Arco Capital Corporation Ltd. v. Deutshe Bank AG

Filing 37

OPINION re: 28 MOTION to Dismiss Amended Complaint filed by Deutshe Bank AG. Based upon the conclusions set forth above, the motion of Deutsche Bank to dismiss the FAC is granted in its entirety and Counts I and II of the FAC is dismissed with prejudice. (Signed by Judge Robert W. Sweet on 11/27/2013) (lmb)

UNITED
SOUTHERN DI

DISTRICT COURT
CT OF NEW YORK

--------------------------------x
ARCO CAPITAL CORPORATION LTD.,
Plaintiff,

12 Civ. 7270

inst

OPINION

BANK AG,
Defendant.

-x
A P PEA RAN C E S:
Att

for Plaintiff

MILLER & WRUBEL P.C.

570 Lexington Avenue

New York, NY 10022

By:
John G. Moon, Esq.

S. Christopher Provenzano, Esq.

Atto

nt

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

-------------------------------,--------_.._--"<..

Sweet, D.J.

Deutsche Bank AG ("Deutsche Bank" or "Defendant") has
moved pursuant to Rule 9(b) and l2(b) (6) of the Federal Rules of
Civil Procedure and the Private Securities Litigation Reform Act
to dismiss the First Amended Complaint

(the "First Amended

Complaint" or "FAC") of Arco Capital Corporation Ltd.
"Plaintiff").

("Arco" or

Upon the conclusions set forth below, the motion

is granted and the FAC is dismissed with prejudice.

Prior Proceedings

This action was commenced on September 27, 2013.

On

December 3, Deutsche Bank moved to dismiss the original
This motion was granted on June 6, 2013

Complaint.
Opinion").l

(the "June 6

On July 3, Plaintiff filed the FAC.

On July 29, 2013, Deutsche Bank moved to dismiss the
FAC.

The instant motion was heard and marked fully submitted on

October 2, 2013.

1 This Court's June 6,
2013 Opinion dismissing Plaintiff's original complaint
is reported at Arco Capital Corp. Ltd. v. Deutsche Bank AG, 12 Civ. 7270,
2013 WL 2467986 (S.D.N.Y. June 6, 2013) [Docket ("Doc.") #23].

1

Facts

The transaction giving
in the

tial complaint and

The addit

se to this action was alleged

scribed in the June 6 Opinion.
FAC, filed on July 5, 2013,

allegations

principally involve a July 2008 transaction in which Arco
purchased notes from Earl's Eight Limited, a special purpose
rated in the Cayman Islands ("Earl's

entity i
~

97.) The transaction is al

ght").

(FAC

d as follows:

In or about March 2007, Deutsche Bank, aIle

dly in

violation of

terms of the CRAFT Transaction, designat

Reference ObI

ions that did not con

rm to International

Swaps and Der

i ves Association, Inc.

(" ISDA") standa

~~

93-94.)

rence Obligations

Deutsche Bank
CRAFT Notes.

in or about early 2008

Arco learned of this brea

when two such Re

(FAC

, and demanded

iate the terms of its purchase of certain
(FAC

~

94.)

Deutsche Bank

d so, and in July

ckaged certain CRAFT Notes into

2008, Deutsche Bank

securities called Earls Eight Series 469

B Pass Though

Notes ("Earls Eight Notes").

Earls Eight

Notes, as "securit
same Eligibility Cr

s"

(FAC

~~

95-97.)

r the Exchange Act,

incorporated the

ria and other obligations as the CRAFT

Notes, including the requirement that an "I
2

ndent

Accountant" certify compliance with the Eligibility Criteria
upon default.

Deutsche Bank also agreed to additional

obligations, such as not including non-ISDA derivatives as
Reference Obligations.

<j{<j{

Tambe, July 29, 2013 ("

96-97);

De

(Declaration of Jayant W.

."), Ex. 22

(Letter Agreement

dated July 15, 2008));

Ex. 25 (Prospectus dated

July 15, 2008).) Deutsche Bank s

Arco the Earls Eight Notes

on July 15, 2008.

(FAC

<j{

97.)

The Earls Eight offering documents contain disclaimers
regarding the risks of the Earls Eight Notes, and caution
investors to "examine carefully" the documentat
the underlying CRAFT Class G Notes.
Arco, as an investor in the Earls Ei

De

relating to
Ex. 25 at 3.)

Notes, was informed

t:

Purchasers of [the Earls Eight] Notes should conduct
such independent investigation and anal is regarding
[CRAFT Class G Notes] and all
r assets from
t
to time comprising the [CRAFT Class G Notes] and
[CRAFT CLO] . . . as they deem app
ate to evaluate
merits and risks of an investment in [the Earls
Eight] Notes.

(Id. at 1.)

Through the Earls Eight offering documents, "[t]he

Issuer [i.e. Earls Eight] and the Arranger [i.e. Deutsche Bank]
disclaim[

any responsibility to advise the purchasers of [the

3

-------_._--

- - - - - - - - - - - - - - - - - - - - - - - - - - - -..........................

_ _--_
.....

.. ­

Earls Eight] Notes of the risks and investment considerations
associated with the purchase of the [Earls Eight] Notes as they
may exist at the date hereof or from time to time thereafter."
(Id. at 1.)

Arco's allegations arise out of events that occurred
with respect to seventeen Reference Obligations, some related to
the Earls Eight transaction and others relating to the CRAFT
CLO, that Deutsche Bank designated in January 2007.
14, 84, 91, 212, 232, 237.)

(FAC

~~

13,

The Reference Obligations were

selected by Deutsche Bank, and noteholders could rely only on
Deutsche Bank's assurances that they would be selected in
compliance with the Eligibility Criteria.

~~

(FAC

119-121.)

Prior to a default, Deutsche Bank purportedly permitted Arco no
knowledge about any Reference Obligation.
single default; three in 2008

In 2007 there was a

(during the financial crisis); two

in 2009; two in 2010; five in 2011; and in the first three
months of 2012, an additional two.

(FAC

~~

123, 130, 133.)

When the CRAFT CLO Notes came due in June 2012, CRAFT had
experienced 15 defaults, not including the two non-ISDA
Reference Obligations, which Arco used to force Deutsche Bank to
repackage the Earls Eight Notes in July 2008.

(FAC

~

138).

Arco

has alleged that it was not alerted to the possibility of fraud
until after the five defaults occurred in 2011.
4

(FAC

~

137.)

The accelerating series of defaults in 2011
purportedly led Arco to commence an investigation that
ultimately revealed that Deutsche Bank had disregarded the
Eligibility Criteria and used the Reference Port
trans

noteholders.

r its toxic loans to

io to

(FAC 'IT'IT 122-138.)

Initially, in trying to investigate the circumstances of
defaults, Arco was frustrated by a lack of publi
information,

se

y available

(FAC 'IT 120-121, 134), and allegedly by

stonewalling, repeated misrepresentations and false assurances
by Deutsche Bank.

(FAC 'IT'IT 118, 120, 124 125, 127 131, 135-136.)

Arco then obtained a few Independent Accountant certifications
relating to some defaults, which indicated breaches of the terms
of the transact

In t
further in

, not fraud.

(FAC 'IT'IT 101-108.)

fall of 2011, having difficulty obtaining

rmation, Arco's general counsel retained litigation

consultants to perform factual investigat
statements of the Re

Obligors.

of the financial

(FAC 'IT 135.)

This

analysis was difficult to conduct because many of the Reference
Obligors were emerging markets companies or non-public.
136.)

When Reference Obligations were finally identi

(FAC 'IT
ed and

researched, Arco discovered apparent repeated violations of t
Eligibility Criter

(FAC 'IT'IT 142-197.)
5

mid-2012, Arco

that the numerous

from its invest
not the result of a poor

ts were

stment or simple noncompliance with

terms of the transaction, but represented a del
lent effort by Deuts
investors.

e

s to

k to transfer its bad

(FAC'J[ 118).

Count I of the FAC

s alleged scheme liability

r

10b-5(a) and (c) on the sale of CRAFT and Earls Eight
sentation and omission

Notes, Count I I has alleged mis
lity on the sale of the Earls E

Notes under Rule 10b­

5(b), and Counts III and IV have all

cornmon law fraud and

Ii

breach of contract, respectively, on the CRAFT and Earls Eight
Notes.

The Applicable Standards

applicable standards were set

rth in the June 6

y on the instant motion as well.

Opinion and

The Transactions Are Not Barred By Morrison

Deuts
Eight Notes

Bank has contended that the sa

ils to satis

facts establishing that

Morrison, because Arco
title passed or ir
6

of

Earls
s pled no

Ie

lity was incurred in

1

U.S., and instead has attempted to

rely on the "conduct and ef
. at 22.)

cts" test Morrison reject

Deutsche Bank's conclusion is belied by t

(Mov.
FAC,

which alleges:

Arco's purchase of Earls
ght Notes from Deuts
Bank was effectuated by means of the execution of
documents by Arco
Management LLC, a Puerto
co LLC as attorney in
r Arco, from its
offices in Puerto Rico. Deuts
Bank's counsel,
located in New York, held
signature pages for both
Arco and Deutsche Bank. When
transaction was
ed, Deutsche Bank's counsel emailed the signature
s to Arco in Puerto Rico and Deutsche Bank in
London, copying LEMG personnel in New York. The Earls
Eight Notes were sold into Arco's prime brokerage
account at Citigroup, locat
New York, NY. On July
17, 2008, Arco Capital Mana
LLC from its offices
in Puerto Rico transmitted to
Deuts
Bank a cross-rece
ing closing of
transaction. It was the
rstanding of the
when Arco received
ies that the transaction
Earls Eight Notes and
its accounts in New
York, and Deutsche Bank rece
G Notes in its
account.

(FAC

<J[

99);

(see also FAC

<J[

17.)

, under Morrison,

Second Circuit has
in order to

ly allege the existence of a domestic

transaction, "it is sufficient for a plaintiff to allege facts
leading to
irrevocable Ii

plausible inference that

rties incurred

lity within the United States." Absolute

7

Act

st Value Master Fund Ltd. v. Ficeto, 677 F.3d 60, 68

(2d

Cir. 2012).

The FAC, as shown above, has alleged that t
const

ut

Unit

States: Arco's agreement was execut

acts

the sale of the Earls Eight Notes occurred in
in the Uni

States, sent to Deutsche Bank's U.S. counsel, the securities
were delivered in t

United States, and the

rties understood

the transaction to close when funds and securities were
livered in New York.
"incur

(See FAC

~~

17, 99.)

Arco

refore

irrevocable liability within the United States to take

and pay for a security." Absolute Activist

677 F.3d at 68.

Deutsche Bank has contended that

Morrison Court

cludes application of Section 10(b) and Rule 10

5 to

offshore transactions, including those structured expressly
ion S like the Earls Eight transaction."

accordance with
(Mov. Br. at 22.)

However, Morrison referred to t

were not

and other securities laws to demonstrate that
intended to have extraterri

a1 effect. Selling securities

under Regulation S does not automatically exempt
the antifraud provisions of the 1933 Act.
S

ssly provi

1933 Act

rties from

Moreover, Re

ion

s that it relates only to the 1933 Act, and

"not to antifraud or ot

r provisions of the
8

deral securit

s

laws," including those upon which Arco relies.
(Prelimina

Note

~

1).

Accordingly, the Ea
by Morrison, and t

17 C.F.R. § 230

s Eight transaction is not barred

conclusions with respect to Morrison in the

June 6 Opinion concerning t

CRAFT CLO transaction remain.

(See June 6 Opinion at 16-26.)

Counts I and II Are Time-Barred

Although Morrison does not preclude

aintiff's

ral claims, Arco's amended Count I and Count II claims are
t

-barred under the applicable statutes of repose and

limitations under which this Court dismissed the predecessor
claim.

(June 6 Opinion at 33 34 (applying 28 U.S.C.

Specifically, Count I is untimely under the f
repose as bas
II are both unt

§

1658(b)).)

-year statute of

on the 2006 or 2007 CRAFT Notes and Counts I and
ly under the statute's two-year post-discovery

deadline.

Pursuant to 28 U.S.C.
Section 10(b) of

§

1658(b), "[a]n action under

Exchange Act or Rule 10b-5 is subject to a

five-year statute of repose or may be brought within '2 years

9

after the discovery of the facts constituting the violation.'"
(Id. at 26.)

"The five-year statue of repose period is a fixed
statutory cutoff independent of a plaintiff's awareness of a
violation and is an absolute bar, not subject to equitable
tolling for any reason." (Id. at 27

(citing Lampf,

Lipkind, Prupis & Petigrow v. Gilbertson, 501

u.s.

Pleva,
350, 363

(1991); P. Stolz Family P'ship, L.P. v. Daum, 355 F.3d 92, 102­
03 (2d Cir. 2004)).

Under the Second Circuit's decision in

Arnold v. KPMG LLP, 334 F.App'x 349, 351

(2d Cir. 2009), "the

statute of repose in federal securities law claims starts to run
on the date the parties have committed themselves to complete
the purchase or sale transaction."

The June 6 Opinion held that

the statute of repose barred the CRAFT Notes claims because at
latest Arco purchased the CRAFT Notes in May 2007, more than
five years before filing its initial Complaint, and "Arco has
not meaningfully distinguished itself from Arnold."

(June 6

Opinion at 27-28.)

Arco's FAC contends that the July 15, 2008 Earls Eight
transaction supports tolling the applicable five-year statute of
repose by eighteen months with respect to the CRAFT Notes.

10

In Arnold
support tolling, t

whi

is the sole case Arco

last in the "complex series of

transactions" was a

to the alleged fraud,

tolling from the date of

st transaction.

KPMG LLP, 543 F. Supp.2d 230,232
Ex. 27 at

~~

79-84,

90 [Arno

See Arnold v.

(S.D.N.Y. 2008);

(Tambe De
(but

r

ter scheme would not have
no fraudulent tax deduction

generated any artificial losses
Here, unli

Arnold, Earls Eight is

not the ultimate and necessary st

a series of

r a

transaction undertaken at Arco's

rate financing

st as

erconnected transactions, but

rt of a settlement

the parties approximately ei

months after the

fraud is purported to have been

Ex. 22 [Letter Agreement].)

requiring

llowing a series of purchase

transactions-the alleged tax s

could have occurred).)

s

Third Amended Complaint]

the last transaction-a sale

all

s to

Arco fail

rway.
to

(AC

<j[~

94-97 i

lude Earls Eight

its initial complaint and has itself alle

that the sale of

the Earls Eight Notes constitutes an i

tion under

1 Ob-5.

ewed as

(FAC

<j[

16.)

Earls Eight cannot therefore be

"essential" to the alleged scheme.
this case
as

i

The distinctions

tween

bar equitable tolling of the
to CRAFT.

See Lampf, Pleva, Lipkind,
501 U.S. 350, 363 (1991)

11

Prupis &

(holding

"t

not apply,"

ling principles

statute of repose is "

se the purpose of the

rly to serve as a cutoff").

Arco's FAC also contends

the repose

riod for a

CRAFT Notes runs from either (i)

claim based on t

2012 (the last day of the purpo
15, 2008 (the

y 15,

"violation"), or (ii) July

of the last all

intiffs' Opposition Brief [Doc

misrepresentat) .
No. 33], "Opp. Br.", at 9

12.) These issues were previously determined in the June 6
Opinion.

(See June 6 Opinion at 28, 32-33); see also

Corre

Servs.

412 (S.D.N.Y. 2007)

. v. J.V.W. Inv. Ltd.
("Under

524 F. Supp.2d

of the case

decision on an issue of law

ine, a

at one stage of a case becomes

binding pre

to be followed in subsequent st

same litigat

(citations and quotations omitted)).

claim under

s of the
Arco's

10b-5(a) and (c) with respect to the 2006 or

2007 CRAFT Notes therefore remains time-barred under the statute
of repose.

(June 6 Opinion at 28, 32-33 (the CRAFT Notes were

purchased, at the latest, in May of 2007, more than five years
prior to

filing of the initial compl

Arco's CRAFT Notes c
two-year post-discovery

)

.)

im has also expired under

, as this Court

12

ously held.

(Id. at 33 (quoting
MBIA

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

Arco contends

the FAC's new allegations overcome

two-year deadline and

support the inference

was not until the pattern of
rea

y be expected to a

d

undertaking investigation of

I condition of emerging market companies," (FAC i

the f
122)

ults in 2011 that "Arco

that it was not until t

investi

completion of this

ion in 2012 revealing a

desi

as Reference Obligat

rea

have, discovered all t

support

Counts I and II.

ttern of bad loans being
t Arco did, and could
elements of its action

(Opp. Br.

ting FAC i

137).)

se "new allegations" in Arco's FAC (Opp. Br. at 12
14 (cit

FAC i i 118-137), do not alter the June 6 Opinion

holding that Arco's federal securities law claims are time­
barred under § 1658 (b).
the Compla
Arco could

(June 6 Opinion at 32

relevant to scienter, as pI

("allegations in

, demonstrate that

scovered 'the facts constituting the

violation' within two years of the date upon which 'a reasonably
diligent pIa

iff would have sufficient

fact to adequately plead it in a complaint.
omitted) .)
13

rmation about the
.'")

(citation

Under the two-year post-discovery statute of
tat ions ,

1

's Section lO(b) claims expi

two years a

date upon which "a reasonably diligent p
ficient information
a complaint."

130 S.Ct. 1784

Co. v. Re

iff would have

to adequately pIe

~~~__~~~~,

r

[its claims] in

637 F.3d at 175; see also Merck &
(2010);

Royal Bank of Scotland Grp., PLC, 902 F. Supp. 2d 329 (S.D.N.Y.
2012).

The appli

as Arco contends.

legal standard is not a subjective one,
(Opp. Br. at 12 13.) A fact is deemed

"discovered" for § 1658(b) purposes when "a reasonably diligent
p

su

intiff would

icient

ormation about that fact to

adequately plead it in a complaint."
(citations omitted); accord Intesa

__________

12

~

________

~

_ _ _ _ _ _ _ _L __ _

~

__

. 2683, 2013 U.S. Dist LEXIS 19635, at *16 (S.D.N.Y.

Feb. 12, 2013).
aile

(June 6 Opinion at 33-34)

Arco's allegations, including the newly added

ions, demonstrate that more than two years

filing its initial complaint In Sept
facts now alleged in support of both t
claims, including al

or to

r 2012, the relevant
CRAFT and

s Eight

ions relevant to scienter, could have

been discovered.

Arco was provi
Reference Obligations at

the identity of the default
time of de
14

t.

(FAC

~

121.)

The

faults began as early as 2007
seven of the seventeen Re

(id. at

(Id.)

By 2008, over four

rs

its initial complaint, Arco had already

llenged
Re

123), and by 2009

rence Obligations of which it now

complains had already defaulted.
fore it fi

~

eligibility of two of the seventeen defaulted

rence Obi
reement.

(Id.

the July 2008 Letter

ions resulting
~~

is a settlement

Letter Agreement, on its face,

94-97.)

llowing Arco's

scovery that

, unlike other

investors, had not signed the amendment in 2007 to allow the
inclusion of non-ISDA documented
Port

lio.

This settlement, and

rivatives in t

Reference

subsequent of

r

documents of Earls

ght, provide

ional support that, under

a "reasonably dili

nt plaintiff"

rd, Arco was on inquiry

notice by at least July 2008.

Furt

r, though Arco retained

legal counsel as early as December 2009, almost t
prior to filing its

ial compla

id.

~

rs

126), Arco waited

two more years, until Fall 2011, to retain litigation
con
(Id.

s to investi
~

the defaulted Reference Obligations.

135).

Arco's FAe has not alleged what
uncovered to substantiate its contention t
scienter could not be discovered earlier, as
holds.

For the seven of seventeen defaul
15

s 2011 investi

tion

Deutsche Bank's
June 6 Op
Reference

ion

Obl

ions that Arco has identified, it has alleged only facts

available contemporaneous with default
three of these seven
September 2007 (id.

~

142) , Peace Mark

relevant facts with re

July 2009

id.

in

October 2008
~

187) .

~

No additional

ct to scienter have been alleged to

prior conclus

s. See, e.g., Merrill
______
~

Fenner & Smith, Inc. v. Young,
*7-8 (S.D.N.Y. July 9, 1996)
leave to

144-197), and

~~

faulted between 2007 and 2009;

160) , and Wockhardt

alter

(FAC

91 Civ. 2

~~L-~~

__

erce

~~~

3, 1996 WL 383135, at

(dismissing claims and denying

lead where amended complaint merely "add[s]

conclusory allegations"

cause such "amendments are cosmet

they add no new factual allegations").

Counts I and II rely on one set of facts to plead t
Deutsche Bank purportedly a

with scienter concerning both
Notes.

the CRAFT CLO and the
that the CRAFT Notes are t
also.

For the same reasons

rred, the Earls

ght claims are

Earls Eight 10b-5 claims are

Accordingly, the CRAFT

both "unt

ly with respect to § 1658(b)'s two-

discovery

ine." (June 6 Opinion at 32 ("al

ar posttions in the

Complaint relevant to scienter, as pled, demonstrate that Arco
could have
within two

t

scovered 'the facts constituting

violation'

rs of the date upon which 'a reasonably diligent

plaintiff would have sufficient information about that fact to
16

,"

adequately plead it in a complaint

(quoting

Pontiac, 637 F. 3d at 175).)

The Allegations of lOb-S Violations Are Inadequate

In any event, Arco's

ral securities claims are

inadequately pled.

To state a c

im

a vi

ation under

defendant;

misrepresentation or omission by

s

causation."

(2) scienter;

sentation or omission and
y;

the purchase or sale
misrepresentation or omiss

10(b) and

"(1) a material

10b-5(b), a plaintiff must

(3) a connection between t

§

(4)

reliance upon the

(5) economic loss; and (6) loss

Pac. Inv.

. Co. LLC v.

LLP, 603 F.3d 144, 151 (2d Cir. 2010)

r Brown

2

The elements are the same under 10b-S{a) and (c), except the first element
under lOb-Sial and (cl is a "device, scheme, or artifice to defaud or "any
, or course of business which operates or would
as a
7 C.F.R. § 40.10b-S(al,lc);

2

ff

. 13,
234 (2d Cir. 2012). Arco, as found below, has not sufficiently
this first element under either standard.
This
s
to both Counts and both transactions.
The Earls
claims
are based on the same al
misconduct as the CRAFT
and the FAC does
not add any new al
ions related to the Earls Eight Notes identi
any
misstatements with
cularity or explaining why
are fraudulent.

17

Fraudulent conduct is not sufficiently pled.

To

satisfy Rule 9(b), a plaintiff "must specify what deceptive or
manipulative acts were performed, which defendants performed
them, when the acts were performed, and the effect the scheme
had on investors in the securities at issue." See, e.g.,
Refco, 2007 WL 2694469, at *7-8.

In re

3

Arco alleges that Deutsche Bank's fraud included the
failure to honor the E&Y Certification requirement

(FAC

~~

108, 207, 219, 228, Ex. B.), the Eligibility Criteria (id.

101­
~~

139-197, 205-206, 220, 228), the Replenishment Conditions (id.
~~

101, 103-104, 106, 151, 219, 228), and the requirement to

give effect to an updated Moody's Mapping Table (id.

~~

109-117,

208), all of which are contractual obligations imposed on
Deutsche Bank by the Swap Agreements.
~4,

(Tambe Decl. Exs. 14-17 at

Schedule C, Schedule D, Schedule E [Swap Confirmations].)

But the FAC has not identified all seventeen defaulted Reference
Obligations; alleged facts to support why each Reference
Obligation was ineligible; demonstrated evidence of Deutsche
Bank's fraud and not inadvertence, error, or oversight in the
selection; pled that Deutsche Bank failed to deliver the

The pleading standard for 10b-5(a) and (c) under 9(b) similarly requires that
Arco "(1) specify the statements that the plaintiff contends were fraudulent,
(2) identify the speaker, (3) state where and when the statements were made,
and (4) explain why the statements were fraudulent." Romach v. Chang, 355
F.3d 164, 170 (2d Cir. 2004).

3

18

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

requi

E&Y Certifications for any of the seventeen defaulted

Reference Obligations; alleged

PIa

anything more than the E&Y Certi
how what was

1

support

ions that were delivered or

allegation that Deut

Moody's Mappi

iff was entitled to

red amounts to fraud: pI

any facts

Bank used the wrong

Table; or alleged facts to support how use of

the wrong Moody's Mapping Table and/or pa

of Credit Event

Bank under the Swap

Payments to Deuts

s would

constitute f

to Deutsche Bank, Arco has all
more than

s of contract but "a breach of contract .

does not justify a Rule 10b-5 action .
promise was made,

F.3d 792, 801

(2d Cir. 2000)

1

fact probative of de
made in contracts execut
at issue).

There are no

v. Winehouse, 235

(citations and quotations omitted):

see also Mills v. Polar Molecular
(dismissi

. unless, when the

defendant secretly intended not to perform

or knew that he could not perform." Gura

Cir. 1993)

nothing

12 F.3d 1170, 1176 (2d

5 claim where plaintiff al

no

's intent not to perform promises
connection with sale of securities
cts alleged to support that at the

time of the so-called "Upsize" in January 2007 Deutsche Bank had
any such secret intention not to

rform its contractual

obligations, or regarding Deuts

Bank's knowledge concern
19

the eligibility of the assets at the time these credits were
underwritten or added to the Reference Portfolio. See, e.g.,
Meridian Horizon Fund, LP v. KPMG (Cayman), Nos. 11-3311-cv, 11­
3725-cv, 2012 WL 2754933, at *3

(2d Cir. Jul. 12, 2012)

(dismissing 10b-5 claim based on "impermissible allegations of
fraud by hindsight"); Bay Harbour Mgmt. LLC v. Carothers, Nos.
07-1124-cv, 07-1157-cv, 2008 WL 2566557, at *2
2008)

(same).

(2d Cir. June 24,

The contractual terms in the Swap Agreements were

disclosed and Arco represented it had received and reviewed the
Transaction Documents prior to its decision to double down on
its investment and purchase additional notes.

Without evidence

of fraud, § 10(b) liability cannot lie where a "defendants
disclosed the practices of which plaintiff now complains." See,
e.g., In re Citigroup Auction Rate Secs. Litig., 700 F. Supp.2d
294,307

(S.D.N.Y. 2009).

The FAC has also failed to plead sufficiently
particularized facts to establish scienter.

To plead a strong

inference of scienter, a plaintiff must allege facts that "(1)
show[] that the defendants had both motive and opportunity to
commit the fraud or (2) constitut[e] strong circumstantial
evidence of conscious misbehavior or recklessness." ATSI
Commc'ns Inc. v. Shaar Fund, Ltd.,
2007) .
20

493 F.3d 87, 103 (2d Cir.

Arco

ils to allege

s supporting a motive to

defraud in connection with the
transaction

yond an ordinary

CLO or Earls Eight
sire for commercial

_C_h_i_l_l__ G_e_n_.____
v_.__
e_c_,__ __, 101 F.3d 263, 268
C_o ,
("generalized mot

, one which could

(2d

fit. See

r, 1996)

imputed to

publicly-owned, for-profit endeavor" insufficient to est
scienter)
468

i

In re AstraZeneca Secs. Litig.,

(S.D.N.Y, 2008)

(same).

lish

559 F, Supp, 2d 453,

Nor has Arco pled facts to support

an inference that Deutsche Bank knowingly or recklessly
misstatements or omissions of material
essly ef
10b-5.

a scheme to de
s' Motion to Di

(De

("Mov. Br."), at 7-8
21).)

In sum, Arco

of any part

Arco in violat
ss, July 29, 2013

Is to adequately allege any facts
that Deutsche Bank knew the risk or
lar asset to be other than as represented at

time it was added to the Reference Port
~~~~~~~~~~~~,

at *8

to state with

"

tion and belief"
~

_ _ _ _ _ _- L_ _ _ _ _ _ _ _ _ _ _ __

lio. See Catton v.

No. 05 Civ. 6954(SAS), 2006 WL 27470,

(S.D.N.Y. Jan. 3, 2006)

fai

__

of

(citing Exs. 2-5, 811, 14-17), 16-17,

ing the
va

or knowingly or

(dismissing 10b-5 claim for

icularity the facts supporting its
legations); see also O'Brien v. Nat'l

, 936 F.2d 674,

676 (2d Cir. 1991)

("[WJhile Rule 9(b) permits scienter to be demonstrated by
21

license to base

inference, this 'must not be mistaken

a

of fraud on speculation and conclusory allegations.'")
(citations omitt

).

it has averred

Though Arco has contended
relevant to s

enter, calling Deuts

s

Bank's arguments

"disingenuous" and "laughable" and claiming that Deuts

Bank

"ignores the allegations" (Opp. Br. at 21-22), scienter cannot
be pleaded merely by describing with rhetorical flourish t
deal structure and mechanics of the transactions, when those
matters were

sclosed to Arco

detail.

(Mov. Br. at 7-8

(citing Exs. 25,8-11,14-17),16-17,21.)

nally, the FAC must establish reliance.
10b-5, Arco must allege
which it was aware. See
S

iance on allegedly de
e.

.

Stoneri

Under Rule
ive acts of

Inv. Partners

ific Atlanta Inc., 552 U.S. 148, 161, 171 (2008)
acts, which were not disclosed to

"de
publ

LLC v.

~~~~~~----~~~~~~~==~~

(holding

sting

are too remote to satisfy the requirement of reliance,"

because a plaintiff cannot rely on acts of which it is unaware);
Mills v.

12 F.3d at 1175 (a 10b-5

intiff must demonstrate that he relied on defendant's
statements when he ente

the transact

)

.

1se

Arco fails to

any false statements or acts by Deutsche Bank upon which
22

Arco purportedly relied.

Arco's allegation that it assumed that

Deutsche Bank would honor its contractual duties in good faith
is insufficient under the applicable standard.

In re Smith

Barney Transfer Agent Litig., No. 05 Civ. 7583(WHP), 2012 WL
3339098, at *9 (S.D.N.Y. Aug. 15, 2012)

(a plaintiff must allege

reliance on a specific deceptive act of which it was aware;
reliance on an assumption that a defendant would honor its
duties is not enough).

Arco has contended that reliance is not an element of
a Rule 10b-5(a) and (c)

claim, and cites district court

decisions that pre-date controlling authorities, including this
Court's decision in In re Tower Automotive Secs. Litig.,
Supp. 2d 327, 349 (S.D.N.Y. 2007).

(See Opp. Br. at 23.)

483 F.
Arco's

arguments and its cases have been superseded by the Supreme
Court's holding in Stoneridge Inv. Partners, LLC v. Scientific
Atlanta Inc., 552 u.S. 148, 161, 171 (2008), and its progeny,
such as In re Smith Barney Transfer Agent Litig., 05 Civ.
7583(WHP), 2012 WL 3339098, at *9 (S.D.N.Y. Aug. 15, 2012).
Those controlling decisions require Arco to plead reasonable
reliance to state a viable claim.

(Mov. Br. at 17.)

Regardless, Arco is foreclosed from asserting
reasonable reliance because it purchased the CRAFT Notes subject
23

Emergent Capital

to express disclaimers of reliance.

LLC v. St

Inv.

Cir. 2003)

(in dete

343 F.3d 189, 195 (2d

ning if reasonable reliance is present,

courts look to "the entire context of t

transaction, including

ors such as its complexity and magnitude, the sophistication
of the

content of any agreements between

rties, and t

them"); ----------~--------~-- , 91 F.3d 337, 345-348 (2d Cir.
Harsco
1996)

(reliance not reasonable where plaintiff was a

sophist

sclaimed reliance on

ed investor who expressly

sentations made outs

of the contract).

The same holds

the Earls Eight transaction, which included Offering

true

discla

Documents containing s

rs.

(Tambe Decl. Ex. 25

at 1, 3.)

dismissed the federal

June 6 Op
cIa
not i

ies

on statutes of limitations and repose grounds, and did
ng deficiencies.

ify any

Arco

s contended

the Court is therefore barred from reconsidering Deutsche Bank's
merit arguments as to these c
because the June 6 Opi
did not address.
the contrary. See

ims under the "law of the case,"

on impli

ly rejected any arguments it

(See Opp. Br. at 14.)
e.

However, pre

. , Orbit One Commc'ns,

Inc. v. Numerex

Corp., 692 F. Supp. 2d 373, 382 (S.D.N.Y. 2010)

(rejecting

plaintiff's "law of the case" assertion as "baseless" where
24

is to

or

isions in case have not "'held [onJ'or 'decided,H the

contested issue); accord DeWeerth v. Bal
1271 (2d Cir. 1994)

38 F.3d 1266,

(finding dismissal of

aim on procedural

grounds did not result in allegedly implicit holding on merits
claim becoming "law of the case H)

(cit

r the "law of the case H

policy perspective, it makes no sense
doctrine to apply where, as
issue.

re,

re is no prior ruling on an
Famous Foods Div., 327

Zdanok v. Glidden Co.,

F.2d 944, 953 (2d Cir. 1964)

by Arco). From a

rationale behind the "law of

(t

the case H doctrine is "to save j

cial time U and to prevent t

"unseemliness H of a court "altering a legal ruling as to
same litigants N

).

Because Arco's all
the required elements of
independently time

ions fail to sufficiently pI
claims, and because both claims are

, Counts I and II are dismissed with

prejudice.

The Court Declines to Exercise SUpplemental Jurisdiction over
the State Law Claims

Deuts

Bank also moves to di

ss Arco's state law

claims for common law fraud and breach of contract, Counts III
and IV re

ly.

25

"[AJ

strict court 'may

to exercise

1

supplemental j

ction' if it 'has

which it has

1 jurisdiction.'"

Pre

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

U.S.C. § 1367(c) (3)).

smissed all claims over
Kolari v. N.Y.

re trial, the balance of

considered under

ndent jurisdiction doctrine

- judicial economy, convenience,

irness, and comity

remaining state law claims."

Carne

& Co. Futures

255, 262

r. 2006)

are el

in the early

generally
remain

s

98 L. Ed. 2d 720

(1988);

Inc. v. Bd. of Trade, 464 F.3d
re, as here, the f

("[WJ

ral claims

s of litigation, courts should

line to exercise pendent jurisdiction over
state law claims.").

Because Arco's
di

e-Mellon Univ. v. Cohill

108 S. Ct. 614,

see also

will

sdiction over

point toward declining to exercise j

484 U.S. 343, 350 n.7,

28

"[IJn the usual case in which all

federal-law claims are eliminated
factors to

(quot

ral securities claims are both

in the instant action, the Court

lines to exercise

emental jurisdiction over Plaintiffs' state law claims,
Counts III and IV are di

ssed without prejudice.

26

Conclusion

Based upon the conclusions
of Deutsche Bank to di
and Counts I and I I of

forth above,

motion

ss the FAC is granted in its entirety
FAC is

smissed with prejudice.

New York, NM
November ~~2013

7

27