Arco Capital Corporation Ltd. v. Deutshe Bank AG

Filing 22

OPINION re: 12 MOTION to Dismiss filed by Deutshe Bank AG. Based on the conclusions set forth above, Defendant's motion to dismiss Plaintiff's federal securities law claim is granted with leave to replead within 20 days. Supplemental jurisdiction over Plaintiff's state law cause of action is declined, without prejudice. (Signed by Judge Robert W. Sweet on 6/6/2013) (cd)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK

------ ----- -------------- ------ -- --x
ARCO CAPITAL CORPORATIONS LTD.,

Plaintiff,

12 Civ. 7270

OPINION

-againstDEUTSCHE BANK AG,
Defendant.

----- ---x
A P PEA RAN C E S:
Attorneys for Plaintiffs
MILLER & WRUBEL P.C.
570 Lexington Avenue
New York, NY 10022
By:
John G. Moon, Esq.
re L. Huene, Esq.

Attorneys

Defendants

JONES DAY
222 East 41st Street
New York, NY 10017
By: Jayant W. Tarnbe, Esq.
Kelly A. Carrero, Esq.

USDCSI'NY
DOCUMLj.JT

:

Sweet, D. J. ,

Defendant Deutsche Bank AG ("Deutsche Bank" or the
"Defendant") has moved pursuant to Rules 9(b) and 12(b) (6) of
the Fede

Rules of Civil Procedure to dismiss the complaint
aintiff Arco Capital Corporation Ltd.

(the "Complaint") of
("Arco" or

"Plaintiff") .

Upon the conclusions set forth below, the motion of
Deutsche Bank to dismiss the cause of action for securities
fraud is granted with leave to

lead within 20 days, and

supplemental jurisdiction over Arco's state law claim is
lined.

I. Prior Proceedings

On September 27, 2012, Arco

led the Complaint

setting forth two causes of action against Deutsche Bank for (I)
securities fraud in violation of Section 10(b) of the Securities
Exchange Act of 1934

(the "Exchange Act") and (2)

contract.

1

for breach of

On December 3,2012, invoking Rules 12(b) (6) and 9(b)
1 Procedure, Deutsche Bank moved to

of the Federal Rules of C
dismiss t

Complaint.

The instant motion was heard and marked

lly submitted on January 16, 2013.

II.

Background

The

llowing factual background is drawn from the

Complaint and from documents referenced in or integral to the
Complaint as submitted by the parties.

The allegations of

Complaint are accepted as true for the purposes of this motion,
see Chambers v. Time Warner, Inc., 282 F.3d 147, 152 (2d Cir.
2002) ,

do not constitute findings of fact by the Court.

This action a
entional or rec

ses out of Deutsche Bank's allegedly

ss misconduct in connection

2006 collateralized loan obligation

(~CLO")

"Transaction"), known as CRAFT EM CLO 200
or the "Issuer") .

(CompI.

g[

Deutsche Bank is a

th a June

transaction (the
1 (t

"CRAFT EM CLO"

1).

nancial institution organized and

existing under the laws of Germany with its principal place of

2

the United States ln New York, New York.

business

Id. 'II

15) .

Arco is an exempted limited company organized and
existing under the laws of the Cayman Islands and external
managed by a company with its princ

1 place of bus

ss in

( Id . '3[ 14).

Guaynabo, Puerto Rico.

The Transaction

In June 2006, Deutsche Bank of
opportunity to acquire debt securities
portfolio (

"Re

Port

originated emerging mar

red investors the

(the "Notes") tied to a

ion) of Deuts

s investments and derivative

transactions (the "Reference Obligations") .
transactions were ef

Bank-

(Id. '3[ 2).

The

cted through CRAFT EM CLO, a Cayman

Islands company created by Deutsche Bank.

Id.

<J[<J[

2-4, 30, 77).

As a "synthetic" CLO, the Craft EM CLO did not go out and
purchase outright whole loans or other

rect exposures to the

emerging market companies or derivatives counterparties;
instead, it gained exposure synthetically through credit
swap transactions (the "CDS Agreements"), which the Issuer

3

fault

(Id.

entered into with Deutsche Bank.

~~

2-3, 31-43; Exs. 14-17

[Swap Confirmations]).

In exchange for the interest payments on the Notes,
investors agreed to risk the principal due on the Notes based on
Reference Portfolio.

t

If a Reference Obligation

a way covered by the CDS Agreements

faulted in

(a "Credit Event"), Deutsche

Bank received a payment (a "Credit Event Payment"), which
directly reduced the principal due on t
(Id.

<JI

Notes at maturity.

3).

The Notes were issued in tranches with different
levels of seniority: Class E, Class F and Class G Notes, with
Class G as the most junior.

(Id.

<JI

4).

The Class E-1, F-1, and

G-1 Notes were issued in June 2006 (the "First Offering"), and
the Class E-2, F-2, and G-2 Notes were issued
(the "Second Of

ring").

(Id.

<JI<JI

January 2007

1, 5, 31, 34, 77, 81).

All

classes of Notes were scheduled to mature on July 15, 2012.
<JI

(Id.

10).

According to Arco, Deutsche Bank caused the Issuer to
enter into an Indenture, dat
with HSBC Bank USA, N.A.

June 21, 2006 (the "Indenture")

("HSBC"), located
4

New York, as

Trustee.
t

Id.

~

5).

Deutsche Bank controlled

Arco alleges

transactions from its offices in New York, that all funds

went to and from HSBC
the Notes by del

New York, and that investors purchased
Id. ) .

ing funds to HSBC.

In June 2006, during the First Offering, Gramercy
Emerging Markets Fund ("Gramercy"), a company associated with
Arco, purchased Class F and Class G Notes on Arco's behalf.
(Id.

~~

81 82).

During the Second Offe

ng in January 2007,

Gramercy purchased new Notes on behalf of Arco.

Id.

~

83).

Gramercy, as the alleged agent for Arco, purchased Class G-1
Notes with an original notional amount
Notes

$15 million, Class G-2

th an original notional amount of $15 million,

Notes with an

ass F-1

ginal notional amount for $8.75 million, and

Class F-2 Notes

th an original notional amount for $17.5

million.

In total, Gramercy purchased a total of $56.25

Id. ) .

million of the Class G and
Offering and Second Offering.

ass G Notes during the First
(Id.).

In May 2007, Gramercy

transferred the Notes to Arco in a pass-through transaction,
which Arco reimbursed Gramercy at par for the amounts Gramercy
had advanced to purchase the Notes.

5

(Id.

~

84).

the purchase of the Notes, Gramercy

In connection w

executed a separate note subscription agreement (the "Note
Subscription Agreement") with the Issuer.

(Id.

~

61).

The Note

Subscription Agreement became an irrevocable agreement between
Gramercy and the CLO, stating that:

This subscription by the Purchaser is irrevocable;
provided, however, that the execution and delivery by
the Purchaser of t
s Subscription Agreement will not
constitute an agreement between the Company and the
Purchaser until this Subscription Agreement is
accepted on behalf of the Company and, if not so
accepted (as described below), this subscription and
the obligations of the Purchaser
reunder will
terminate.

(Exs. 8-11 at § 1 (b)

[Note Subscription Agreements]) .

On or before the closing date of each issuance, each
Note Subscription Agreement was agreed to and accepted in t
Cayman Islands by a director of the CLO employed by the CLO's
"Administrator," Maples & Calder, a Cayman Islands law firm.
(Exs. 8-11 at Signature Pages [Note Subscription Agreements];
Ex. 12 at § 2.4

[Administrat

Directors and

ficers]).

Agreement]; Ex. 13 [Registers of

The Administration Agreement required

them to "perform all services and take all actions in connection
with [the transaction] in or from within the Cayman Islands."
6

(Ex. 12 at § 2.9 [Administration Agreement]).

Deutsche Bank was

not a party to any of the Note Subscription Agreements, but was
expressly identified as a third party beneficiary.
§

(Exs. 8-11 at

ption Agreements]).

17 (Note Subs

In Section 4 of each Note Subscription Agreement,
Gramercy made several representations and warranties, including
that:

• It "received the Indenture and the other Transaction
Documents and has not reli
on any information .
other
information that is contained in, and the
terms and provisions of, the Indenture and the ot r
Transaction Documents or is otherwise available."
• It "has made its own investment decis
s based upon
its review of the Indenture and the other Transaction
Documents, its own judgment
upon any advice from
such advisers as it has deemed necessary .
"
Notes had been sold
• It acknowledged that
pursuant to Regulation S ("Reg S") of t
Securities
Act of 1933 (
"1933 Act"), an exemption from the
stration requirements of Section 5 of the 1933 Act
for offshore securities offerings.

(Exs. 8-11 at

The CDS

§

4 (e) -

(i)

[Note Subscription Agreements] . )

s

7

CDS Agreements applied to the Reference Portfol
which started at $500

size.

llion

~

(Compl.

1).

In

January 2007, the Swap Confirmations were amended and the
Re

rence Portfolio's size doubled to $1 billion (the "Opsize")

(rd.

~

10).

At that t

finit

, the

of "Re

Payment

Obligation" was expanded to include "Specif
Obl

rence

ions," which in turn was defined to include certain

derivative transactions and "a senior secured or unsecured note
the Re

pursuant to an indenture or

rence Entity is
~

equivalent instrument." (rd.

Exs. 14-15 at

77;

[2006 Swap Confirmations], with Exs. 16-17 at

§§

§

1

1 and 3 [2007

Amended Swap Confirmations]).

Bank

Deuts
Re
~~

rence

sole

scret

to select the

igations to add to the Reference Portfolio.

7, 36, 178(d)).

Each Reference Obl

meet the following quali

(Compl.

ion was required to

cations (the "Eligibility Criteria"),

on the date it was first included in the Reference Portfolio,
and on the date of any replenishment

increased the notional

amount of the Reference Obligation (the "Relevant Daten):
the underlyi
the

company (the "Reference Entity") would satisfy

rati
n

(1)

or better);

thresholds (e.g., Moody's Equivalent Rating of
(2) the Reference Obligation could meet

8

origination requirements (e.g., an eligible asset type and
originated by Deutsche Bank "in accordance with its standard
credi t policies and guidelines");

(3)

there was no known event

that with notice or lapse of time would become a Credit Event in
relation to the Reference Obligation;

(4) the Reference

id and enforceable in accordance with

Obligation was legally

s terms and applicable provisions of law; and (5) the
Reference Obligation was held by or for the benefit of a
Deutsche Bank entity.

(CompI.

37, 44 56; Exs. 14-17 at

<J1<J1

<J1

1, C

[Swap Confirmations]).

Under the

rst Eligibility Criter

, a Reference

Entity had to meet certain minimum credit rating t
including holding a Moody's

sholds,

iva lent Rating of "B3" or better.

(Exs. 14-17 at C [Swap Confirmations]).

For any unrat

Reference Entity, Deutsche Bank would ascribe an internal rating
to that Reference Entity.

(CompI.

<J1<J1

21, 47 -4 8).

The rating

agencies provided "mapping tables" to determine t
corresponding Moody's or Standa

& Poor's ("S&P") rating to

Deutsche Bank's internal ratings, which would be used to
determine the "Moody's Equivalent Rating" and "S&P Equivalent
Rating," as defined in the CDS Agreements.
<J1<J1

22, 49,

ld.

60, 97; Exs. 14-17 at E [Swap Confirmations]).
9

As "Calculation Agent" under the Swap Confirmations,
Deutsche Bank was required to engage an independent accountant,
Ernst & Young LLP ("E&Y"), to deliver an irrevocable notice to
the Issuer containing a certification, as a condition precedent
to Deutsche Bank's entitlement to any claimed Credit Event
Payment.
Con

Id.

~~

rmationsJ).

41-42, 89-96; Exs. 14-17 at

~

4 [Swap

The certification was to include:

(a) that the

defaulted Reference Obligation satisfied the Eligibil
Criteria and Replenishment Conditions;

(b) ve

y

fication that the

related Credit Event occurred; and (c) verification that the
computation of the relevant "Loss Determination Amount"
an "E&Y Certification").
Confirmations]).

(Exs. 14-17 at

~

(each,

4 [Swap

The E&Y Certifications were drafted by E&Y in

accordance with "agreed upon procedures" and provided that they
were "in accordance with attestation standards established by
the American Institute of Certified Public Accountants
[("AICPA") l." (CompI. at Ex. B).

III. Arco's Allegations and Claims

Arco brings a securities fraud
10(b) and Rule 10b-5(a) and (c)

aim under Section

for "scheme liability" arising

10

out of the same operative facts as the contract claim and seeks
to recoup the

sses it allegedly suffered.

Arco's al

gations

are predicated on seventeen Reference Obligations that Deutsche
Bank designated after the Second Offering in January 2007 and
that later suf

red Credit Events.

First, as a basis

(Id. 'lr'lr 11, SO).

its fraud and contract claim,

Arco contends that the assets that suffered Credit Events were
ineligible under the Eligibility Criteria.
69, 17S(c)).

As discuss

(Id. 'lr'lr 106-62, 16S­

above, upon default of each Reference

Obligation, as provided for under t

CDS Agreements, the Issuer

was required to make a Credit Event Payment to Deutsche Bank.
(Id. 'lr'lr 3 4, 69-70).

Each Credit Event Payment correspondingly

reduced the amount of funds available to repay the principal
balance due on the Notes at maturity.

(Id. 'lr 6).

According to Arco, at the time of the Upsize, Deutsche Bank
faced more stringent regulatory capital requirements and had
poorly-written and toxic investments on its books, particularly
its

rivative investments.

Id. 'lr'lr 76).

Arco alleges that

Deutsche Bank knew that such investments did not meet the
Eligibility Criteria, and secretly intended to use t
itself of such assets and shift the losses to Arco.

Upsize to
Id.

Deutsche Bank allegedly took advantage of the Upsize to dump
11

ineligible lending transactions into the Re

rence Port

io,

and used its control over the Transaction to disguise its
misconduct and frustrate the protections that exi
Noteholders.

Id.

<Jl

ed for

10).

its fraud and contract claim,

Second, as a basis

Arco takes issue with the E&Y Certifications.

Id.

<.IT<.IT

89-96).

The Complaint alleges that all of the E&Y Certifications
obtained by Arco have patent

fi

encies and fail to satis

the condition precedent that E&Y, as an independent accountant,
certify that the default

Reference Obligation complied with

the Eligibility Criteria and Replenishment Conditions.

Id.

<Jl<Jl

94-95) .

Third, as a basis for its fraud and contract claim,
Arco contends that Deutsche Bank falsely reported Moody's
Equivalent Ratings based on its use of an outdated Moody's
mapping table.

(Id.

<.IT<Jl

97-105, 171, 178 (b)).

The Complaint

refers to a Moody's issued April 6, 2009 press release, which
stated that "[b]ecause this mapping was performed prior to 1st
April 2007, an additional stress was applied to capture
potential deviations from the established mapping."
Arco

(rd.

<.IT

98).

leges that the employees managing the Transaction knew,
12

or were reckless in not knowing, that Moody's had updated the
mapping table in or around April 2007, and intentionally or
recklessly continued to use the old Moody's mapping tab
order to

in

lsely report higher Moody's Equivalent

able to

Ratings for the Reference Obligations in the Reference
Portfolio.

(Id.

~~

103-104).

Fourth, as a basis for its fraud and contract claims,
Arco contends Deutsche Bank took Credit Event Payments it should
not have.

Id.

~~

172, l78(e)).

instructed HSBC to rna
Bank knew it was not ent
Credit Event Payments.

Deutsche Bank allegedly

Credit Event Payments to which Deutsche
led, amounting to over $86 million in
(Id.

~~

106-162).

As a result of

Deutsche Bank's alleged misconduct, Arco contends that it
incurred damages in excess of $37 million.

IV.

The Applicable Standards

Standa

In considering a motion to dismiss pursuant to Rule
12(b) (6), the Court construes the complaint liberally, accepting
all factual allegations as true and drawing all reasonable
inferences in the plaintiff's favor.
13

Mills v.

----------------~~~~~

Corp., 12 F.3d 1170, 1174 (2d Cir. 1993).

The issue "is not

whether a plaintiff will ultimately prevail but whether the
imant is entit

to of

evidence to support the claims."

Villager Pond, Inc. v. Town of Darien, 56 F.3d 375, 378 (2d
1995)

(quoting Scheuer v. Rhodes,

r.

416 U.S. 232, 235-36, 94 S.

Ct. 1683, 40 L. Ed. 2d 90 (1974)).

ssal, "a complaint must contain

To survive di

sufficient factual matter, accepted as true, to 'state a claim
to relief that is plausible on its face.'"

Ashcroft v. I

556 U.S. 662, 129 S. Ct. 1937, 1949, 173 L. Ed. 2d 868 (2009)
(quoting =B~e~l~l~. .~~~~~~~_v.~.~T~w~o_m~b~l~,

550 U.S. 544, 570, 127 S.

Ct. 1955, 167 L. Ed. 2d 929 (2007)).

Plaintiffs must allege

ficient facts to "nudge [ ] their claims across the line from
conceivable to plaus

e."

Twombl

plausibility standard is not a
rement,' but it asks

550 U.S. at 570.

"The

n to a 'probability

r more than a sheer possibility that

a defendant has acted unlawfully."

Cohen v. Stevanovich, 772 F.

Supp. 2d 416, 423 (S.D.N.Y. 2010).

Though the court must accept

the factual allegations of a complaint as true, it is "not bound
to accept as true a 1
allegation."

I

--"-­

1 conclusion couched as a factual

556 U.S. at 678.

at 555).
14

(quoting Twombl

550 U.S.

Standard

Rule 10b-S and the Rule 9 b

Section 10(b) imposes civil liability on any person
who uses "any manipulative or deceptive device or contrivance"
"in connection with the purchase or sale" of any security.
U.S.C. § 78j (b).

Rule 10b-S makes it unlaw

lS

r "any person

1

. . to engage in any act, practice, or course of business which
operates or would operate as a fraud or deceit upon any

rson,

in connection with the purchase or sale of any security."

17

C.F.R. § 240.10b-S.

To state a claim under Section 10(b) and Rule 10b-S , a
plaintiff must plead that defendants "'(1) made misstatements or
omissions of material facti

(2) with scienter;

wi th the purchase or sale of securities;

(4)

plaintiffs relied; and (S) that plaintif

J

proximate cause of their injury.'"

(3) in connection

upon which
reliance was the

Lentell v. Me

_ _ _ _....

~~

_ _ _ _ _ _ _ _ _ _ _ _ _ _ __ L_ _ _ __ _

Co., Inc., 396 F.3d 161, 172 (2d Cir. 200S)
Sec. Liti.

163 F.3d 102, 106 (2d Cir. 1998)).

Such claims are

subject to the heightened pleading requirements of Rule 9(b) of
the Federal Rules of Civil Procedure and Private Securities
Litigation Reform Act of 1995 ("PSLRA"),

lS

lS U.S.C.

§

78u-4(b).

Rule 9(b) requires that the plaintiff "state with
particularity the circumstances constituting the fraud."
R. Civ. P. 9(b).
must:

Fed.

To satisfy this requirement, the complaint

"(1) specify the statements that the plaintiff contends

were fraudulent,

(2)

speaker,

identify

(3) state where and

when the statements were made, and (4) explain why the
statements were fraudulent."
(2d Cir. 2004)

Romach v. Chang, 355 F.3d 164, 170
marks and citation omi

(internal quotat

)

.

While "intent, knowledge, and other conditions of mind may be
averred generally," a plaintiff must allege sufficient facts to
create a "strong inference" of senter.

Kalnit v. Eichler, 264

F.3d 131, 137-38 (2d Cir. 2001).

v. Discussion

A) The Section lO(b) Claim Survives Under Morrison

Deutsche Bank seeks dismissal of t

Section 10(b)

claim under the transactional test adopted by the Supreme Court
in Mo

son v. National Australia Bank Ltd., --- U.S. ---, 130

S. Ct. 2869, 177 L. Ed. 2d 535 (2010).
Arco purchas

It contends that because

the Notes offshore, and not on a domestic

exchange or in a domestic transaction, Arco cannot avail itself
16

...

of the federal securities laws to bring a claim

r alleged

securities violations in connection with its transactions.
maintains that the Complaint and the documents assoc
the Transaction give

Arco

ed with

se to the plausible inference that

irrevocable liability arose in New York and that therefore its
investment in the Notes was a domestic transaction for Morrison
purposes.

Morrison involved a "foreign-cubed" class action:

one

in which one in which "(1) foreign plaintiffs [were] suing (2) a
fore

issuer in an American court for violations of American

securities laws based on securities transactions in (3) foreign
countries.

rd. at 2894 n.ll (Breyer, J., concurring in part and

concurring in the judgment)

(emphasis in the original).

Australian plaintiffs sued an Australian bank, t

Three

National

Australian Bank, under Section lO(b) of the Exchange Act
losses they allegedly suffe
Australian exchanges.

on stock purchases traded on

rd. at 2875.

The Supreme Court

ld that

a private right of action under Section lO(b) and Rule lOb-5 of
Exchange Act could be maintained by foreign plaintiffs only
if:

(1) the security was listed on an American stock exchange or

(2) the purchase or sale took place in the U.S.

rd. at 2888.

("Section lO(b) reaches the use of a manipulat

or decept

17

device or contrivance only in connection with the purchase or
sale of a security listed on an American stock exchange, and the
purchase or sale of any other security in the United States.").

In reaching its decision, the Court directed its
attention to the Exchange Act's regulatory center and adopted a
"transactional" test, which focused "not upon the place where
the deception originated, but upon the purchases and sales of
securities in the United States."

Id. at 2884.

This new

transactional test replaced the Second Circuit's conduct and
effects test, which asked "whether the wrongful conduct had a
substantial effect in the United States or upon United States
tizens" or "whether the wrongful conduct occurred in the
United States."

Id. at 2879 (quoting .SEC v .

------~---~~-.

187, 192-93 (2d. Cir 2003)).

322 F.3d

The Court explained that the

conduct and effects test lacked textual support in the Exchange
Act and contravened the longstanding presumption against
extraterritorial application of U.S. legislation in the absence
of contrary Congressional intent.

Morrison, 130 S. Ct. at 2878.

Applying the transactional test to the case before it, the Court
concluded that "there is no
Exchange Act that

§

firmative indication in the

10(b) applies extraterritorially," Id. at

2883, and dismissed the action because it "involve[d] no
18

securit

s listed on a dome

exchange, and all aspects of the

purchases complained of by

e petitioners who still have live

claims occurred outside of t

United States."

In addition, under

son, deceptive conduct is

---------

y "in connection wi

punished
security

Id. at 2888.

the purchase or sale of any

stered on a national securities exchange or any

security not so registered" but transacted in the Unit
Id. at 2884.

The Second Circuit recently addressed

States.
s second

prong of Morrison's transactional test and clarified what
In Absolute Act

constitutes a domestic transact
Master Fund

. v. Ficeto, the

st Value

Circuit endorsed both an

"irrevocable liability" and "transfer of title" standard,
holding that "to sufficiently all

a domestic securities

transaction in securities not list

on a domestic exchange

. a plaintiff must allege facts suggesting that irrevocable
liability was
United States."

red or title was transferred within
677 F.3d 60, 68

(2d Cir. 2012).

Thus, under Morrison, a plaintiff must demonstrate
that its purchase or sale of a security was domestic by alleging
(1) the transact
domestic exchange,

involved securit

s traded on a

(2) irrevocable liability was incurred in the
19

United States, or (3) title was passed in the United States.
See Morrison, 130 S. Ct. at 2884; see also Absolute Activist
677 F.3d at 66-67.

At the pleading stage, it is sufficient

the plaintiff "to allege

e

s leading to the plaus

inference" of a domestic transaction.
instant transaction does not fall

Id. at 68.

r

As the

the first category, Arco

must adequately allege fact demonstrating that the Notes that it
purchased fall in the latter two categories.

To support its claim, Arco contends that (i)
"Issuer granted its interest in the Transaction .

the

. to

New

York Trust;" (ii) the Trustee "HSBC maintained the bank accounts
for the Transactions, and all funds in the Transaction went to
and from HSBC in New York;" (iii) "Deutsche Bank controlled the
Transaction from its offices in New York;"

(iv) the "[relevant

agreements] are all governed by New York law;" and (v) "it is
plausible that de

sions concerning the Transaction, including

the decision to sell Notes to Arco, were made by Deutsche Bank
in New York." (Opp. Br. at 6-8).

To

extent that Arco seeks to establi

some nexus

to the United States because the Deutsche Bank employees
involved in the transactions were located in New York or that
20

the contracts were governed by New York law,

(Compl.

166),

<J[

such assertions are irrelevant as to whether Arco's purchase of
its Notes was a domestic transaction a ,' contemplat

by

,)

Morrison's transactional approach.
2884

See Morrison, 130 S. Ct. at

(noting that "the presumption against extraterritorial

s

a craven watchdog if it retreated to

application would

kennel whenever some domestic activity is involved in the
case.")

(emphasis in the original).

While potentially relevant

under conduct and effects test, courts have found such pleadings
that "some acts that ultimately result in the execution of the
transaction abroad [took] place

the United States amounts to

nothing more than the reinstatement of the conducts test."
Invs. II LLC v.
3

6621, at *8

Pope

No. 10 Civ. 6608, 2012 WL
(S.D.N.Y. Aug. 15, 2012); Cornwell v. Credit

Suisse Grp., 729 F. Supp. 2d 620, 624
that read as a whole,
Court considered

(S.D.N.Y. 2010)

(finding

Morrison opinions indicate t

the

under its new test § 10(b) would not

extend to foreign securities trades executed on foreign
exchanges even if purchased or sold by American investors, and
even if some aspects of the transaction occurred
States .

.").

Examples of factual aIle

the United

ions that would be

sufficient under Morrison include "facts concerning the
formation of the contracts, the placements of purchase
21

0

s,

the passing of title, or the exchange of money,

[but] the mere

assertion that transactions 'took place in the United States' is
insufficient to adequately plead the existence of domestic
transactions."

Absolute Activist,

677 F.3d at 70.

In addition, "the point of irrevocable liability can
be used to determine
sale."

Id. at 68.

locus of a securit

s purchase or

In this Circuit, parties incur irrevocable

liability within the United States when the purchaser agrees "to
take and pay

r a security" in the Uni

seller agrees "to del

States or when the

a security" in the United States.

Id.

Specifically, the Second Circuit highlighted "the time when the
parties to the transaction are committed to one another . . . in
classic contractual sense,
the minds of the parties;

[where] there was a meeting of

marks the point at which the

parties obligated themselves to perform what they had agreed to
perform even if the formal performance of their agreement is to
be after a lapse of time."

Id. at 67-68 (citing Radiation

Dynamics, Inc. v. Goldmuntz, 464 F.2d 876, 891 (2d Cir. 1972)).

Deutsche Bank contends that, under the terms of the
Note Subscription Agreements between Gramercy and the Issuer,
irrevocable liability attached to the transaction when the
22

Issuer accepted each of the executed the agreements in the
Cayman Islands.

According to Deutsche Bank, the transaction

cannot be domestic because the purchase involved a Cayman
Islands' purchaser and a Cayman Islands' issuer, which was
completed only upon acceptance by the Issuer in the Cayman
Islands.

ot

Arco, on

r hand, maintains that, under the

Note Subscription Agreements, the sale of the Notes was
expressly non-binding until the purchase price was received by
HSBC in New York.

Specifically, Arco asserts that the Notes

Subscription Agreements,

(1) required Arco to deliver the

purchase price to HSBC in New York on the Closing Date,
Subscription Agreements § 2)

(Note

(delivery of payment to be by

"immediately available funds on the Closing Date to the account
to be advised to the Purchaser by the Trustee [HSBC]");

(2) the

Notes were not "valid and binding" until "paid for by the
Purchaser pursuant to Section 2 hereof," (Note Subscription
Agreements § 3(i));

(3)

receipt of payment "in accordance with

Section 2" (i.e. delivery to HSBC) was a condition precedent to
the Issuer's obligation to "sell"
the Issuer could revoke

Notes,

Id.

§

7(c));

(4)

Note Subscription Agreements in "its

sole discretion at any time prior to the Closing Date," i.e.
23

pr

to Arco's delivery of paymenti

(Id. § 9(a))

i

and (5)

Arco's delivery of funds to HSBC completed the Note Subscription
payment of

Agreement, which automatically terminated with "t

2 hereof." (Id.

the [purchase price] in accordance with Sect
§9(b)).

Courts have repeatedly held that allegations "that
Funds by wir

investors subscribed to
located in New York . .
market

. or that

money to a bank

funds were he

ly

in the United States and that United States investors

were harmed by t

defendant's actions," without more, do not

satisfy the transactional test announced in Morrison.
Activist, 677 F.3d at 70; ----.~------------~-see

Absolute

LLC v.

... ~--~~-------

Vestbirk, No. 2:10-cv-02483-GEB-CKD, 2012 WL 2873371, at *7
(E. D. Cal. July 12, 2012)

("P

intiff's allegations concerning

the transactions, that certain funds were trans
New York-based banking institutions, are
establish t

suffic

rred in between
to

existence of a domestic transaction, as required

under Section 10(b) .").

In Cascade Fund, LLP v. Absolute
for example, the Court found that a

transaction was not "completed" in New York where the investor's
delivery of money was "one step"
invest in the funds."

the process of "applying to

No. 08-cv-01381-MSK-CBS, 2011 WL 1211511,
24

at *7

(D. Colo. Mar. 31, 2011).

The agreement in that case also

made "clear that simply sending money to New York was not
sufficient to complete the transaction" and that the fund
manager reserved the right to reject an application, "even if
the purchase money had properly been wired to New York."

Id.

Here, in contrast, the Note Subscription Agreements
provide that the

1

funds to HSBC automatically

ry

terminated or "consummate[d]" the transaction because that act
made the contract irrevocably binding.

(Note Subscription

Agreements § 7)

(receipt of funds a "condition" of "obligation"

to "sell" Notes)

i

see also 1 WILLISTON ON CONTRACTS, 1936 Ed., § 116

("The subscription agreement is not a contract, but an of

r to

contract, which, when acted upon by incurring liability, becomes
a binding obligation.").

As outlined in Section 9, the date

beyond which the Issuer no longer had the discretion to revoke
acceptance was the Closing Date, when the purchaser was to
transmit the funds to HSBC in New York.

Thus, the irrevocable

sale of the Notes occurred with the parties' performance on the
Closing Date, when Gramercy

livered the funds to HSBC in New

York and the Issuer assigned the interest to the Trust
York.

25

New

Accordingly,

the reasons stated above, Arco has

alleged facts leading to the plausible inference that
irrevocable liability was incurred when the funds were

livered

to HSBC in New York, and thus, its Section 10(b) claim survives
under Morrison.

B) Arco's Section lO(b) Claim, However, is Time-Barred

A district court may consider timeliness on a motion
to

smiss when the circumstances are "sufficiently clear on the

face of the complaint and related documents as to make the timebar ruling appropriate on a motion to dismiss."
Partners

LP v. Frontier

r. 2003).

LC
- -....

318 F. 3d 148, 157 (2d

Even if irrevocable liability arose

Arco's Section 10(b) cla

tal

----"~--

New York and

survives under Morrison, the claim is

time-bared under the applicable statute of repose.

An action under Section 10(b) of the Exchange Act or
Rule 10b-5 is subject to a five-year statute of repose or may
brought within "2 years after the discovery of the facts
constituting the violation."

28 U.S.C.

IThe temporal limitations governing Areo's
U.S.C. § 1658(b), which states:

26

§

§

1658(b).1

Thus, in

10 (b) claims are set forth in 28

is timely, it

order to determine whether Arco's § 10(b) cIa

must be determined (1) when the violation occurred, and (2) when
Arco can be said to have discovered the facts constituting the
violation.

The five-year statute of repose period is a fixed
statutory cutoff, which is independent of a plaintiff's
awareness of the violation and is not subject to equitable
tolling.

See

--------~~------~--~~--.--~--.~~----------~------

lbertson, 501 u.S. 350, 363, 111 S. Ct. 2773, 115 L.
321 (1991)

(stating that "

purpose of t

. is clearly to serve as a cutoff

. 2d

[statute of repose]
[and equitable]

tolling principles do not apply to that period. H);

P. Stolz

Family P'ship, L.P. v. Daum, 355 F.3d 92, 102-03 (2d Cir. 2004)
("[A] statute of repose begins to run without interruption once
the necess

trigge

ng event

s occurred, even if equitable

considerations would warrant tolling.

The s

.H).

ute of repose begins to run "on the dates the

parties have committed themselves to complete the purchase or

0=

[AJ private right
action that involved a claim of fraud,
deceit, manipulation, or contrivance in contravention of
atory
rement concerning the securities laws . . . may
be brought not later than the earlier of: (1) 2 years after the
discovery of the facts constituting the violation; or (2) 5 years
after such violation.

27

sale of transaction.

351 (2d Cir. 2009)

Arnold v. KPMG 1,LP, 334 Fed. App' x 349,

ff

(stating that "Plaintiff's contention that

the period of repose begins to run at the time of the last
alleged misrepresentation (even when made after

final

purchase or sale of the securities) ignores the applicable
limitations period, and thus is devoid of merit."); Anwar v.
Fairfield Greenwich Ltd., 728 F. Supp. 2d 372, 428
2010)

(S.D.N.Y.

(dismissing Section 10(b) claims as time-barred because

the investments were made more than five years be

re the

complaint was filed.).

In the Complaint, Arco alleges that Gramercy purchased
the Notes, on its behalf, in June 2006 and January 2007.
(Compl.

~~

81 83).

At the very latest, Arco acquired its

securities in May 2007 when Gramercy allegedly transferred the
Notes to Arco.

Id.

~

84).

The Complaint was filed on

September 27, 2012, more than five years after the latest
purchase day.

Arco, however, contends that Deutsche Bank's allegedly
deceptive conduct in furtherance of its scheme continued from
January 2007 through 2012, which directly reduced the
outstanding principal value of Arco's Notes throughout that
28

·ij&;_

,·. .1"'_01 _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ __

period.

(Opp. Br. at 12).

language of the statute .

According to Arco, the plain
measures the repose period from

the 'violation,' which is not the same things as the date of
'purchase or sale.'"

(Id.).

Arco therefore maintains that,

because it commenced this action within a few months of the end
of the Transaction in June 2012, its claim is timely.

(Id.) .

Arco cites to certain cases that it claims supports
its position that the statute of repose runs from the date of
the last misrepresentation.

(Id.).

Several of these cases pre­

date Arnold, are factually inopposite, or are from outside of
this Circuit.

For example, Arco relies on In re Beacon Assocs.

Litig., 282 F.R.D. 315 (S.D.N.Y. 2012) and Plymouth County Ret.
Ass'n v. Schroeder, 576 F. Supp. 2d 360

(E.D.N.Y. 2008) for the

proposition that "where a series of fraudulent
misrepresentations is alleged, this 'period of repose beings
when the last alleged misrepresentation was made.'"

Both cases

cite to In re Dynex Capital, Inc. Secs. Litig., which pre-dates
Arnold and which limited the date of the last misrepresentation
to circumstances where "plaintiff purchased the bonds at issue
less than five years before filing suit."

No. 05 Civ. 1897(HB),

2006 WL 314524, at * 5 n. 4 (S. D. N . Y. Feb. 10, 2006).

29

Indeed, district courts that have employed Arco's
formulation have done so in the context of claims by plaintiffs
who, unlike Arco, purchased their securities within five years
prior to the commencement of their action.
Tower Automotive Sec. Litig"
2007).

Alternatively, t

See e.

483 F. Supp. 2d 327, 331

In re
(S.D.N.Y.

s and other courts in this Circuit

have held that the repose period runs from the date of last
misrepresentation when the last alleged misrepresentation pre­
dates the purchase.

~S~e~e~e~.~~~~~~~~~~~~~~__~~~~~~~~

Agricole, --- F. Supp. 2d - Feb. 13, 2013)

2013 WL 525000, at *7 (S.D.N.Y.

stinguishing Arnold's holding from a situation

where the last alleged misrepresentation pre-dated purchase) ;
Isanaka v.

rum Tech. USA Inc., 131 F. Supp. 2d 353, 358

(N.D.N.Y. 2001)

(stating that "a violation of section 10(b) and

Rule 10b-5 can take place before and up to the time when the
sale of securities take place, but not after the investment is
made.")

(citation omitted).

Thus, where post-purchase

olations are alleged, having a repose period triggered on the
date of purchase is consistent with the well-established rule
that a statute of repose cannot be equitably tolled.

501 U.S. at 363.

30

See

------~~

In a supplemental letter to the Court, Arco suggests
that decisions such as Arnold, which refer to a transaction
date, "do so conclusorily, and without addressing the statutory
term 'violation'" in 28 U.S.C. § 1658(b).

While the Second

Circuit in Arnold did not engage in statutory construction,
instead relied on a prior decision, which held that "the statute
repose in federal securities law claims 'starts to run on the
date the parties have committed themselves to complete the
purchase or sale transaction.'"

Arnold,

334 Fed. App'x at 351

(quoting Grondahl v. Merritt & Harris, Inc., 964 F.2d 1290, 1294
(2d Cir. 1992)).

In addition, the Arnold Court was expressly

invited to consider several of the cases now cited by Arco, but
declined to do so.

See Tambe Supp. Decl. Exs. A and B)

(highlighting the relevant excerpts of appellant's brie

in

Arnold making the same argument advanced here by Arco) .

Taken together, the allegedly fraudulent conduct here
occurred after the date of purchase and Arco has not
meaningfully distinguished itself from Arnold to align itself
with the line of cases that have allowed for the statute of
repose to run from the date of the last misrepresentations.
Without any dispositive distinguishing facts from Arnold, there

31

is no reason to disturb the long-l

of cases in this district

upholding Arnold's holding.

In addition, pursuant to § 1658(b), Arco was requi
to have asserted its

§

10(b) cIa

within two

rs of the

upon which "a reas

y diligent plaintiff would have

suff

about that

ient informat

a complaint."
MBIA, Inc.,

Cit

~~

to adequately plead

Pontiac Gen.

_ _~~ ...

_~~~~~~~

facts that 'constitut[e] the
Inc. v.

. v.

_ _-L~_ _~~~~~~~

637 F.3d 169, 175 (2d Cir. 2011).

respect to the facts showing sc

Co.

s' Ret. S

in

Thus, with

er, which are "among those
ation" under 1658(b), Merck &

130 S.Ct. 1784, 1796 (2010), they are

deemed "discovered" for

§

1658(b} purposes when the pIa

iff

has uncovered (or when a reasonably diligent plaintiff would
have uncovered) enough information about the

fendant's

knowledge or intent "to state with particularity facts giving
rise to a strong inference t
red state of mind such t

t the defendant acted with the
it is at least as likely as not

the defendant acted with the relevant knowledge or intent."
Pontiac

637 F.

at 175.

A plaintiff may establish the requisite strong
inference of

if the Complaint (I) demonstrates 'that
32

defendants had both mot

and opportunity to commit fraud,' or

(2) alleges 'facts that constitute strong

rcumstantial

evidence of conscious misbehavior or recklessness.'" Campo v.
Sears Holding Corp., 635 F. Supp. 2d 323, 332-33 (S.D.N.Y. 2009)
(citation omitted).

Citing to paragraphs 76, 79, 88 through 96 of the
Complaint, Arco contends that its allegations are more than
sufficient to allege scienter.

These paragraphs re

to the

Upsize in January 2007, the E&Y Certifications issued after the
Credit Events, and a conclusory statement of Deuts
Bank's misconduct.

See Compl.

<J[

88)

(alleging that" [a]

r

the Upsize, Deutsche Bank systematically violated the terms of
the Transaction and engaged in other misconduct so pervasive
that it demonstrates an intention to use

Transaction to

commit fraud on the Noteholders, including Arco.").
allegations in the Complaint

Because the

evant to scienter, as pled,

demonstrate that Arco could have discovered "the facts
constituting the violation" within two years of the date upon
which "a reasonably diligent plaintiff would have sufficient
information about that fact to adequately plead it in a
complaint[,]"

Arco's Section 10(b) claims have expired.

Pontiac, 637 F.3d at 175.

Accordingly, Arco's Section 10(b)
33

cIa

are untimely with respect to § 1658(b)'s five-year

atute

of repose and two-year post-discovery deadline.

C) The SUpplemental Jurisdiction Over Arco's Breach of
Contract Claim is Declined

Because Arco's Section 10(b) claim is dismissed as
time-barred pursuant to 28 U.S.C. § 1658(b), there is no need to
reach on the sufficiency of the allegations in the Complaint as
to that claim.

The Complaint also alleges as breach of contract

claim under New York law.
party bene

Arco contends that it is a third-

ciary under the CDS Agreement, whi

Deutsche Bank

allegedly breached.

U[AJ dist

ct court 'may decline to exercise

supplemental jurisdiction' if
which it has

ginal jurisdiction.'"

Kolari v. N.Y.

455 F.3d 118, 122 (2d Cir. 2006)

Pre
U.S.C.

'has dismissed all claims over

§

1367 (c) (3)).

(quoting 28

"[IJn the usual case in which all

federal-law claims are eliminated before trial, the balance of
factors to be consi

red under the pendent jurisdiction doctrine

- judicial economy, convenience, fairness,
point toward declining to exercise juris
remaining state-law claims."

and comity - will
ction over the
Univ. v. Cohi

34

484

u.s. 343, 350 n.7, 108

Kl

S. Ct.

614, 98 L. Ed. 2d 720 (1988);

& Co. Futures, Inc. v. Bd. of T

, 464 F.3d 255, 262 (2d

Cir. 2006)

(" [Wl here, as here, the federal claims are eliminated

in the ea

y stages of litigation, courts should generally

decline to exercise pendent juri
law claims.")

ction over remaining state

Because Arco's federal claim is dismissed, the

Court declines to exercise supplemental juri

ction over its

breach of contract claim.

VI.

Conclusion

Based on the conclusions set forth above, Defendant's
motion to
grant

smiss Plaintiff's

with leave to repl

ral securities law claim is
within 20

ys.

Supplemental

jurisdiction over Plaintiff's state law cause of action is
declined, without prejudice.

It is so ordered.

New York, NY
June" ' 2013

U.S.D.J.

35