it could be liable for breach of a duty to disclose.18 In a footnote in my
summary judgment Opinion and Order, I stated that generally, under New York
law, “‘[a]n omission does not constitute fraud unless there is a fiduciary
relationship between the parties.’”19 That statement does not, however, foreclose
the possibility that Morgan Stanley might be liable in negligent misrepresentation
for its breach of a potential duty to disclose.20
The very nature of a privity-like “special relationship” is that it entails
a duty to provide accurate information. See Mandarin Trading, 16 N.Y.3d at 180
(requiring “the existence of a special or privity-like relationship imposing a duty
on the defendant to impart correct information to the plaintiff”). Thus, my prior
holding that plaintiffs have sufficiently alleged a “special relationship” with
Morgan Stanley is tantamount to a holding that plaintiffs have sufficiently alleged
Morgan Stanley’s duty to provide accurate information.
See Def. Mem. at 4.
Abu Dhabi Commercial Bank v. Morgan Stanley & Co. Inc., No. 08
Civ. 7508, --- F. Supp. 2d ---, 2012 WL 3584278, at *7 n.96 (S.D.N.Y. Aug. 17,
2012) (quoting Cobalt Partners, L.P. v. GSC Capital Corp., 944 N.Y.S.2d 30, 35
(1st Dep’t 2012)). I have already determined that Morgan Stanley did not have a
fiduciary relationship with plaintiffs. See May 4 Order, referring to King County,
2012 WL 1592193, at *14 (“[T]he relationship between the parties is too
attenuated to give rise to a fiduciary duty.”).
I also note that there are limited circumstances in which an omission
may constitute fraud under New York law absent a fiduciary relationship.
However, plaintiffs did not argue in their summary judgment briefing that such
It is not anomalous that a defendant who made no actionable
misstatement might be liable for negligent misrepresentation but not fraud. The
existence of the special relationship without which a negligent misrepresentation
claim cannot proceed creates a duty to impart correct — and complete —
information. Whereas plaintiffs had a high bar to establish the existence of a
special relationship, upon doing so they have a lower bar to establish that Morgan
Stanley’s conduct was negligent. Because intent is an element of a fraud claim, it
is essential for a court to determine to whom an allegedly fraudulent statement may
be attributed.21 However, because intent is not an element of a negligent
misrepresentation claim, questions of attribution miss the mark. Thus, Morgan
Stanley may be liable for negligently imparting the inaccurate ratings to plaintiffs
even though the ratings cannot be attributed to Morgan Stanley.
To summarize, plaintiffs have sufficiently pled a special relationship
with Morgan Stanley such that Morgan Stanley had a duty to make no negligent
misrepresentations to them. Plaintiffs have further alleged that Morgan Stanley
negligently conveyed to them ratings that it had reason to believe were inaccurate
circumstances were present here.
See Abu Dhabi, 2012 WL 3584278, at *7-9.
or deeply flawed, omitting facts that would expose the flaws in the ratings. 22
Morgan Stanley's conveyance of the inaccurate ratings -
combined with its
omission of non-public facts that it knew would undercut the ratings
represented a breach of its duty to provide plaintiffs with accurate information.
Accordingly, plaintiffs have sufficiently alleged a negligent misrepresentation
claim against Morgan Stanley.
For the reasons stated above, plaintiffs have shown cause as to why
their negligent misrepresentation claims against Morgan Stanley should not be
New York, New York
See NAC ~'1219-227.
- Appearances For Plaintiffs:
Patrick J. Coughlin, Esq.
Daniel S. Drosman, Esq.
Jessica T. Shinnefield, Esq.
Jarrett S. Charo, Esq.
Darryl J. Alvarado, Esq.
X. Jay Alvarez, Esq.
David C. Walton, Esq.
Robbins Geller Rudman & Dowd LLP
655 West Broadway, Suite 1900
San Diego, CA 92101-3301
Samuel H. Rudman, Esq.
Robbins Geller Rudman & Dowd LLP
58 South Service Road, Suite 200
Melville, NY 11747
Luke O. Brooks, Esq.
Jason C. Davis, Esq.
Robbins Geller Rudman & Dowd LLP
Post Montgomery Center
One Montgomery Street, Suite 1800
San Francisco, CA 94104
Additional Attorneys for Plaintiff State Board of Administration of Florida:
Marc I. Gross, Esq.
Pomertantz Haudek Grossman & Gross LLP
100 Park Avenue
New York, NY 10017
For Defendants Morgan Stanley & Co. Incorporated and Morgan Stanley &
Co. International Limited:
James P. Rouhandeh, Esq.
Antonio J. Perez-Marques, Esq.
William R. Miller, Jr., Esq.
Jessica L. Freese, Esq.
Christopher J. Roche, Esq.
Andrew D. Schlichter, Esq.
Davis Polk & Wardwell LLP
450 Lexington Avenue
New York, NY 10017
For Defendants Moody’s Investors Service, Incorporated and Moody’s
Investors Service Limited:
Joshua M. Rubins, Esq.
James J. Coster, Esq.
Mario Aieta, Esq.
Dai Wai Chin Feman, Esq.
Justin E. Klein, Esq.
Aaron M. Zeisler, Esq.
Satterlee Stephens Burke & Burke LLP
230 Park Avenue, 11th Floor
New York, NY 10169
For Defendants Standard & Poor’s Rating Services and The McGraw-Hill
Floyd Abrams, Esq.
Dean I. Ringel, Esq.
Tammy L. Roy, Esq.
Andrea R. Butler, Esq.
David Owen, Esq.
Adam N. Zurofsky, Esq.
Cahill Gordon & Reindel LLP
80 Pine Street
New York, NY 10005
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