Dandong et al v. Pinnacle Performance Limited et al
Filing
175
OPINION AND ORDER re: 120 MOTION to Dismiss the Amended Class Action Complaint. filed by Morgan Stanley. For the foregoing reasons, Pinnacle's motion to dismiss for lack of personal jurisdiction is DENIED. Morgan Stanley's motion to dismiss is GRANTED with respect to Plaintiffs' claim of aiding and abetting breach of the implied covenant of good faith and fair dealing, but is DENIED as to Plaintiffs' remaining claims. The Clerk of Court is directed to terminate Docket Number 120. (Signed by Judge Jesse M. Furman on 8/22/2013) (djc)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
08/22/2013
GE DANDONG ET AL.,
Plaintiffs,
10 Civ. 8086 (JMF)
-vOPINION AND ORDER
PINNACLE PERFORMANCE LTD. ET AL.,
Defendants.
JESSE M. FURMAN, United States District Judge:
In this putative class action, a group of Singapore investors (“Plaintiffs”) assert various
claims against Morgan Stanley & Co. and certain of its affiliates (collectively, “Defendants”),
related to a series of credit-linked notes (the “Pinnacle Notes” or the “Notes”) issued by
Defendant Pinnacle Performance Limited (“Pinnacle”) and purchased by Plaintiffs. On October
31, 2011, the Honorable Leonard B. Sand — to whom this case was previously assigned —
granted in part and denied in part Defendants‟ motion to dismiss Plaintiffs‟ complaint. See
Dandong v. Pinnacle Performance Ltd., No. 10 Civ. 8086 (LBS), 2011 WL 5170293, at *1
(S.D.N.Y. Oct. 31, 2011).1 By separate opinion dated December 12, 2011, Judge Sand granted a
preliminary injunction to Plaintiffs, enjoining Defendants from pursuing an anti-suit injunction
from the High Court of the Republic of Singapore. See Dandong v. Pinnacle Performance Ltd.,
No. 10 Civ. 8086 (LBS), 2011 WL 6156743, at *1 (S.D.N.Y. Dec. 12, 2011).
Defendants sought interlocutory review of both orders. Although the Second Circuit
affirmed the injunction, it held that Judge Sand had erred in not addressing whether there was
1
The original Complaint misidentified Defendant Morgan Stanley and Co., Inc. as
“Morgan Stanley” and did not name Morgan Stanley as a defendant. Morgan Stanley was added
as a defendant in this action in the Amended Complaint.
personal jurisdiction over Pinnacle and remanded for jurisdictional discovery on that issue. See
Lam Yeen Leng v. Pinnacle Performance Ltd., 474 F. App‟x 810, 814 (2d Cir. 2012) (summary
order). The Court declined to reach the question of whether Judge Sand had properly ruled on
Defendants‟ motion to dismiss. Id. at 814. After remand, on October 22, 2012, Plaintiffs filed
an Amended Complaint, alleging claims for fraud, fraudulent inducement, breach of the implied
covenant of good faith and fair dealing, and aiding and abetting fraud. (Docket No. 109).
Pinnacle has now moved, pursuant to Rule 12(b)(2) of the Federal Rules of Civil
Procedure, for dismissal of the Amended Complaint for lack of personal jurisdiction. (Docket
No. 127). Defendant Morgan Stanley has separately moved, pursuant to Rules 9(b), 12(b)(3),
and 12(b)(6) of the Federal Rules of Civil Procedure, as well as the doctrine of forum non
conveniens and principles of international comity, for dismissal of the Amended Complaint in its
entirety. (Docket No. 120). For the reasons stated below, Pinnacle‟s motion to dismiss is
DENIED, and Morgan Stanley‟s motion to dismiss is GRANTED in part and DENIED in part.
BACKGROUND
The factual background of this action is complex and summarized in greater detail in
Judge Sand‟s prior opinions, familiarity with which is assumed.
Plaintiffs are retail investors who purchased the Pinnacle Notes from various distributor
banks based in Asia between August 2006 and December 2007. The Pinnacle Notes are a type
of credit derivative known as a credit-linked note (“CLN”), which Defendants structured and
issued in seven series during 2006 and 2007. (See McNeela Decl. (Docket No. 134) Ex. 2 at ii;
id. Ex. 3 at ii; id. Ex. 4 at ii; id. Ex. 5 at ii; id. Ex. 6 at ii). Credit-linked notes shift the credit risk
associated with certain Reference Entities (“REs”) from a protection buyer (typically the bank
2
arranging the CLNs) to a protection seller (the CLN investors). As explained in Judge Sand‟s
October 31, 2011 Opinion, CLNs are typically created as follows:
First, the bank arranging the CLNs creates a Special Purpose Vehicle (“SPV”) to
issue the CLNs. The SPV is generally . . . an orphan company owned by a trustee
that will not appear on the balance sheet of any party to the transaction. The bank
then buys protection from the SPV in the amount of the CLNs that will be issued
to investors insuring it against the possibility that the REs would experience a
credit event, such as a default. The name given to this particular transaction is a
credit default swap, and this is, in effect, a derivative contract that functions like a
form of insurance. Second, the SPV sells the CLNs to investors and uses the
principal it receives therefrom to purchase highly-rated securities, or underlying
assets, which serve as collateral in the event the REs default. . . . Third, in return
for assuming the risk, investors receive interest in the form of (i) credit protection
payments from the sponsoring bank and (ii) any interest generated by the
underlying assets. Assuming that no credit event occurs, investors will receive
the redemption value of the Note.
Dandong, 2011 WL 5170293, at *1 (internal quotation marks and citations omitted).
In 2005, Defendants retained the law firm of Maples and Calder (“Maples”) to
incorporate Pinnacle in the Cayman Islands as the SPV that would issue the Pinnacle Notes.
(See McNeela Decl. (Docket No. 126) Exs. 18 & 19). On November 30, 2005, Maples
incorporated Pinnacle through its affiliate, Mapcal Ltd. (See McNeela Decl. (Docket No. 126)
Ex. 1 (“Gordon Dep.”) at 36:5-7). Pinnacle entered into a Proposals and Advice Agreement with
Morgan Stanley Asia (Singapore) Pte. (“MS Singapore”), under which MS Singapore proposed
the terms and conditions of each series of Notes and oversaw the solicitation of investors.
(Youngwood Decl. (Docket No. 128) Ex. 3 at 1-3; Gordon Dep. 64:5-10, 94:14-95:18, 98:2199:25). After Pinnacle‟s directors approved MS Singapore‟s proposals, it issued the Notes,
which were then sold to Plaintiffs by independent distributors. (Youngwood Decl. Ex. 3 at 2).
Pinnacle‟s “sole business [was] the raising of money by issuing Series of Notes . . . for the
purposes of purchasing assets and entering into related derivatives and other contracts.”
(McNeela Decl. (Docket No. 126) Ex. 3 at SING 618). Pinnacle used the principal raised from
3
the sale of the Notes to purchase the Underlying Assets, namely, single tranche Synthetic
Collateralized Debt Obligations (“CDOs”) that were selected by Defendant Morgan Stanley &
Co. International plc (“MS International”) and issued by Morgan Stanley ACES SPC (“MS
ACES”). (See Gordon Dep. 118:21-120:2, 122:6-14; Am. Answer ¶¶ 4, 104; McNeela Decl.
Docket No. 126) Ex. 3 at SING 621; id. Ex. 30 § 2.3).
These CDOs (the “MS ACES CDOs”) were linked to the performance of a portfolio of
approximately 100 CDO reference entities (“CDO REs”), see Dandong, 2011 WL 5170293, at
*2, which Defendant Morgan Stanley Capital Services Inc. (“MS Capital”) had selected. (See
McNeela Decl. (Docket No. 126) Ex. 13 at 1; id. Ex. 14 at 1; id. Ex. 15 at 1; id. Ex. 16 at 1; id.
Ex. 17 at 1). According to Plaintiffs, Defendants marketed the Notes as safe, conservative
investments (McNeela Decl. (Docket No. 134) Ex. 1 at SING 162963; id. Ex. 2 at ii; id. Ex. 3 at
ii; id. Ex. 4 at ii; id. Ex. 5 at ii; id. Ex. 6 at ii), when in reality MS Capital had selected a highly
disproportionate number of CDO REs that were at an elevated risk of default, and it had
manipulated the characteristics of the MS ACES CDOs to suffer sudden, swift, and total
impairment upon even modest CDO RE defaults (Am. Compl. ¶¶ 154, 167-244).
Plaintiffs further allege that, when promoting the Notes, Defendants did not inform
investors that they had an inherent conflict of interest because they had “shorted” the MS ACES
CDOs. Specifically, the MS ACES CDOs were based on a credit default swap under which
Pinnacle ― using the investors‟ principal ― assumed the CDO‟s credit risk, taking the “long”
position on the risk by selling protection to MS Capital. (Am. Compl. ¶¶ 72, 146-48; Gordon
Dep. 115:20-116:20, 119:17-120:2; Am. Answer ¶¶ 4, 18). Plaintiffs allege that under this
arrangement there was an express conflict of interest because MS Capital was the “short”
counter-party to ― that is, bet against ― every MS ACES CDO that MS International had
4
selected to serve as an Underlying Asset for the Notes. (Am. Compl. ¶ 72). Under this
arrangement, “MS Capital stood to profit in the event that the pool of assets performed poorly,
while the investors in the Notes suffered losses.” Dandong, 2011 WL 5170293, at *2.
Plaintiffs commenced this action on October 25, 2010. (Docket No. 1). By Order dated
October 31, 2011, the Court granted in part and denied in part Defendants‟ motion to dismiss,
dismissing Plaintiffs‟ claims of negligent misrepresentation, breach of fiduciary duty, unjust
enrichment, aiding and abetting negligent misrepresentation, and aiding and abetting breach of
fiduciary duty. See Dandong, 2011 WL 5170293, at *16. The Court declined to dismiss
Plaintiffs‟ remaining claims for, inter alia, fraud, fraudulent inducement, and breach of the
implied covenant of good faith and fair dealing. Id. The Court also denied Defendants‟ motion
to dismiss on the basis of forum selection clauses contained in the Notes‟ various pricing
statements, forum non conveniens, and principles of international comity. See id. Less than a
month later, Defendants “took the extraordinary measure of seeking an „expedited‟ anti-suit
injunction from the High Court” of Singapore to bar Plaintiffs from litigating before this Court,
based on arguments “substantially similar” to those Judge Sand had rejected in the October 25,
2010 Order. See Dandong, 2011 WL 6156743, at *1, *4. By Order dated December 12, 2011,
the Court granted Plaintiffs‟ motion for a counter-injunction, and enjoined Defendants from
further prosecuting their injunction application in Singapore. See id. at *1, *8.
The Second Circuit affirmed the injunction in a summary order dated April 10, 2012. See
Lam Yeen Leng, 474 F. App‟x at 813. With respect to Pinnacle, however, the Second Circuit
found that the “district court [had] erred in enjoining Pinnacle without first making any findings
as to its jurisdiction over that party,” and remanded the case with instructions to “make factual
5
findings adequate enough to permit intelligent appellate review” of any judicial determination
regarding Pinnacle‟s personal jurisdiction challenge. Id.
On April 23, 2012, Judge Sand ordered that the parties conduct discovery regarding the
Court‟s jurisdiction over Pinnacle and submit simultaneous briefing on the issue. (Docket No.
72). On October 22, 2012, Plaintiffs filed an Amended Class Action Complaint “on their behalf
and on behalf of all other purchasers of Pinnacle Performance Limited Series 1, 2, 3, 6, 7, 9 and
10 notes . . . between August 1, 2006 and December 31, 2007, inclusive (the „Class Period‟), and
who have been damaged thereby,” asserting claims for fraud, fraudulent inducement, breach of
the implied covenant of good faith and fair dealing, and aiding and abetting fraud. (Am. Compl.
¶ 1). As noted, Pinnacle now moves to dismiss the Amended Complaint as to it for lack of
personal jurisdiction; Morgan Stanley moves to dismiss the Amended Complaint in its entirety
pursuant to Rules 9(b), 12(b)(3), and 12(b)(6) of the Federal Rules of Civil Procedure. (Docket
Nos. 120, 125-27, 167-69).2
DISCUSSION
A. Pinnacle’s Motion to Dismiss
The Court turns first to Pinnacle‟s motion. A plaintiff bears the burden of establishing a
court‟s personal jurisdiction over a particular defendant. See Penguin Grp. (USA) Inc. v. Am.
Buddha, 609 F.3d 30, 34 (2d Cir. 2010); accord In re Terrorist Attacks on Sept. 11, 2001, 714
F.3d 659, 673 (2d Cir. 2013). “[T]he showing a plaintiff must make to defeat a defendant‟s
claim that the court lacks personal jurisdiction over it „varies depending on the procedural
posture of the litigation.‟” Dorchester Fin. Secs, Inc. v. Banco BRJ, S.A., — F.3d —, No. 12770-cv, 2013 WL 3335784, at *3 (2d Cir. July 3, 2013) (per curiam) (quoting Ball v. Metallurgie
Plaintiffs‟ motion to certify the class pursuant to Rule 23 of the Federal Rules of Civil
Procedure is currently pending before the Court. (Docket No. 141).
6
2
Hoboken-Overpelt, S.A., 902 F.2d 194, 197 (2d Cir. 1990)). “„Prior to discovery, a plaintiff
challenged by a jurisdiction testing motion may defeat the motion by pleading in good faith,
legally sufficient allegations of jurisdiction. At that preliminary stage, the plaintiff‟s prima facie
showing may be established solely by allegations.‟” Id. (quoting Ball, 902 F.3d at 197). After
discovery, however, the plaintiff‟s prima facie showing “„must include an averment of facts that,
if credited by the trier, would suffice to establish jurisdiction over the defendant. At that point,
the prima facie showing must be factually supported.‟” Id. (quoting Ball, 902 F.3d at 197).
Here, the parties have engaged in jurisdictional discovery. Moreover, Pinnacle‟s motion
comes on remand from the Second Circuit‟s decision affirming the anti-anti-suit injunction as to
all defendants other than Pinnacle and remanding for further proceedings as to Pinnacle. Before
entering a preliminary injunction, such as the anti-anti-suit injunction, jurisdiction over a
defendant must be “clearly established,” Weitzman v. Stein, 897 F.2d 653, 658-59 (2d Cir. 1990),
and a “prima facie showing of jurisdiction will not suffice,” Visual Scis., Inc. v. Integrated
Commc’ns, Inc., 660 F.2d 56, 59 (2d Cir. 1981). Instead, a plaintiff responding to a
jurisdictional challenge in that context must “adequately establish that there is at least a
reasonable probability of ultimate success upon the question of jurisdiction when the action is
tried on the merits.” Id. (citation and internal quotation marks omitted); accord Lam Yeen Leng,
474 F. App‟x at 813-14 (remanding for application of that standard).
Personal jurisdiction over a non-resident defendant in a federal diversity action is
determined by the law of the forum state. See, e.g., D.H. Blair & Co., Inc. v. Gottdiener, 462
F.3d 95, 104 (2d Cir. 2006). Even if the exercise of jurisdiction is appropriate under state law,
however, a court must determine whether the exercise of such jurisdiction satisfies the federal
due process requirements of “„fair play and substantial justice.‟” Burger King Corp. v.
7
Rudzewicz, 471 U.S. 462, 477 (1985) (quoting Int’l Shoe Co. v. Wash., 326 U.S. 310, 320
(1945)); see also Aquiline Capital Partners LLC v. FinArch LLC, 861 F. Supp. 2d 378, 391
(S.D.N.Y. 2012).
1. N.Y. C.P.L.R. § 302(a)(1)
Plaintiffs argue that the Court can exercise personal jurisdiction over Pinnacle pursuant to
Section 302(a)(1) of New York‟s long-arm statute, which permits a court to exercise jurisdiction
over a person or entity that “in person or through an agent . . . transacts business within the state
or contracts anywhere to supply goods and services in the state.” N.Y. C.P.L.R. § 302(a). To
determine the existence of jurisdiction under Section 302(a)(1), a court must decide “(1) whether
the defendant transacts any business in New York and, if so, (2) whether this cause of action
arises from such a business transaction.” Best Van Lines, Inc. v. Walker, 490 F.3d 239, 246 (2d
Cir. 2007) (internal quotation marks omitted). “[T]he overriding criterion necessary to establish
a transaction of business is some act by which the defendant purposefully avails itself of the
privilege of conducting activities within New York.” Licci ex rel. Licci v. Lebanese Canadian
Bank, SAL, 673 F.3d 50, 61 (2d Cir. 2012) (internal quotation marks omitted). As to Section
302(a)(1)‟s second requirement, “a suit will be deemed to have arisen out of a party‟s activities
in New York if there is an articulable nexus, or a substantial relationship, between the claim
asserted and the actions that occurred in New York.” Id. at 66 (brackets and internal quotation
marks omitted). Section 302(a)(1)‟s requirements may be satisfied by a single act within New
York, see id. at 62, but “jurisdiction will not extend to cover defendants with nothing more than
petty contacts to the state,” Tamam v. Fransabank Sal, 677 F. Supp. 2d 720, 726 (S.D.N.Y.
2010) (internal quotation marks omitted).
8
Pinnacle is a Cayman Island corporation and does not solicit business in New York. It
does not have an office, a phone listing, or mailing address in New York; it is not registered to
do business in New York; and it does not have any securities listed on any United States
exchange. (Youngwood Decl. (Docket No. 128) Ex. 1 ¶¶ 3-10; id. Ex. 2 at 143:8-146:16).
Nevertheless, Plaintiffs argue that Pinnacle is subject to this Court‟s jurisdiction because it
opened bank accounts in New York to deposit the money it raised from investors and to facilitate
its purchase of subsidiary investments that were used to “defraud the Pinnacle investors.” (Pls.‟
Supplemental Mem. Law Regarding Personal Jurisdiction 1). Specifically, Plaintiffs allege that
for each series of Notes that Pinnacle issued, it (1) established bank accounts in New York with
MS Capital to deposit investors‟ funds; (2) submitted IRS tax documentation related to those
accounts to other Defendants in New York to file on its behalf; and (3) used the funds in those
accounts to purchase the Underlying Assets that Defendants created (namely, the MS ACES
CDOs). (Id. at 2).
The New York Court of Appeals recently held that a defendant transacts business with
New York through its “„use of a correspondent bank account in New York, even if no other
contacts between the defendant and New York can be established, if the defendant‟s use of that
account was purposeful.‟” Licci v. Lebanese Canadian Bank, SAL, 984 N.E.2d 893, 899 (N.Y.
2012) (quoting Licci, 673 F .3d at 66).3 In Licci, the Court found that a foreign bank that “did
not operate branches or offices, or maintain employees, in the United States” and whose “sole
A correspondent bank account is “an account with a domestic bank that is held in the
name of a foreign financial institution.” Chase Manhattan Bank v. Banque Generale Du
Commerce, No. 96 Civ. 5184 (KMW), 1997 WL 266968, at *1 n.1 (S.D.N.Y. May 20, 1997).
“Typically, foreign banks are unable to maintain branch offices in the United States and
therefore maintain an account at a United States bank to effect dollar transactions.” Id. (quoting
Sigmoil Res., N.V. v. Pan Ocean Oil Corp. (Nigeria), 650 N.Y.S.2d 726, 727 (App. Div. 1st
Dep‟t 1996)).
3
9
point of contact with the United States was a correspondent banking account” transacted
business with New York where it made “repeated use” of a correspondent account. Id. at 896,
899. That repeated use, the Court explained, “show[s] purposeful availment of New York‟s
dependable and transparent banking system, the dollar as a stable and fungible currency, and the
predictable jurisdictional and commercial laws of New York and the United States.” Id. at 900.
Applying that standard here, Pinnacle‟s use of New York bank accounts to shelter
significant and repeated transfers of funds related to the Notes plainly constitutes the “transaction
of business” necessary to satisfy the first requirement of Section 302(a)(1). See, e.g., Jain v. T &
C Holding Inc., No. 10 Civ. 1006 (RMB), 2011 WL 814659, at *5 (S.D.N.Y. Mar. 3, 2011)
(internal quotation marks omitted). In arguing otherwise, Pinnacle asserts that the accounts were
“not even bank accounts to begin with,” but rather “in house „accounts‟ on MS Capital‟s books”
that were opened for “administrative ease.” (Pinnacle Mem. in Supp. Mot. to Dismiss 2, 14).
That assertion, however, is easily rejected. The evidence in the record indicates that Pinnacle
established several accounts with MS Capital in New York to deposit the funds it raised through
the issuance of the Notes. (See, e.g., McNeela Decl. (Docket No. 126) Ex. 38 (Series 2), Ex. 39
(Series 3), Ex. 40 (Series 9) Ex. 41 (Series 10)). For example, Richard Gordon, one of
Pinnacle‟s directors, testified that Pinnacle had certain bank accounts in New York “in relation to
the swap” (Youngwood Decl. (Docket No. 128) Ex. 2 at 125:2-13), and although he testified that
these accounts would have been opened by one of Pinnacle‟s “counterparties,” rather than
Pinnacle itself (see id. at 125:2-13, 127:2-128:11), the account opening letters are addressed to
Pinnacle and direct Pinnacle to file certain forms with the IRS as the beneficial owner of those
accounts (McNeela Decl. (Docket No. 126) Ex. 42).
10
Plaintiffs also satisfy the second prong of the Section 302(a)(1) inquiry, requiring “an
articulable nexus or substantial relationship between the business transaction and the claim
asserted.” Licci, 984 N.E.2d at 900 (internal quotation marks and citations omitted). As
Plaintiffs allege, Pinnacle opened accounts specific to Series 9 and 10 on the very same day that
the Notes were issued. (McNeela Decl. (Docket No. 126) Ex. 42 (account opening letters dated
December 14, 2007); Am. Answer ¶ 132 (Series 9 and 10 “issued on or about December 14,
2007”)). Additionally, the funds Pinnacle deposited matched the $17.9 million investment raised
by the issuance of those Series (see Am. Compl. ¶ 132(a); McNeela Decl. (Docket No. 126) Ex.
40 at PINNACLE 1215; id. Ex. 41 (Docket No. 126), at PINNACLE 1221), which were then
used to purchase $17.9 million of MS ACES CDOs (see McNeela Decl. (Docket No. 126) Ex. 31
at SING 49318). Further, because “Pinnacle did not engage in any business other than the
raising of money through the issuance of Notes” (id. Ex. 3 at SING 618), Plaintiffs argue that the
$17.9 million in Pinnacle‟s Series 9 and 10 New York accounts must “represent[ ] either: (i) the
funds Pinnacle used to purchase the MS ACES CDOs; or (ii) the dollar value of the MS ACES
CDOs that Pinnacle purchased.” (Pls.‟ Supplemental Mem. Law Regarding Personal Jurisdiction
19). Pinnacle offers no other explanation to rebut this conclusion.
In short, Pinnacle‟s “repeated use” of the New York account “shows not only transaction
of business, but an articulable nexus or substantial relationship between the transaction” and
Plaintiffs‟ claims in this case. Licci, 984 N.E.2d at 901. Pinnacle “did not route a transfer”
relating to the Notes “once or twice by mistake.” Id. Instead, Plaintiffs allege and the record
demonstrates that Pinnacle “deliberately used” the New York account “again and again” in
connection with the design and issuance of the Notes at issue in this case. Id. Indeed, it was the
very transfers into New York that allowed Pinnacle to purchase the Underlying Assets central to
11
the allegedly fraudulent transactions at issue here. See HSH Nordbank AG N.Y. Branch v. Street,
No. 11 Civ. 9405 (DLC), 2012 WL 2921875, at *5 (S.D.N.Y. July 18, 2012) (“Regardless of
whether the mere maintenance of a New York bank account is not standing alone, a sufficient
basis to subject a foreign defendant to personal jurisdiction under § 302(a)(1), § 302(a)(1) is
satisfied where, as here, the plaintiff‟s cause of action arises directly from the use of New York
accounts.” (internal quotation marks and citation omitted)). Thus, Section 302(a)(1) provides for
personal jurisdiction over Pinnacle.4
2. Due Process
The exercise of personal jurisdiction over Pinnacle also satisfies due process. The due
process analysis “consists of two separate components: the „minimum contacts‟ inquiry and the
„reasonableness‟ inquiry.” Licci, 673 F.3d at 60. The minimum contacts test asks whether a
defendant has engaged in “purposeful availment” — i.e., whether the contacts indicate the
defendant‟s intent to invoke the benefits and privileges of New York law. See Burger King, 471
U.S. at 472; Deutsche Bank Sec. Inc. v. Montana Bd. of Invs., 7 N.Y.3d 65, 72 (2006). The
second part of the due process analysis asks “whether the assertion of personal jurisdiction
comports with traditional notions of fair play and substantial justice — that is, whether it is
reasonable under the circumstances of the particular case.” Bank Brussels Lambert v. Fiddler
Gonzalez & Rodriguez, 305 F.3d 120, 129 (2d Cir 2002) (internal quotation marks omitted).
Here, Pinnacle has sufficient contacts with New York for this Court to exercise
jurisdiction. By using New York bank accounts to deposit funds it raised through the issuance of
the Notes, which were then used to purchase the MS ACES CDOs, Pinnacle has “purposefully
In light of this finding, the Court need not, and does not, reach Plaintiffs‟ alternative
arguments as to personal jurisdiction based on acts by Pinnacle‟s agents and alleged coconspirators. See, e.g., Glencore Ltd. v. Degussa Engineered Carbons L.P., 848 F. Supp. 2d 410,
438 n.29 (S.D.N.Y. 2012) (declining to reach alternative basis for personal jurisdiction over
defendant, once jurisdiction was established under one basis).
12
4
avail[ed] [it]self of the privilege of conducting activities within [New York], thus invoking the
benefits and protections of its laws.” Burger King, 471 U.S. at 475 (internal quotation marks
omitted); see also Peterson v. Islamic Rep. of Iran, No. 10 Civ. 4518 (KBF), 2013 WL 1155576,
at *15 (S.D.N.Y. Mar. 13, 2013) (“The minimum contacts necessary to comport with the New
York jurisdictional statutes, C.P.L.R. §§ 301 and 302, necessarily comport with the Due Process
Clause since New York law requires a greater showing of minimum contacts than would be
required by the Due Process Clause alone.” (citing Licci, 673 F.3d at 60-61)).
Further, the Court‟s exercise of jurisdiction over Pinnacle is “reasonable.” See Chloé v.
Queen Bee of Beverly Hills, LLC, 616 F.3d 158, 165 (2d Cir. 2010) (explaining that “the exercise
of jurisdiction is favored where the plaintiff has made a threshold showing of minimum
contacts,” and the defendant must “present[] „a compelling case that the presence of some other
considerations would render jurisdiction unreasonable‟” (quoting Burger King, 471 U.S. at
477)). The reasonableness inquiry focuses on five factors: “(1) the burden that the exercise of
jurisdiction will impose on the defendant; (2) the interests of the forum state in adjudicating the
case; (3) the plaintiff‟s interest in obtaining convenient and effective relief; (4) the interstate
judicial system‟s interest in obtaining the most efficient resolution of the controversy; and (5) the
shared interest of the states in furthering substantive social policies.” Id. at 164. None of these
factors weighs against the exercise of personal jurisdiction over Pinnacle.
First, the burden on Pinnacle of defending this suit is minimal in comparison to New
York‟s interests in providing a forum to adjudicate disputes over financial instruments created
with money funneled through New York bank accounts. See Bank Brussels, 305 F.3d at 129-30.
Second, Plaintiffs have brought their claims in New York and exercising jurisdiction over
Pinnacle will enable the “efficient resolution of plaintiffs‟ claims . . . in a single proceeding.”
13
Peterson, 2013 WL 1155576, at *18; see also Lawson v. Full Tilt Poker Ltd., ― F. Supp. 2d ―,
2013 WL 950871, at *8 (S.D.N.Y. Mar. 7, 2013) (holding that the exercise of jurisdiction was
reasonable in part because of the interstate judicial system‟s interest in favor of resolving related
disputes in a single forum). Accordingly, the Court finds that the exercise of personal
jurisdiction over Pinnacle comports with due process.
B. Morgan Stanley’s Motion to Dismiss
Having established the Court‟s jurisdiction over Pinnacle, the Court now turns to
Defendant Morgan Stanley‟s motion to dismiss pursuant to Rules 9(b), 12(b)(3), and 12(b)(6).
Morgan Stanley moves to dismiss the Amended Complaint on three grounds, which it
contends were not reached by Judge Sand in his October 31, 2011 Opinion dismissing the
original complaint. First, arguing that the law of the case does not apply, Morgan Stanley asserts
that the Amended Complaint should be dismissed based on the forum selection clause in the
Pinnacle Notes offering documents (i.e., the Base Prospectus and Pricing Statements), as well as
forum non conveniens and principles of international comity. (Morgan Stanley Mem. in Supp.
Mot. to Dismiss 1). Second, Morgan Stanley argues that “subsequent developments render the
Amended Complaint‟s core fraud allegation implausible as a matter of law,” as Plaintiffs‟
allegation that the Pinnacle Notes were “built to fail . . . is contradicted by the subsequent fact
that one Series of Pinnacle Notes did not fail.” (Id.). Third, Morgan Stanley argues that because
certain named Plaintiffs testified that they did not read or could not remember reading the
Pinnacle Notes Base Prospectus and Pricing Statements, Plaintiffs cannot plead reasonable
reliance, which is an essential element of their common law fraud claims. (Id.). These
arguments are easily rejected.
14
1. Forum Selection, Forum Non Conveniens, and International Comity
Morgan Stanley‟s first argument is barred by the law of the case. “The law of the case
doctrine, while not binding, counsels a court against revisiting its prior rulings in subsequent
stages of the same case absent „cogent‟ and „compelling‟ reasons such as „an intervening change
of controlling law, the availability of new evidence, or the need to correct a clear error or prevent
manifest injustice.‟” Ali v. Mukasey, 529 F.3d 478, 490 (2d Cir. 2008) (quoting United States v.
Tenzer, 213 F.3d 34, 39 (2d Cir. 2000)). Even when cases are reassigned to a different judge, the
law of the case “dictates a general practice of refusing to reopen what has been decided.” Wright
v. Cayan, 817 F.2d 999, 1002 n.3 (2d Cir. 1987).
Here, Judge Sand previously considered and rejected Morgan Stanley‟s arguments that
the Singapore forum selection clauses preclude suit in New York and that the case should be
dismissed on the grounds of forum non conveniens or international comity. See Dandong, 2011
WL 5170293, at *4-9. Specifically, Judge Sand found that “[t]he inevitable conclusion is that
the Base Prospectus and Pricing Statements — which contain the omissions and misstatements
that underlie Plaintiffs‟ claims — are governed by no forum selection clause.” Id. at *4. Next,
applying the three-part test outlined in Norex Petroleum Ltd. v. Access Industry Inc., 416 F.3d
146, 154 (2d Cir. 2005), Judge Sand found that Plaintiffs‟ original complaint “asserts causes of
action that appear to be connected more strongly to New York than to Singapore,” and that
Defendants had not put forth any other compelling reasons to dismiss the complaint on ground of
forum non conveniens. See Dandong, 2011 WL 5170293, at *5-6 (explaining that forum non
conveniens is a “„discretionary device permitting a court in rare instances to dismiss a claim even
if the court is a permissible venue with proper jurisdiction over the claim‟” (quoting Wiwa v.
Royal Dutch Petroleum Co., 226 F.3d 88, 100 (2d Cir. 2000)). Finally, Judge Sand rejected
15
Defendants‟ arguments that “(i) that international comity is warranted because of the existence of
parallel actions in Singapore and (ii) that this court should defer to the specially-created
Singapore Monetary Authority‟s dispute resolution system,” finding that “Defendants‟ appeal to
international comity is without merit.” Id. at *8-9.
Morgan Stanley has not offered a reason ― let alone a “cogent or compelling” reason —
to reconsider these holdings. Instead, Morgan Stanley‟s argument boils down to a contention
that Judge Sand got it wrong. (See Morgan Stanley Mem. in Supp. Mot. to Dismiss 16 (“The
Court‟s previous decision failed to recognize that the exclusive Singapore forum selection clause
is the only forum selection clause that applies to investors like Plaintiffs . . . .”); id. at 16-17
(“The Court‟s decision on the original Defendants‟ motion held incorrectly that this language
restricted the Singapore forum selection clause to the Notes Application Form only.”); id. at 17
(“[T]he Court erred when it concluded earlier that Plaintiffs‟ claims were „governed by no forum
selection clause‟ . . . .”)). These are not grounds to revisit the Court‟s prior determination. See
Boyd v. J.E. Robert Co., No. 05 Civ. 2455 (KAM) (RER), 2010 WL 5772892, at *16 (E.D.N.Y.
Mar. 31, 2010) (holding that because defendants “appear merely to reprise arguments offered in
support of prior motions to dismiss that were ultimately rejected by this Court, the doctrine of the
law of the case mandates that these arguments be rejected”).
At most, Morgan Stanley asserts that “[n]umerous new facts justify reevaluating both the
forum selection clause and forum non conveniens” rulings. (Morgan Stanley Mem. in Supp.
Mot. to Dismiss 15). These facts include that (1) Plaintiffs disclaimed reliance on the Pinnacle
Notes‟ offering documents; (2) Plaintiffs testified that they had relied on non-party Distributors‟
oral representations in Singapore; and (3) Plaintiffs “fail[ed] to supplement the Complaint with
any concrete evidence of fraud despite having access to over 100,000 pages of Defendants‟
16
documents to date.” (Id.). Yet these new allegations have little bearing on Judge Sand‟s
previous holding, and certainly do not present a compelling reason to depart from it. Morgan
Stanley further argues that “Judge Scheindlin‟s recent decision in In re Optimal shows that a
court may ― and indeed, should ― dismiss actions like this one on forum non conveniens
grounds.” (Id. at 2 (citing In re Optimal U.S. Litig., No. 10 Civ. 4095 (SAS), 2012 WL 3264372
(S.D.N.Y. Aug. 10, 2012)). But In re Optimal does not constitute an “intervening change of
controlling case law,” as it does not bind this Court. See Ali, 529 F.3d at 490 (internal quotation
marks omitted). Further, considering the “highly fact-specific” nature of forum non conveniens
analyses, see Online Payment Solutions Inc. v. Svenska, 638 F. Supp. 2d 375, 380 (S.D.N.Y.
2009), the Court sees no reason to rely on the holding of In re Optimal.
Finally, Morgan Stanley argues that the United States Supreme Court‟s decision in
Morrison v. National Australia Bank Ltd., 130 S. Ct. 2869 (2010) “dictates” the dismissal of this
action on grounds of international comity. (Morgan Stanley Mem. in Supp. Mot. to Dismiss 24).
As Morgan Stanley admits (id.), however, Morrison predated Defendants‟ earlier motion to
dismiss and was even cited by Defendants in support of their motion; plainly, therefore, it is not
an “intervening change” in the law. Moreover, nothing in Morrison — which held, as a matter
of statutory construction, that Section 10(b) of the Securities Exchange Act of 1934 does not
extend to extraterritorial conduct, see Morrison, 130 S.Ct. at 2884 — supports Morgan Stanley‟s
argument that “New York state law [cannot] . . . regulat[e] entirely foreign securities transactions
like the Pinnacle Notes.” (Morgan Stanley Reply Mem. 10). Indeed, courts have been careful to
limit Morrison‟s application to the narrow issue before the Court. Loginovskaya v.
Batratchenko, ― F. Supp. 2d ―, 2013 WL 1285421, at *10 (S.D.N.Y. Mar. 29, 2013); S.E.C. v.
17
Gruss, 859 F. Supp. 2d 653, 661 (S.D.N.Y. 2012); United States v. Singhal, 876 F. Supp. 2d 82,
97 (D.D.C. 2012).
In sum, Defendants have provided no reason for the Court to revisit Judge Sand‟s
previous determination ― made in a careful and detailed opinion ― that Plaintiffs‟ claims
survive challenges based on the forum selection clause in the Pinnacle offering documents, the
doctrine of forum non conveniens, and principles of international comity. Accordingly, the Court
adheres to the law of the case and denies Morgan Stanley‟s motion to dismiss on these grounds.
2. Allegations of Fraud
The law of the case also applies to much of Morgan Stanley‟s argument that Plaintiffs‟
allegations of fraud are insufficient as a matter of law. Morgan Stanley argues that Plaintiffs
cannot show that there were misstatements or omissions in the Pinnacle offering documents. In
doing so, however, it merely restates the exact arguments that were rejected by Judge Sand in his
October 31, 2011 Order, including that investors were properly warned that the Underlying
Assets would be synthetic CDOs (compare Defs.‟ Feb. 2, 2011 Mem. 34 (Docket No. 19)), with
Morgan Stanley Mem. in Supp. Mot. to Dismiss 8); that the risks of the underlying transactions
were “repeatedly disclosed in the Pinnacle Notes offering documents,” (compare Defs.‟ Feb. 2,
2011 Mem. 33, with Morgan Stanley Mem. in Supp. Mot. to Dismiss 9); and that MS Capital
was clearly identified as the swap counterparty in the Underlying Assets‟ offering documents
(compare Defs.‟ Feb. 2, 2011 Mem. 33-34, with Morgan Stanley Mem. in Supp. Mot. to Dismiss
9). Judge Sand held that “while there is little doubt that the cautionary language warned
Plaintiffs that the Notes carried some risk, it [was] inadequate to have put the reasonable investor
on notice of the alleged fraud.” Dandong, 2011 WL 5170293, at *13. Morgan Stanley has
presented no basis to revisit that ruling.
18
Morgan Stanley also argues that Plaintiffs‟ fraud allegations are implausible as a matter
of law because one series of Notes identified in the original complaint (Series 5) did not default,
but instead matured and paid out one hundred percent of principal with interest. Morgan Stanley
contends that this “undisputed fact highlights the legal inadequacy of Plaintiffs‟ total reliance on
the structure of the Notes from which to infer a fraudulent state of mind.” (Morgan Stanley
Reply Mem. 1). It is well-established that when deciding a motion to dismiss, however, a court‟s
“review is limited to the facts as asserted within the four corners of the complaint, the documents
attached to the complaint as exhibits, and any documents incorporated in the complaint by
reference.” McCarthy v. Dun & Bradstreet Corp., 482 F.3d 184, 191 (2d Cir. 2007); see
Faulkner v. Beer, 463 F.3d 130, 134 (2d Cir. 2006). “[W]hen matters outside the pleadings are
presented in response to a 12(b)(6) motion, a district court must either exclude the additional
material and decide the motion on the complaint alone or convert the motion to one for summary
judgment under Fed. R. Civ. P. 56 and afford all parties the opportunity to present supporting
material.” Friedl v. City of New York, 210 F.3d 79, 83 (2d Cir. 2000) (alteration in original)
(internal quotations marks omitted); accord Quick Cash of Westchester Ave. LLC v. Vill. of Port
Chester, 11 Civ. 5608 (CS), 2013 WL 135216, at *3 (S.D.N.Y. Jan. 10, 2013).
Here, as Morgan Stanley correctly notes, the Amended Complaint makes no reference to
Series 5 (Morgan Stanley Mem. in Supp. Mot. to Dismiss 1); as such, Morgan Stanley‟s
argument that Series 5 “matured and paid out one hundred percent of principal with interest” (id.
at 7), is plainly a matter outside the four corners of the Amended Complaint. Accordingly, and
because the Court declines to convert Morgan Stanley‟s motion into one for summary judgment,
the Court will not consider the evidence Morgan Stanley submitted to support its assertion that
Series 5 “was a good investment” ― namely, excerpts of the June 21, 2012 deposition of the
19
Singapore Government Staff Credit Cooperative Society (McNeela Decl. (Docket No. 134) Ex.
13). It follows that the alleged success of Series 5 does not provide a basis to dismiss.5
3. Reasonable Reliance
Morgan Stanley next argues that Plaintiffs cannot establish reasonable reliance because
every named Plaintiff has been deposed and has testified that he or she did not read or could not
remember reading the Pinnacle Notes Base Prospectus and Pricing Statements. (Morgan Stanley
Mem. in Supp. Mot. to Dismiss 11-13). Morgan Stanley contends that this testimony contradicts
the original Complaint‟s allegations of reliance on the Base Prospectus and Pricing Statements
and that Plaintiffs‟ new allegation in the Amended Complaint that Plaintiffs relied on sales
brochures fails as a matter of law. As discussed above, however, Defendant cannot introduce
testimonial evidence from depositions on a motion to dismiss pursuant to Rule 12(b)(6), as the
Court is limited to reviewing the allegations in the complaint and documents attached to it or
incorporated by reference. See Chambers v. Time Warner, Inc., 282 F.3d 147, 152-54 (2d Cir.
2002); Kregler v. City of New York, 770 F. Supp. 2d 602, 607 (S.D.N.Y. 2011). Thus, the Court
excludes the deposition testimony introduced by Morgan Stanley.6
Even if this Court were to credit Morgan Stanley‟s allegations with respect to Series 5,
the success of a single series of Notes is insufficient to alter the conclusion, reached by Judge
Sand, that Plaintiffs adequately alleged fraud in their original complaint ― allegations that are
repeated in the Amended Complaint. See Dandong, 2011 WL 5170293, at *11-12 (“[Plaintiffs]
have pled what amounts to self dealing by Morgan Stanley, insofar as Morgan Stanley was
betting against, or „shorting,‟ the synthetic CDOs that it had itself created.”); see also Tellabs,
Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 314, 323 (2007) (explaining that in
determining whether fraud has been properly plead, a court must consider whether “all of the
facts alleged, taken collectively, give rise to a strong inference of scienter, not whether any
individual allegation, scrutinized in isolation, meets that standard” (emphasis added)).
5
6
Relying on the unpublished summary order in Campo v. Sears Holdings Corp., 371 F.
App‟x 212, 216 n.4 (2d Cir. 2010) (summary order), Morgan Stanley argues that because the
Second Circuit has approved the use of confidential witness testimony to test the good faith of a
complaint‟s allegations on a motion to dismiss, “[t]here is no reason to exclude the parties‟ own
testimony.” (Morgan Stanley Reply Mem. of Law 5 n.3). In Campo, however, the Court held
20
Morgan Stanley also argues that “[a]s a matter of law, Plaintiffs cannot plead reasonable
reliance on the sales brochures, especially because each directs potential investors to read the
Prospectus before investing.” (Morgan Stanley Mem. in Supp. Mot. to Dismiss 13). But Judge
Sand previously held that neither the Base Prospectus nor the Pricing Statements sufficiently
warned Plaintiffs of the risks of the transactions and do not insulate defendants from allegations
of fraud. See Dandong, 2011 WL 5170293, at *13-14 (holding that the “cautionary language” in
the offering documents “[did] not embrace the alleged fraud”). Thus, the brochures‟ instruction
that investors should review the Base Prospectus and the Pricing Statements (Youngwood Decl.
(Docket No. 128) Ex. 3 at ii), is irrelevant to the issue of Plaintiffs‟ reliance. See Fed. Hous. Fin.
Agency v. Deutsche Bank AG, No. 11 Civ. 6192 (DLC), 2012 WL 5471864, at *2-3 (S.D.N.Y.
Nov. 12, 2012) (holding that reliance on offering materials was sufficient to state a claim for
fraud despite the materials‟ instruction to read the final prospectus because the plaintiff‟s
“complaint is not that the information in the Preliminary Materials was inconsistent with that in
the final Prospectus . . . but that both sets of materials contained the same, inaccurate,
information”).
4. Morgan Stanley’s Remaining Arguments
Morgan Stanley also argues that Plaintiffs‟ fraudulent inducement claim and claim for
breach of the implied covenant of good faith and fair dealing should be dismissed because they
are duplicative of their fraud claim. (Morgan Stanley Mem. in Supp. Mot. to Dismiss 13-14).
“At the pleadings stage, however, the Plaintiffs are entitled to pursue alternative theories.” Apple
v. Atlantic Yards Dev. Co., LLC, No. 11 Civ. 5550 (JG) (JMA), 2012 WL 2309028, at *6
that the testimony could be used “for the limited purpose of determining whether the confidential
witnesses acknowledged the statements attributed to them in the complaint.” Campo, 371 F.
App‟x at 216 n.4. Here, Plaintiffs have not relied on confidential witnesses in their Amended
Complaint, and accordingly there is no reason for the Court to consider the proffered testimony.
21
(E.D.N.Y. June 18, 2012) (collecting cases); see also Willman v. Zelman & Assocs., LLC, No. 11
Civ. 1216 (KBF), 2012 WL 811512, at *5 (S.D.N.Y. Mar. 12 ,2012) (“Dismissal of plaintiff‟s
alternative theories at this stage would violate the liberal policy of rule 8(e)(2) which allows
plaintiffs wide latitude in framing their right to recover.” (internal quotation marks omitted));
China Dev. Indus. Bank v. Morgan Stanley & Co., Inc., 927 N.Y.S.2d 52 (App. Div. 1st Dep‟t
2011) (sustaining claims of fraud and fraudulent inducement arising out of the same series of
events); Citi Mgmt. Grp., Ltd. v. Highbridge House Ogden, LLC, 847 N.Y.S.2d 33, 34 (App.
Div. 1st Dep‟t 2007) (“[T]he claims for breach of the implied covenant of good faith and fair
dealing, and for fraud, should not be dismissed as duplicative of the breach-of-contract cause of
action at this juncture.”); cf. Dandong, 2011 WL 5170293, at *16 (declining to dismiss Plaintiffs‟
fraudulent inducement and fraud claims and noting that the elements of the two are the same).
To be sure, Plaintiffs cannot obtain double recovery for the same injury; but that prospect can be
addressed at a later stage of the case, if necessary.
Next, Morgan Stanley contends that Plaintiffs‟ claims for aiding and abetting fraud and
fraudulent inducement fail because Plaintiffs have not alleged any underlying torts. (Morgan
Stanley Mem. in Supp. Mot. to Dismiss 14). A plaintiff asserting a claim of aiding and abetting
fraud must allege (1) existence of the underlying fraud; (2) the defendant‟s actual knowledge of
the fraud; and (3) the defendant‟s substantial assistance in perpetrating the fraud. See Lerner v.
Fleet Bank, N.A., 459 F.3d 273, 292 (2d Cir. 2006). “Substantial assistance occurs when a
defendant affirmatively assists, helps conceal or fails to act when required to do so, thereby
enabling the [fraud or breach of fiduciary duty] to occur.” Fraternity Fund Ltd. v. Beacon Hill
Asset Mgmt., LLC, 479 F. Supp. 2d 349, 370 (S.D.N.Y. 2007) (alteration in original) (internal
quotation marks omitted). Here, Plaintiffs have sufficiently alleged the existence of the
22
underlying fraud, and the Amended Complaint alleges that Morgan Stanley substantially assisted
the fraud by, inter alia, inducing Plaintiffs to invest in the Pinnacle Notes by concealing material
information about the Notes, including that they were “designed to fail.” (Am. Compl. ¶¶ 30305, 317-21). Consequently, Plaintiffs have sufficiently alleged claims for aiding and abetting
fraud and fraudulent inducement.
Finally, as Plaintiffs concede (Pls.‟ Mem. in Opp‟n Morgan Stanley‟s Mot. to Dismiss 25
n.23), Morgan Stanley is correct in arguing that New York law does not recognize a cause of
action for aiding and abetting breach of the implied covenant of good faith and fair dealing. See
Fisch v. New Heights Acad. Charter Sch., No. 12 Civ. 2033 (DLC), 2012 WL 4049959, at *7
(S.D.N.Y. Sept. 13, 2012). Accordingly, that claim — and that claim alone — is dismissed.
CONCLUSION
For the foregoing reasons, Pinnacle‟s motion to dismiss for lack of personal jurisdiction
is DENIED. Morgan Stanley‟s motion to dismiss is GRANTED with respect to Plaintiffs‟ claim
of aiding and abetting breach of the implied covenant of good faith and fair dealing, but is
DENIED as to Plaintiffs‟ remaining claims. The Clerk of Court is directed to terminate Docket
Number 120.
SO ORDERED.
Dated: New York, New York
August 22, 2013
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