SHIRA A. SCHEINDLIN

Patrick J. Coughlin, Esq., Daniel S. Drosman, Esq., Jessica T. Shinnefield, Esq., Jarrett S. Charo, Esq., Darryl J. Alvarado, Esq., X. Jay Alvarez, Esq., David C. Walton, Esq., Robbins Geller Rudman & Dowd LLP, San Diego, CA, Samuel H. Rudman, Esq., Robbins Geller Rudman & Dowd LLP, Melville, NY, Luke O. Brooks, Esq., Jason C. Davis, Esq., Robbins Geller Rudman & Dowd LLP, San Francisco, CA, for Plaintiffs. Marc I. Gross, Esq., Pomertantz Haudek Grossman & Gross LLP, New York, NY, for Plaintiff State Board of Administration of Florida.
James P. Rouhandeh, Esq., Antonio J. Perez–Marques, Esq., William R. Miller, Jr., Esq., Jessica L. Freese, Esq., Christopher J. Roche, Esq., Andrew D. Schlichter, Esq., Davis Polk & Wardwell LLP, New York, NY, for Defendants Morgan Stanley & Co. Incorporated and Morgan Stanley & Co. International Limited.

Joshua M. Rubins, Esq., James J. Coster, Esq., Mario Aieta, Esq., Dai Wai Chin Feman, Esq., Justin E. Klein, Esq., Aaron M. Zeisler, Esq., Satterlee Stephens Burke & Burke LLP, New York, NY, for Defendants Moody's Investors Service, Incorporated and Moody's Investors Service Limited.

Floyd Abrams, Esq., Dean I. Ringel, Esq., Tammy L. Roy, Esq., Andrea R. Butler, Esq., David Owen, Esq., Adam N. Zurofsky, Esq., Cahill Gordon & Reindel LLP, New York, NY, for Defendants Standard & Poor's Rating Services and The McGraw–Hill Companies, Incorporated.

OPINION AND ORDER

SHIRA A. SCHEINDLIN, District Judge:

+-------------------+ ¦Table of Contents ¦ +-------------------¦ ¦ ¦ +-------------------+

+-------------------------------------------------------------------+ ¦ ¦Page ¦ +------------------------------------------------------------+------¦ ¦ ¦ ¦ +-------------------------------------------------------------------+

+--------------------------------------------+ ¦I. ¦INTRODUCTION ¦439 ¦ +---+-----------------------------------+----¦ ¦ ¦ ¦ ¦ +---+-----------------------------------+----¦ ¦II.¦BACKGROUND ¦440 ¦ +--------------------------------------------+

+------------------------------------------+ ¦ ¦A.¦Undisputed Facts ¦440¦ +---+--+-------------------------------+---¦ ¦ ¦B.¦Procedural History ¦442¦ +------------------------------------------+

+----------------------------------------------------------+ ¦ ¦ ¦ ¦ +----+-----------------------------------------------+-----¦ ¦III.¦LEGAL STANDARDS ¦443 ¦ +----------------------------------------------------------+

+----------------------------------------------------------------------------+ ¦ ¦A. ¦Summary Judgment ¦443 ¦ +-----+----+---------------------------------------------------------+-------¦ ¦ ¦B. ¦Summary Judgment Standard for Fraud and Aiding and ¦444 ¦ ¦ ¦ ¦Abetting Claims ¦ ¦ +----------------------------------------------------------------------------+

+--------------------------------------------+ ¦ ¦ ¦ ¦ +---+-----------------------------------+----¦ ¦IV.¦APPLICABLE LAW ¦444 ¦ +--------------------------------------------+

+------------------------------------------+ ¦ ¦A.¦Fraud ¦444¦ +---+--+-------------------------------+---¦ ¦ ¦B.¦Aiding and Abetting ¦445¦ +---+--+-------------------------------+---¦ ¦ ¦C.¦Standing ¦446¦ +------------------------------------------+

+-----------------------------------+ ¦ ¦ ¦ ¦ +--+----------------------------+---¦ ¦V.¦DISCUSSION ¦446¦ +-----------------------------------+

+------------------------------------------+ ¦ ¦A.¦Standing ¦446¦ +------------------------------------------+

+------------------------------------------+ ¦ ¦ ¦1.¦SEI ¦446¦ +---+--+--+----------------------------+---¦ ¦ ¦ ¦2.¦Butterfield ¦447¦ +---+--+--+----------------------------+---¦ ¦ ¦ ¦3.¦Commerzbank ¦447¦ +---+--+--+----------------------------+---¦ ¦ ¦ ¦4.¦Hapoalim ¦448¦ +------------------------------------------+

+------------------------------------------+ ¦ ¦B.¦Actionable Misstatements ¦448¦ +------------------------------------------+

+------------------------------------------+ ¦ ¦ ¦1.¦Morgan Stanley ¦448¦ +------------------------------------------+

+----------------------------------------------------------------------------+ ¦ ¦ ¦ ¦a. ¦Participation in a Scheme to Defraud ¦449 ¦ +-----+----+----+---+-------------------------------------------------+------¦ ¦ ¦ ¦ ¦b. ¦Whether the Ratings May Be Attributed to Morgan ¦451 ¦ ¦ ¦ ¦ ¦ ¦Stanley ¦ ¦ +----------------------------------------------------------------------------+

+------------------------------------------+ ¦ ¦ ¦2.¦Rating Agencies ¦453¦ +------------------------------------------+

+----------------------------------------------------------------------------+ ¦ ¦ ¦ ¦a. ¦Whether Credit Ratings Are Opinions ¦453 ¦ +-----+----+----+---+-------------------------------------------------+------¦ ¦ ¦ ¦ ¦b. ¦When Opinions Are Actionable ¦455 ¦ +-----+----+----+---+-------------------------------------------------+------¦ ¦ ¦ ¦ ¦c. ¦Whether Plaintiffs Have Proof that the Ratings ¦456 ¦ ¦ ¦ ¦ ¦ ¦Were Both Misleading and Disbelieved When Made ¦ ¦ +----------------------------------------------------------------------------+

+------------------------------------------+ ¦ ¦C.¦Scienter ¦458¦ +------------------------------------------+

+--------------------------------------------------------------------------+ ¦ ¦ ¦1. ¦Whether the Rating Agencies Had the Required Intent¦458 ¦ +-----+----+----+---------------------------------------------------+------¦ ¦ ¦ ¦2. ¦Disclosure of the Risks ¦460 ¦ +-----+----+----+---------------------------------------------------+------¦ ¦ ¦ ¦3. ¦Hindsight ¦460 ¦ +-----+----+----+---------------------------------------------------+------¦ ¦ ¦ ¦4. ¦Motive ¦460 ¦ +--------------------------------------------------------------------------+

+------------------------------------------+ ¦ ¦D.¦Reliance ¦462¦ +------------------------------------------+

+-------------------------------------------------------------+ ¦ ¦ ¦1. ¦GIB ¦463 ¦ +----+---+---+------------------------------------------+-----¦ ¦ ¦ ¦2. ¦NACF ¦464 ¦ +----+---+---+------------------------------------------+-----¦ ¦ ¦ ¦3. ¦SinoPac ¦465 ¦ +----+---+---+------------------------------------------+-----¦ ¦ ¦ ¦4. ¦Hapoalim ¦465 ¦ +----+---+---+------------------------------------------+-----¦ ¦ ¦ ¦5. ¦Postbank ¦466 ¦ +----+---+---+------------------------------------------+-----¦ ¦ ¦ ¦6. ¦Commerzbank ¦466 ¦ +----+---+---+------------------------------------------+-----¦ ¦ ¦ ¦7. ¦PSERS ¦466 ¦ +----+---+---+------------------------------------------+-----¦ ¦ ¦ ¦8. ¦SFT ¦467 ¦ +----+---+---+------------------------------------------+-----¦ ¦ ¦ ¦9. ¦FSBA ¦467 ¦ +----+---+---+------------------------------------------+-----¦ ¦ ¦ ¦10.¦SEI ¦468 ¦ +----+---+---+------------------------------------------+-----¦ ¦ ¦ ¦11.¦ADCB ¦469 ¦ +----+---+---+------------------------------------------+-----¦ ¦ ¦ ¦12.¦GIS ¦470 ¦ +----+---+---+------------------------------------------+-----¦ ¦ ¦ ¦13.¦SEI Strategies ¦470 ¦ +----+---+---+------------------------------------------+-----¦ ¦ ¦ ¦14.¦King County ¦471 ¦ +-------------------------------------------------------------+

+------------------------------------------+ ¦ ¦E.¦Loss Causation ¦471¦ +------------------------------------------+

+----------------------------------------------------------------------------+ ¦ ¦ ¦1. ¦The Cause of Plaintiffs' Losses ¦472 ¦ +-----+----+----+-----------------------------------------------------+------¦ ¦ ¦ ¦2. ¦Whether Plaintiffs Suffered Losses When the Ratings ¦473 ¦ ¦ ¦ ¦ ¦Were Downgraded ¦ ¦ +-----+----+----+-----------------------------------------------------+------¦ ¦ ¦ ¦3. ¦Disclosure of the Risks ¦473 ¦ +-----+----+----+-----------------------------------------------------+------¦ ¦ ¦ ¦4. ¦The Senior Noteholders' Evidence of Damages ¦474 ¦ +----------------------------------------------------------------------------+

+------------------------------------------+ ¦ ¦F.¦Aiding and Abetting ¦476¦ +------------------------------------------+

+------------------------------------------+ ¦ ¦ ¦1.¦The Rating Agencies ¦476¦ +---+--+--+----------------------------+---¦ ¦ ¦ ¦2.¦Morgan Stanley ¦477¦ +------------------------------------------+

+----------------------------------------------------------+ ¦ ¦ ¦ ¦ +----+-----------------------------------------------+-----¦ ¦VI. ¦ADDENDUM ¦478 ¦ +----+-----------------------------------------------+-----¦ ¦ ¦ ¦ ¦ +----+-----------------------------------------------+-----¦ ¦VII.¦CONCLUSION ¦478 ¦ +----------------------------------------------------------+

I. INTRODUCTION

Plaintiffs—institutional investors who invested in the Cheyne structured investment vehicle (“SIV”)—initiated this action on August 25, 2008, seeking to recover losses stemming from the liquidation of notes issued by the SIV between October 2004 and October 2007.

Plaintiffs assert New York common law claims of fraud and negligent misrepresentation against: Morgan Stanley & Co. Incorporated and Morgan Stanley & Co. International Limited (collectively “Morgan Stanley”); Moody's Investors Service, Inc. and Moody's Investors Service Ltd. (collectively “Moody's”); and Standard & Poor's Ratings Services and The McGraw Hill Companies, Inc. (collectively “S & P,” and, together with Moody's, the “Ratings Agencies”). Morgan Stanley and the Rating Agencies now move for summary judgment on plaintiffs' fraud claims. For the reasons discussed below, summary judgment is granted in part and denied in part.

II. BACKGROUND

A. Undisputed Facts

An SIV is a special purpose entity designed to undertake arbitrage by issuing short-term commercial paper and medium-term notes to finance the acquisition of long-term fixed-income assets such as mortgage bonds and asset-backed securities, including residential mortgage-backed securities (“RMBSs”).

Cheyne Finance PLC (now known as SIV Portfolio PLC) (“Cheyne PLC”)—which is now in receivership as a bankrupt entity—and its wholly-owned subsidiaries Cheyne Finance LLC and Cheyne Capital Notes LLC (collectively, “Cheyne LLC,” and together with Cheyne PLC, the “Cheyne SIV”) were authorized to issue four categories of notes: (1) Senior Capital Notes (“senior notes”), also known as Commercial Paper (“CP”); (2) Mezzanine Capital Notes (“MCNs”), also known as Medium Term Notes (“MTNs”); (3) Junior Capital Notes (“junior notes” or “capital notes”); and Combination Capital Notes (“CCNs”) which contain a mix of the other three.

The CP and MCNs are senior to the junior notes, which bear the first loss if an SIV declines in value.

The Cheyne SIV had additional structural features such as “credit enhancements”—senior note investors were protected by a subordinated series or “tranche” of Capital Notes, and Capital Note investors were protected by a subordinated tranche of Junior Capital Notes.

Morgan Stanley acted as the Arranger and Placement Agent for the Rated Notes of the Cheyne SIV.

Pursuant to these roles, Morgan Stanley was responsible for distributing to investors IMs and other Selling Documents, containing information regarding the notes issued by the Cheyne SIV, including ratings assigned by the Rating Agencies and the terms and conditions of the purchase and sale of the notes.

Morgan Stanley also engaged the Rating Agencies to rate the Cheyne SIV Rated Notes and placed the Notes with the Cheyne SIV investors.

Moody's and S & P are “nationally recognized statistical rating organizations” or “NRSROs,” having a special status that was created by the SEC in 1975.

The Second Circuit has recognized that:

[Issuers] have their securities rated for two reasons. First, once the security or debt has received a favorable rating, that rating makes it easier to sell the security to investors, who rely upon [the rating agency's] analysis and evaluation. The second reason is that a favorable rating carries with it a regulatory benefit as well. Fitch, along with its direct competitors Amici Moody's Investors Service, Inc. (“Moody's”) and Standard & Poor's (“S & P”), has been designated by the Securities and Exchange Commission (“SEC”) as a “nationally recognized statistical rating organization” (“NRSRO”) whose endorsement of a given security has regulatory significance, as many regulated institutional investors are limited in what types of securities they may invest based on the securities' NRSRO rating.

On May 17, 2005, S & P assigned a credit rating of AAA to the MTNs issued by the Cheyne SIV and a credit rating of A–1+ to the CP issued by the Cheyne SIV.

On or around July 29, 2005, Moody's assigned a credit rating of Aaa to the senior MTNs issued by the Cheyne SIV and a credit rating of Aaa/P–1 to the CP issued by the Cheyne SIV.

The Cheyne SIV launched on August 3, 2005.

Plaintiffs are large institutional investors who acquired notes issued by the Cheyne SIV.

On August 28, 2007, Cheyne breached its “Major Capital Loss Test,” thus triggering “enforcement,” an irreversible operating state requiring that a receiver be appointed to manage the SIV in order to sell its assets and repay maturing liabilities.

Plaintiffs now seek to recover losses they claim they suffered as a result of Cheyne's liquidation.

B. Procedural History

Plaintiffs filed their First Amended Complaint on March 30, 2009, alleging thirty-two common law claims against Morgan Stanley, The Bank of New York (“BoNY”), and the Rating Agencies, including (1) common law fraud;

(2) negligence;

(3) negligent misrepresentation; (4) breach of fiduciary duty; (5) breach of contract between plaintiffs and each defendant; (6) “contract failure of condition;” (7) breach of contract between the Cheyne SIV and other defendants to which plaintiffs allege they were third-party beneficiaries; (8) breach of the implied covenant of good faith and fair dealing; (9) unjust enrichment; (10) tortious interference with the contract between the Cheyne SIV and plaintiffs; (11) tortious interference with the contract between the Cheyne SIV and other defendants to which plaintiffs allege they were third-party beneficiaries;

and (12) in the alternative, aiding and abetting.

On May 18, 2009, Morgan Stanley and BoNY jointly, and Moody's and S & P jointly, moved to dismiss. On September 2, 2009, I granted BoNY's motion in full, and—based on the then-settled Second Circuit rule that New York's Martin Act preempted the common law tort claims

—I dismissed all claims against Morgan Stanley and the Rating Agencies except for fraud and aiding and abetting fraud.

On December 20, 2011, the New York Court of Appeals ruled that the Martin Act does not preempt common law claims in the securities context,

and on January 10, 2012, the plaintiffs filed the NAC—which once again included claims of negligence against the Rating Agencies, and claims of negligent misrepresentation, breach of fiduciary duty, and aiding and abetting those causes of action against Morgan Stanley and the Rating Agencies. The NAC also included a new claim against Morgan Stanley for negligence. On May 4, 2012, I dismissed the causes of action for negligence, breach of fiduciary duty, and aiding and abetting, but allowed plaintiffs' negligent misrepresentation claim to proceed.

At around the same time that defendants filed their motions to dismiss the re-pleaded non-fraud claims, they filed this motion for summary judgment on plaintiffs' claims for fraud and aiding and abetting fraud. Accordingly, only these claims—and not plaintiffs' negligent misrepresentation claims—are currently before the Court.

III. LEGAL STANDARDS

A. Summary Judgment

“Summary judgment is designed to pierce the pleadings to flush out those cases that are predestined to result in a directed verdict.”

Thus, summary judgment is only appropriate “if the pleadings, the discovery and disclosure materials on file, and any affidavits show that there is no genuine issue as to any material fact and that the movant is entitled to judgment as a matter of law.”

“For summary judgment purposes, a ‘genuine issue’ exists where the evidence is such that a reasonable jury could decide in the non-moving party's favor.”

“ ‘A fact is material when it might affect the outcome of the suit under governing law.’ ”

“[T]he burden of demonstrating that no material fact exists lies with the moving party....”

“When the burden of proof at trial would fall on the nonmoving party, it ordinarily is sufficient for the movant to point to a lack of evidence to go to the trier of fact on an essential element of the non [-]movant's claim.”

In a summary judgment setting, “[t]he burden is on the moving party to demonstrate that no genuine issue respecting any material fact exists.”

“When the burden of proof at trial would fall on the nonmoving party, it ordinarily is sufficient for the movant to point to a lack of evidence ... on an essential element of the nonmovant's claim.”

In turn, to defeat a motion for summary judgment, the non-moving party must raise a genuine issue of material fact.

The non-moving party “ ‘must do more than simply show that there is some metaphysical doubt as to the material facts,’ ”

and cannot “ ‘rely on conclusory allegations or unsubstantiated speculation.’ ”

In deciding a motion for summary judgment, a court must “ ‘construe the facts in the light most favorable to the non-moving party and must resolve all ambiguities and draw all reasonable inferences against the movant.’ ”

However, “ ‘[c]redibility determinations, the weighing of the evidence, and the drawing of legitimate inferences from the facts are jury functions, not those of a judge.’ ”

“ ‘The role of the court is not to resolve disputed issues of fact but to assess whether there are any factual issues to be tried.’ ”

B. Summary Judgment Standard for Fraud and Aiding and Abetting Claims

In New York, a plaintiff alleging fraud must establish each element of its fraud claim by “clear and convincing evidence.”

The same is true for a plaintiff asserting a claim of aiding and abetting fraud.

Thus, the appropriate summary judgment question is whether the evidence on the record could support a reasonable jury finding that the plaintiff has shown each element of either a fraud or an aiding and abetting claim by clear and convincing evidence.

IV. APPLICABLE LAW

A. Fraud

To recover damages for fraud under New York law, a plaintiff must prove: “ ‘(1) a misrepresentation or a material omission of fact which was false and known to be false by defendant; (2) made for the purpose of inducing the other party to rely upon it; (3) justifiable reliance of the other party on the misrepresentation or material omission; and (4) injury.’ ”

“The claim also requires a showing of proximate causation, such that the injury ‘is the natural and probable consequence of the defrauder's misrepresentation or ... the defrauder ought reasonably to have foreseen that the injury was a probable consequence of his fraud.’ ”

The standard for evaluating whether plaintiffs have presented sufficient evidence of scienter is the same under New York common law as it is under Section 10(b) of the Securities Exchange Act of 1934 (“1934 Act”).

Plaintiffs need not establish intent to defraud; rather “[p]laintiffs may satisfy the scienter requirement by producing ‘evidence of conscious misbehavior or recklessness.’ ”

The Second Circuit has described recklessness as:

“[A]t the least, conduct which is highly unreasonable and which represents an extreme departure from the standards of ordinary care ... to the extent that the danger was either known to the defendant or so obvious that the defendant must have been aware of it.”[ ] “An egregious refusal to see the obvious, or to investigate the doubtful, may in some cases give rise to an inference of ... recklessness.”

The Second Circuit has further directed courts to be “ ‘lenient in allowing scienter issues to withstand summary judgment based on fairly tenuous inferences,’ because such issues are ‘appropriate for resolution by the trier of fact.’ ”

In addition to establishing scienter, plaintiffs must show that they reasonably relied on the false and misleading statements to their detriment.

Reasonable reliance entails a duty to investigate the legitimacy of an investment opportunity where plaintiff was placed on guard or practically faced with the facts. Only [w]hen matters are held to be peculiarly within defendant's knowledge [is it] said that plaintiff may rely without prosecuting an investigation, as he ha[d] no independent means of ascertaining the truth.

An “evaluation of the reasonable-reliance element [should involve] many factors to ‘consider and balance,’ no single one of which is ‘dispositive.’ ”

“Accordingly, reasonable reliance is often a question of fact for the jury rather than a question of law for the court.”

B. Aiding and Abetting

“To establish liability for aiding and abetting fraud, the plaintiffs must show ‘(1) the existence of a fraud; (2) [the] defendant's knowledge of the fraud; and (3) that the defendant provided substantial assistance to advance the fraud's commission.’ ”

Under New York law, a defendant must be shown to possess actual knowledge of the underlying fraud.

“The ‘knowledge’ element of an aiding and abetting fraud claim is not identical to the scienter required for the underlying fraud.”

While a strong inference of scienter can be satisfied by a showing of “ ‘facts that constitute strong circumstantial evidence of ... recklessness,’ ” aiding and abetting requires a reasonable inference of actual knowledge.

The “substantial assistance” requirement is satisfied where “ ‘a defendant affirmatively assists, helps conceal or fails to act when required to do so, thereby enabling the breach [or fraud] to occur.’ ”

“[T]he mere inaction of an alleged aider and abettor constitutes substantial assistance only if the defendant owes a fiduciary duty directly to the plaintiff.”

C. Standing

“Whether a party has a sufficient stake in an otherwise justiciable controversy to obtain judicial resolution of that controversy is what has traditionally been referred to as the question of standing to sue.”

The plaintiff bears the burden of establishing standing, which, at summary judgment requires setting forth “specific facts,” showing: (1) “injury in fact”; (2) “a causal connection between the injury and [defendants' conduct]”; and (3) likelihood that “injury will be redressed by a favorable decision.”

Standing is “assessed as of the time the lawsuit is brought.”

An assignee who holds “legal title to an injured party's claim has constitutional standing to pursue the claim....”

New York law permits “free assignability of [fraud] claims,”

and “any act or words are sufficient which show an intention of transferring the chose in action to the assignee.”

For example, transferring “all rights, title and interest” in a given transaction is “sufficient to effect the assignment of tort claims based on fraud.”

“ ‘An assignment may be made by an oral communication.’ ”

V. DISCUSSION

A. Standing

1. SEI

SEI is suing on six investments made on behalf of three money market mutual funds sponsored by SEI (“the SEI Funds”).

In September 2008 and March 2009, SEI purchased the MTNs from the SEI Funds.

On September 22, 2009, the SEI Funds assigned “all of their rights, obligations, and claims arising out of or related to the MTNs to SEI.”

Because the SEI Funds assigned all claims arising out of the MTNs as of the filing of the Second Amended Complaint, in which SEI was first named as a plaintiff,

SEI has standing to pursue tort claims stemming from the SEI Funds' investment in Cheyne.

2. Butterfield

Butterfield is suing on an investment made by the Butterfield Money Market Fund (“BMMF”), which was managed by Butterfield's wholly-owned subsidiary, Butterfield Asset Management (“BAM”). Defendants argue that Butterfield lacks standing to sue on behalf of BMMF because there is no evidence that BMMF assigned its right of action to Butterfield.

In its declaration on reliance, Butterfield asserts that through its purchase of “CP and MTNs at par from wholly-owned affiliate, [BMMF], on July 11, 2008,” it “acquired BMMF's entire interest in the CP and MTNs.”

However, the mere purchase of notes is insufficient to establish an assignment of rights, and the bare assertion that Butterfield “acquired all rights and claims relating to the Rated Notes”—without any supporting facts—is insufficient to withstand summary judgment.

Finally, because standing is assessed at the time the complaint is filed, a “ratification” in a 2012 Reliance Declaration

does not cure the deficiency. Thus, Butterfield's claims arising out of BMMF's investments are dismissed for lack of standing.

3. Commerzbank

Commerzbank is suing both on MCNs it purchased for itself and on the Allianz–Dresdner Daily Asset Fund's (“DAF”) investments in Cheyne. Dresdner Bank A.G. (“Dresdner”) purchased the DAF notes on October 9, 2007, and Commerzbank acquired Dresdner in May 2009.

Although Commerzbank offers evidence that it has acquired any potential rights of action possessed by Dresdner, it has provided no evidence that DAF assigned its rights of action to Dresdner. Commerzbank argues that it nonetheless has standing by virtue of the fact that it “acquired the Rated Notes and [was] thus record [owner] of the notes before bringing suit.”

However, Commerzbank provides no support for its assertion that, under New York law, the record holder of a rated note may bring fraud claims on behalf of prior holders, even without an assignment.

Because Commerzbank has provided no evidence that it has standing to bring a fraud claim based on DAF's purchase of the notes, these claims are dismissed.

4. Hapoalim

Hapoalim is suing on MCNs purchased pursuant to a Note Purchase Agreement (“NPA”) and a Loan Asset Purchase Agreement (“LAPA”) on behalf of a fully-sponsored commercial paper conduit, Venus Funding Corporation (“Venus”).

Hapoalim made the decision to invest for Venus, and in September 2007, Hapoalim acquired “through an assignment” and pursuant to the LAPA and NPA the whole of Venus's MCNs at par.

This assignment included “all rights” and “all present and future claims, demands, causes and choses in action in respect of” the MCNs.

Thus, Hapoalim may sue on the notes that were initially purchased by Venus.

B. Actionable Misstatements

1. Morgan Stanley

In its motion to dismiss plaintiffs' fraud claims, Morgan Stanley argued that plaintiffs had failed to identify any actionable misstatements that could be attributed to it.

I denied Morgan Stanley's motion on the basis of the group pleading doctrine,

which “provides an exception ‘to the requirement that the fraudulent acts of each defendant be identified separately in the complaint.’ ”

Group pleading, however, is only a pleading device, and plaintiffs cannot rely on it at this stage of the proceedings.

Morgan Stanley now argues that it cannot be liable for fraud because as a matter of law, the ratings—which are the only alleged misstatements

—are attributable solely to the Rating Agencies.

Plaintiffs argue that: (1) the ratings are attributable to Morgan Stanley; and (2) the question of attribution “misses the mark” as Morgan Stanley may be liable for fraud on the basis of its conception and execution of a fraudulent scheme.

Thus, this Court must answer the following two questions: (1) whether—as a matter of law—a party that devised and executed a fraudulent scheme may be liable for common law fraud in New York even though no actionable misstatement can be attributed to it; and (2) if not, whether any actionable misstatement may be attributed to Morgan Stanley.

a. Participation in a Scheme to Defraud

In support of their argument that Morgan Stanley can be liable even if it made no actionable misstatement, plaintiffs rely on CPC International, Inc. v. McKesson Corp., in which the New York Court of Appeals reversed the Appellate Division's dismissal of common law fraud claims against Morgan Stanley and other defendants based on allegations that all defendants were involved in a “scheme ... devised and executed for the specific purpose of defrauding the prospective purchaser by selling [a stock] for more than it was worth.”

The defendants in CPC International did, however, make actionable misstatements

—the question presented was whether some defendants could be liable for fraud even though the plaintiff relied on misstatements made by other defendants. At no point did the Court of Appeals suggest that a defendant could be liable for fraud even if it made no actionable statement.

CPC International is not helpful to plaintiffs for two additional reasons: (1) it was decided at the pleading stage as opposed to summary judgment;

and (2) it made no distinction between fraud and aiding and abetting fraud.

This latter point supports Morgan Stanley's argument that a defendant who made no actionable misstatement, can be liable for, at most, aiding and abetting fraud.

Indeed, plaintiffs' definition of fraud—as including any knowing participation in a scheme to defraud—is so broad that it encompasses aiding and abetting fraud, thus obliterating the distinction between the two causes of action.

Plaintiffs cite several additional cases for the proposition that a defendant may be liable under New York law based on its knowing participation in a scheme to defraud. But plaintiffs have not cited a single New York case in which a common law fraud claim against a defendant who made no actionable misstatement survived summary judgment. Plaintiffs cite Danna v. Malco Realty, Inc. for the proposition that “[l]iability for fraud may be premised on knowing participation in a scheme to defraud, even if that participation does not by itself suffice to constitute the fraud.”

Yet Danna, like CPC International: (1) failed to distinguish between fraud and aiding and abetting fraud; and (2) was a decision on a motion to dismiss.

Although the other case plaintiffs cite— Chubb & Son Inc. v. Kelleher—was decided on summary judgment, the defendant there admitted to making a false statement.

In sum, plaintiffs have failed to provide a single example of a New York fraud claim surviving summary judgment despite the lack of any actionable misstatements or omissions attributable to the defendant. Thus, if no actionable misstatement can be attributed to Morgan Stanley,

it can be liable for aiding and abetting fraud, but not fraud.

b. Whether the Ratings May Be Attributed to Morgan Stanley

In its memoranda of law, Morgan Stanley relies heavily on Eurycleia Partners, LP v. Seward & Kissel, LLP

to support its argument that the ratings contained in the IMs may be attributed only to the Rating Agencies, not Morgan Stanley.

In Eurycleia, plaintiffs were investors asserting fraud claims against a law firm that drafted an offering memorandum for a hedge fund. The offering memorandum included both legal opinions and representations regarding the fund's investment strategy.

The appellate court granted the motion to dismiss because “plaintiffs [did] not allege that [the law firm] made any representation, fraudulent or otherwise, to them.”

The court held that although the legal advice in the offering memorandum could be attributed to the law firm, the portions of the memorandum containing the fund's investment strategy were “representations made by the fund—not [the law firm].”

In a more recent case, Mateo v. Senterfitt,

a New York appellate court suggested that a party who prepares a document which incorporates actionable misstatements made by a third party may be liable for at most aiding and abetting fraud. In Mateo, plaintiffs alleged that “defendant relied on a fraudulent operating agreement supplied to it by [a third party, and] took no further steps to verify the actual ownership of the company in drafting the relevant transactional documents.”

The appellate court granted defendant's motion to dismiss the fraud claim, concluding that any misrepresentations in the transactional document were “misrepresentations attributable to [the third party].”

The court in Mateo further clarified that

To the extent plaintiffs contend that defendant made actionable misrepresentations in the transactional documents it drafted by incorporating [the third party]'s misrepresentations into the documents, they are alleging substantial assistance by defendant to aid and abet [the third party]'s fraud. However, the complaint fails to state a cause of action for aiding and abetting because it does not allege that defendant had actual knowledge of any fraud perpetrated by [the third party].

Thus, under New York law, although some of the statements in the IMs may be attributable to Morgan Stanley, the ratings are attributable only to the Rating Agencies that issued them. Even if Morgan Stanley had actual knowledge that the ratings were false, it could only be liable for aiding and abetting fraud.

This conclusion of law is supported by the following evidence: (1) the IMs indicate that Morgan Stanley is not responsible for and has not verified the information contained in the ratings;

(2) an acknowledgment by plaintiffs' expert on class certification that ratings are “well understood in the market” to be the opinions of the Rating Agencies;

and (3) testimony from various plaintiffs that they understood the ratings to reflect the opinions only of the Rating Agencies that issued them.

Plaintiffs nonetheless argue that Morgan Stanley authored the rating report based on an e-mail in which a Morgan Stanley employee says “I attach the Moody's [NIR] (that we ended up writing).”

However, this statement is insufficient as a matter of law to create a genuine issue of fact as to whether the ratings may be attributed to Morgan Stanley. Although the NIR contained the ratings that Moody's assigned to Cheyne,

the statement does not imply that Morgan Stanley authored or assigned the ratings as opposed to the report.

Thus, because the ratings cannot be attributed to Morgan Stanley, the fraud claim against Morgan Stanley is dismissed.

2. Rating Agencies

Defendants argue that the credit ratings are opinions which cannot provide the basis of a fraud claim unless they are both disbelieved by the speaker when made and false or misleading.

Defendants further argue that plaintiffs cannot prove either.

This argument presents three separate questions: (1) whether credit ratings are opinions or statements of fact; (2) if the ratings are opinions, under what circumstances may they serve as the basis of a fraud claim; and (3) whether there is a disputed issue of fact as to whether the ratings were false or misleading or disbelieved when made.

a. Whether Credit Ratings Are Opinions

Defendants offer testimony from plaintiffs and plaintiffs' expert indicating that plaintiffs understood that the ratings are subjective opinions of the Rating Agencies regarding the creditworthiness of the Cheyne notes.

Plaintiffs dispute that they made any such admissions and offer contrary testimony.

However, as all of the cited cases addressing this issue were decided on motions to dismiss,

whether the credit ratings are opinions and under what circumstances they are actionable is a question of law, not of fact.

Recently, several New York courts have defined credit ratings not as opinions regarding future valuation but statements analyzing current worth. In M & T Bank Corp. v. Gemstone CDO VII, Ltd., the Erie County Supreme Court discussed the actionability of credit ratings at length:

DBSI argues that its alleged misrepresentations, including the credit ratings, the statements by Mr. Whelan and the representations as to HBK's skills, were all opinions and/or predictions and are therefore not actionable. The Court disagrees. The ratings by Moody's and S & P are facts constituting the actual evaluation by reputable independent entities concerning the creditworthiness of the Notes. Plaintiff alleges that these ratings were false because the Defendants provided false information to the ratings agencies. The ratings by Moody's and S & P are not just predictions of future valuation but a present analysis of current valuation. Such ratings have been highly regarded and eagerly sought for years. To characterize them merely as predictions or opinions would undercut the necessary reliability such ratings furnish in the world of credit.

This decision was affirmed by the Appellate Division—although it did not discuss how credit ratings should be defined

— and its reasoning has been adopted by at least one other New York court.

In contrast, federal courts have consistently described credit ratings as opinions. In Fait v. Regions Financial Corp., the Second Circuit provided guidance for courts faced with the question of whether a representation is an opinion or a fact:

[P]laintiff's allegations regarding goodwill do not involve misstatements or omissions of material fact, but rather a misstatement regarding Regions' opinion. Estimates of goodwill depend on management's determination of the “fair value” of the assets acquired and liabilities assumed, which are not matters of objective fact. Plaintiff does not point to any objective standard such as market price that he claims Regions should have but failed to use in determining the value of AmSouth's assets.

Because plaintiffs have not offered any objective standard by which credit ratings can be evaluated, Fait implies that the ratings must be considered opinions. Other federal courts that have considered the nature of credit ratings have come to the same conclusion.

At first blush, the New York cases appear to be in tension with Fait. In reality, there is no conflict—the New York cases do not treat credit ratings as pure statements of either fact or opinion but rather as a hybrid of the two. These opinions hold that ratings are actionable because they are understood to be statements of creditworthiness based on an analysis of underlying facts conducted by respected ratings organizations.

Fait held that opinions may be actionable if they are disbelieved when made.

While ratings are not objectively measurable statements of fact,

neither are they mere puffery

or unsupportable statements of belief akin to the opinion that one type of cuisine is preferable to another.

Ratings should best be understood as fact-based opinions.

When a rating agency issues a rating, it is not merely a statement of that agency's unsupported belief, but rather a statement that the rating agency has analyzed data, conducted an assessment, and reached a fact-based conclusion as to creditworthiness. If a rating agency knowingly issues a rating that is either unsupported by reasoned analysis or without a factual foundation, it is stating a fact-based opinion that it does not believe to be true.

b. When Opinions Are Actionable

Plaintiffs argue that an opinion may be actionable in fraud if either the speaker genuinely disbelieves it or the opinion is without basis in fact. In support of this, plaintiffs cite this Court's decision denying defendants' motion to dismiss plaintiffs' fraud claims, in which I said “ ‘[a]n opinion may still be actionable if the speaker does not genuinely and reasonably believe it or if it is without basis in fact.’ ”

The word “or” was not, however, determinative in my prior opinion—plaintiffs had sufficiently pled both that the ratings were misleading and that “the Rating Agencies did not genuinely or reasonably believe that the ratings they assigned to the Rated Notes were accurate and had a basis in fact.”

Defendants concede that opinions may serve as the basis for a fraud claim,

yet argue that they may only do so when they are both disbelieved by the speaker and false.

In Fait, the Second Circuit held that opinions “may be actionable if they misstate the opinions or belief held ... and are false or misleading with respect to the underlying subject matter they address.”

In addition, the Second Circuit recently confirmed that the reasoning of Fait applies to both section 10(b) and section 11 claims,

and it is well-established that opinions interpreting federal securities laws are helpful to courts analyzing New York common law fraud claims.

Moreover, a number of federal courts have held that opinions must be disbelieved when spoken to be actionable under common law fraud in New York.

Thus, the Rating Agencies may only be liable for fraud if the ratings both misstated the opinions or beliefs held by the Rating Agencies and were false or misleading with respect to the underlying subject matter they address.

c. Whether Plaintiffs Have Proof that the Ratings Were Both Misleading and Disbelieved When Made

Defendants argue that “even if the truth or falsity of rating opinions could be evaluated objectively—which it cannot, as a matter of law—plaintiffs' claims fail because there is no evidence that the ratings of the Cheyne SIV notes were ‘wrong’ when issued.”

Defendants are correct that hindsight may not serve as the basis of a fraud claim and that plaintiffs must offer more than evidence of the SIV's subsequent performance to demonstrate that the ratings were false or misleading when issued.

But plaintiffs have offered the following evidence, which is sufficient to create an issue of fact as to whether the ratings were misleading when issued: (1) expert testimony that the ratings were not justified by the underlying facts when they were issued;

and (2) numerous statements from employees of the Rating Agencies describing how ratings should be calculated and the ways in which the Rating Agencies' practices fell short of that standard.

Plaintiffs have also offered sufficient evidence from which a reasonable jury could infer that the Rating Agencies did not believe the ratings when they issued them.

Plaintiffs have offered a statement from a Moody's analyst explaining that a Triple–A rating describes assets that “should survive the equivalent of the U.S. Great Depression, undoubtedly with downgrades but with no loss to Aaa holders.”

Nonetheless, in an e-mail, a lead analyst for Moody's observed that there was “no actual data backing the current model assumptions” on the Cheyne deal.

The same analyst admitted that, although the Cheyne SIV contained a high percentage of RMBSs, he had little knowledge of the U.S. RMBS market when he rated Cheyne.

Plaintiffs offer additional statements by Moody's employees—in e-mails, deposition testimony, and internal memoranda—indicating concern with the paucity of data and the adequacy of the models used to rate Cheyne and SIVs in general.

Similarly, plaintiffs offer a statement from S & P's head quantitative analyst for structured finance explaining that the methodology used to rate the Cheyne SIV was “totally inappropriate.”

Plaintiffs also offer an Instant Message Dialog between two analysts, containing the following conversation:

Shah, Rahul Dilip (Structured Finance—New York): btw—that deal is ridiculous

Mooney, Shannon: i know right ... model def does not capture half of the rish

Mooney, Shannon: risk

Shah, Rahul Dilip (Structured Finance—New York): we should not be rating it

Mooney, Shannon: we rate every deal

Mooney, Shannon: it could be structured by cows and we would rate it

Shah, Rahul Dilip (Structured Finance—New York): but there's a lot of risk associated with it—I personally don't feel comfy signing off as a committee member.

And as with Moody's, plaintiffs offer additional e-mails, deposition testimony, and internal memoranda in which S & P employees indicate concern with the paucity of data and the adequacy of the models used to rate Cheyne and SIVs in general.

In sum, plaintiffs have offered sufficient evidence from which a jury could infer that the ratings were both misleading and disbelieved by the Ratings Agencies when issued.

Plaintiffs have therefore raised a disputed issue of fact as to whether the Rating Agencies made actionable misstatements.

C. Scienter

Defendants make the following arguments that summary judgment is appropriate due to lack of scienter: (1) plaintiffs have offered no evidence that any defendant disbelieved the SIV credit ratings; (2) defendants disclosed the risks of investing in Cheyne, thus negating any theory of scienter; (3) fraud cannot be proven in hindsight; and (4) there was no motive for defendants to commit fraud. Defendants' first argument misstates the test of scienter—plaintiffs need not demonstrate that the Rating Agencies disbelieved the ratings when they issued them; rather “[p]laintiffs may satisfy the scienter requirement by producing ‘evidence of conscious misbehavior or recklessness.’ ”

1. Whether the Rating Agencies Had the Required Intent

Defendants argue that to demonstrate scienter, plaintiffs must provide direct evidence that individuals who worked on the Cheyne SIV transaction admitted that they believed the ratings were false.

Defendants are incorrect. First, plaintiffs may demonstrate scienter with evidence that the Rating Agencies issued the ratings recklessly.

Second, plaintiffs need only offer evidence from which a jury could infer scienter

—indeed, it is the rare defendant who admits to having had fraudulent intent. Mindful of this, the Second Circuit has indicated that courts should be “ ‘lenient in allowing scienter issues to withstand summary judgment based on fairly tenuous inferences,’ ” so as not to impermissibly take on the role of the fact-finder.

Defendants next argue that there is no evidence that those responsible for issuing the ratings had the requisite state of mind.

In support of this, defendants offer testimony from members of the ratings committee that the ratings reflected their honestly-held beliefs.

In deciding a motion for summary judgment, however, I cannot assess the credibility of witnesses, nor weigh competing evidence.

Plaintiffs have offered extensive evidence from which a jury could infer that the ratings were either disbelieved when made or issued in a manner that was “highly unreasonable and which represent[ed] an extreme departure from the standards of ordinary care ... to the extent that the danger was either known to the defendant or so obvious that the defendant must have been aware of it.”

For example, in an internal e-mail before the SIV was launched, S & P's lead analyst stated “I had difficulties explaining ‘HOW’ we got to those numbers since there is no science behind it.”

Similarly, in an e-mail, a lead analyst for Moody's observed that there was “no actual data backing the current model assumptions” on the Cheyne deal.

Plaintiffs also present expert testimony supporting an inference that the ratings were highly unreasonable when made,

as well as additional documents and testimony which support not only an inference that the ratings were issued recklessly, but also an inference that those on the ratings committee did not believe the ratings to be accurate.

The parties dispute whether plaintiffs must demonstrate that specific individuals within the Rating Agencies—such as executives or those who worked on the rating committees—had the requisite state of mind. “To prove liability against a corporation, of course, a plaintiff must prove that an agent of the corporation committed a culpable act with the requisite scienter, and that the act (and accompanying mental state) are attributable to the corporation.”

Defendants argue that plaintiffs must produce evidence that the “actual speakers”—those on the rating committee—made the alleged misstatement with the requisite state of mind.

Plaintiffs argue that “there is no requirement ‘that the same individual who made the alleged misstatement on behalf of a corporation personally possessed the required scienter.’ ”

I have already determined that plaintiffs have proffered sufficient evidence from which a jury could infer that those on the rating committees issued the ratings recklessly or without believing the ratings to be accurate. Thus, there is no need to resolve this dispute at this time.

2. Disclosure of the Risks

Defendants argue that general disclaimers in the offering documents disclosed the risk of loss, and that “ ‘[t]he mere fact of that disclosure undermines any credible theory of scienter,’ ”

because disclosures of potential risks are “inconsistent with a state of mind going toward ‘deliberate illegal behavior.’ ”

First, the disclaimers in the IMs are attributable to Morgan Stanley, not the Rating Agencies. Second, plaintiffs do not assert that the Rating Agencies hid the possibility that the Cheyne SIV could collapse and go into enforcement mode; rather, plaintiffs' claim is that the ratings were false or misleading because they: (1) misstated the likelihood that Cheyne would collapse;

and (2) implied that the Rating Agencies had conducted a detailed and fact-based analysis when they had not done so. The crux of plaintiffs' complaint is that by issuing the top ratings, the Rating Agencies indicated to them that notes issued by Cheyne would have an extremely low probability of default—and that the Rating Agencies did this either recklessly or with the knowledge that the notes would have a much higher risk of default.

3. Hindsight

Defendants assert that plaintiffs' case proceeds from the premise that, because the SIV ultimately collapsed, the ratings must have been false when issued.

It is axiomatic that fraud may not be proven by hindsight and that plaintiffs must provide evidence that the ratings were either highly unreasonable or disbelieved by the Rating Agencies at the time they were issued.

However, as discussed above, plaintiffs have not relied solely on hindsight but rather provided sufficient evidence that the ratings were actionable misstatements when made.

4. Motive

While a plaintiff need not show a motive to establish scienter, evidence of a motive to commit fraud can support an inference of fraudulent intent.

Thus, even were defendants correct that “[t]here is no evidence that defendants had any motive to commit fraud,”

lack of motive would not be fatal to plaintiffs' fraud claim. That said, plaintiffs have presented evidence that the Rating Agencies had incentives to issue top ratings, regardless of whether those ratings were supportable.

If a given Rating Agency did not issue the top ratings that Morgan Stanley desired, Morgan Stanley could have taken its business elsewhere.

An analyst at Moody's acknowledged that ratings on structured financial products such as CDOs and SIVs were “cash cows.”

Further, not only is there evidence that the Rating Agencies' fees would have been significantly diminished had the Cheyne SIV not closed,

but there is also evidence that the Rating Agencies compromised the quality of their ratings in pursuit of profits.

Defendants vigorously dispute that they had any motive to commit fraud,

just as they vigorously dispute whether there is any evidence that those responsible for the ratings disbelieved the ratings when they issued them.

Yet, with respect to scienter, plaintiffs need only provide evidence from which a jury could reasonably infer that the ratings were made recklessly. The evidence plaintiffs have provided—coupled with the suggestion that courts should refrain from deciding issues of intent on summary judgment—is enough to create a disputed issue of fact as to scienter.

D. Reliance

To survive summary judgment, each plaintiff must provide evidence from which a reasonable jury could infer that the ratings were a substantial factor in its decision to invest in Cheyne.

“[R]easonable reliance is often a question of fact for the jury rather than a question of law for the court,”

Generally, “[t]he reliance element does not require complex legal analysis and may be satisfied simply by plaintiff's testimony.”

Plaintiffs argue that because some of the key information pertaining to the Cheyne SIV was available to the Rating Agencies but not to investors,

plaintiffs had no choice but to rely on the ratings and thus reliance may be presumed.

Plaintiffs also argue that reliance may be demonstrated by Moody's and S & P statements indicating their understanding that investors rely on their ratings.

While these facts may indicate a likelihood that Cheyne's investors relied on the ratings—particularly because plaintiffs lacked access to information available to the Rating Agencies

—this is still insufficient to prove substantial reliance. In denying plaintiffs' motion for class certification, I held that:

[T]he question of reliance requires hearing from each investor as to what it did, what it relied on when deciding to invest in the Cheyne SIV, and whether it relied substantially on the credit ratings, minimally on the ratings or did not rely on them at all.

Accordingly, I will evaluate plaintiffs' evidence as to whether each plaintiff relied on the ratings in making its investment decision, taking into consideration that each plaintiff lacked access to all the information available to the Rating Agencies.

1. GIB

Defendants argue that GIB could not have relied on the ratings because it decided to invest in Cheyne before the ratings were issued.

S & P issued a “Presale Report” containing its preliminary ratings on May 16, 2005 and rating letters setting forth final ratings on August 3, 2005.

Moody's announced preliminary ratings for the Cheyne SIV on July 29, 2005, and published final ratings in an NIR on August 2, 2005.

Although defendants assert that GIB's “investment securities approval form” demonstrates that GIB decided to invest in Cheyne in May 2005,

the approval form is unclear as to the precise date on which GIB made its final determination.

Not only does the form list a number of dates ranging from May 2005 to October 2005, but the form explicitly mentions ratings from both Moody's and S & P,

indicating that the ratings played a role in GIB's decision to invest in Cheyne. Thus, there is a disputed issue of fact as to whether GIB made a final and binding decision to invest in Cheyne before the ratings were issued.

Defendants also argue that because Yaser Humaidan—GIB's Rule 30(b)(6) designee—did not speak to five of the six individuals who approved GIB's investment and could not recall anything from his conversation with the sixth, there is no evidence of what GIB considered in making its investment decision.

This ignores Humaidan's testimony that he prepared the internal investment proposal recommending that GIB invest in Cheyne, and that in doing so, he relied on the ratings.

Because a reasonable jury could infer that those who approved GIB's investment decision did so on the basis of an internal investment proposal, Humaidan's testimony is sufficient to create an issue of fact as to whether GIB relied on the ratings.

2. NACF

As with GIB, defendants argue that NACF's decision to invest in Cheyne was made before the ratings were issued. Byung–Gyu Pahk—NACF's Rule 30(b)(6) designee—testified that NACF approved its decision to invest in Cheyne on June 8, 2005.

There is no evidence as to whether NACF took additional steps between June 8 and the August 3, 2005 launch date of Cheyne to confirm that the information on which it based its investment decision remained accurate.

While Pahk testified at length as to the importance of the ratings in the decision to invest in Cheyne,

NACF's internal “investment evaluation document” does not refer to any rating from Moody's.

Because Pahk testified that he had no knowledge of anyone at NACF viewing or considering a Moody's rating prior to investing in Cheyne

—and because NACF has provided no evidence that it was aware of or considered Moody's ratings in making its decision to invest

—NACF's claims against Moody's are dismissed.

Although NACF's internal “investment evaluation document” does mention S & P, it refers only to an “expected” rating from S & P.

As described by S & P, provisional ratings are issued “pending receipt of final documentation and legal opinions.”

Further, S & P cautions that “[a]ssignment of a final rating is conditional on the receipt and approval by Standard & Poor's of appropriate documentation. Changes in the information provided to Standard & Poor's could result in the assignment of a different rating.”

Still, NACF's decision to invest in Cheyne was not irrevocable until August 3, the date on which the SIV launched and S & P issued its final ratings.

A reasonable jury could infer that NACF relied on the preliminary rating in making its initial decision to invest, and that had Cheyne launched with an unexpectedly lower final rating, NACF would not have consummated its purchase of Cheyne notes. Thus, a disputed issue of fact remains as to whether NACF relied on S & P's ratings.

3. SinoPac

SinoPac invested in Cheyne CCNs, which were assigned a Baa2 rating by Moody's, but which were not rated by S & P.

While SinoPac concedes that the CCNs were not rated by S & P, it provides evidence that the CCNs were comprised primarily of rated Cheyne MCNs (along with a small portion of unrated junior notes) and that SinoPac relied on S & P's high rating of the MCNs when it decided to purchase CCNs.

This is sufficient to create a genuine issue of fact as to whether SinoPac relied on ratings issued by both Moody's and S & P. However, S & P cannot be liable for SinoPac's losses stemming from the performance of the CCNs—a product which S & P did not rate. Instead, SinoPac may only recover from S & P to the extent it can demonstrate measurable losses stemming from the performance of the S & P-rated MCNs.

4. Hapoalim

Hapoalim offers the following evidence demonstrating that it relied on the ratings: (1) testimony that it considered the ratings, and that the ratings served as the basis for the decision to invest in Cheyne;

(2) internal guidelines stating that it could rely on AA–AAA ratings which are updated at least once a year;

and (3) the investment application prepared before Hapoalim's investment, which explicitly relies on both the A/A3 ratings on the MCNs and the high ratings of Cheyne's underlying assets.

This is sufficient to create an issue of fact as to whether Hapoalim relied on ratings issued by both Moody's and S & P in making the decision that Venus would invest in Cheyne.

5. Postbank

Postbank offers the following evidence that it relied on the ratings in making its decision to invest in Cheyne: (1) testimony from its 30(b)(6) designee that it was “particularly interested in the ratings by S & P and Moody,” and that “[i]n evaluating the risk, we relied on the A3 and A rating of S & P”;

(2) the investment approval memorandum prepared in connection with Postbank's purchase, which explicitly relied on and highlighted the A/A3 ratings as “pros” in support of the purchase;

and (3) Postbank's own guidelines allowed it to invest only in assets with high ratings.

Defendants counter with evidence that Postbank conducted its own extensive analysis of the transaction, and argue that the ratings could not have been a substantial factor in Postbank's decision to invest given the many other factors it considered.

However, investors did not have access to enough information to conduct a fully informed analysis of Cheyne,

and Postbank has offered sufficient evidence to create an issue of fact as to whether it relied on the ratings.

6. Commerzbank

With regard to the MCNs Commerzbank purchased on its own behalf,

Commerzbank has provided evidence that it relied on ratings from both Moody's and S & P in making its decision to invest in Cheyne.

Thus, there is a disputed issue of fact as to whether Commerzbank relied on the ratings.

7. PSERS

PSERS invested through its advisor, Credit Suisse Asset Management (“CSAM”) on whose judgment it relied.

PSERS offered evidence that it had guidelines requiring CSAM to rely on ratings when making investment decisions on PSERS' behalf,

and that while only Baa3/BBB ratings were required, “[t]he overall weighted-average rating of the portfolio must be A2/A or better.”

CSAM provided conflicting testimony regarding the role that the ratings played in its analysis. While CSAM suggested that the ratings might have been given some weight in its own credit analysis,

it also testified that the Cheyne credit file contained ratings from both S & P and Moody's, and that PSERS' guidelines required that ratings be a relevant factor in CSAM's analysis.

This is sufficient evidence from which a reasonable jury could infer that CSAM—and by extension, PSERS—relied on the ratings.

8. SFT

SFT has provided testimony that “in order to even look at [an investment], it had to be AAA rated,” and that SFT “look[ed] at the rating agencies for their AAA rating at first and then look[ed] at the underlying assets that would fall into that category.”

Further, SFT provided testimony that “the AAA rating was ... the gateway or the threshold to meet before you could actually look at the underlying [assets],” and that SFT's Chief Investment Officer mandated that SFT could only purchase AAA-rated securities.

This testimony is sufficient to create an issue of fact as to whether SFT relied on the ratings.

9. FSBA

FSBA invested through an investment advisor, Victory Capital Management (“Victory”), which had “full discretion” to make investment decisions on FSBA's behalf consistent with FSBA's guidelines.

Defendants argue that because Victory's own internal credit rating process gave the ratings no weight, neither it nor FSBA could have relied on the ratings.

However, FSBA's investment advisor testified that ratings were a “significant factor” and the “initial door-opener” before Victory could even consider the MTNs for inclusion in FSBA's portfolio.

As a whole, the evidence supports an inference that Victory first relied on the ratings to create a list of investments it could consider, and then conducted its own analysis (which did not consider the ratings) to decide which of those investments to pursue.

Thus, because the evidence supports an inference that Victory would not have invested in Cheyne if not for the ratings, it is sufficient to create an issue of fact as to whether the ratings were a substantial factor in Victory's selection of the Cheyne SIV as an investment.

10. SEI

SEI is suing on investments made by an investment advisor, Columbia Management Advisors (“CMA”).

Defendants provide evidence that CMA expressly disagreed with the ratings,

and argue that CMA therefore could not have relied on the ratings in deciding to invest in Cheyne on behalf of the SEI Funds.

Plaintiffs counter with testimony from CMA that securities would not likely be considered for investment unless they had “Tier 1” ratings.

Plaintiffs also provide evidence that CMA was not authorized to purchase unrated notes.

The evidence does not, however, support an inference that CMA relied on the high ratings issued by Moody's and S & P in making the decision to invest in Cheyne on behalf of SEI. For one thing, SEI's 30(b)(6) designee testified only that “a rating”—and not necessarily high ratings, or the ratings actually issued by the Rating Agencies—was required before CMA could purchase a note.

For another, CMA testified that: (1) its own analysts did an extensive analysis which did not rely on and was independent of the ratings;

and (2) it could consider notes which lacked a “Tier 1” rating.

In sum, SEI has provided no evidence that the actual ratings issued by Moody's and S & P were a substantial factor in CMA's decision to invest. Accordingly, SEI's claims are dismissed.

11. ADCB

Vikas Vijayan—ADCB's 30(b)(6) designee—testified that ADCB's investment committee fully approved the decision to invest in Cheyne on July 18, 2005.

While S & P had issued a preliminary rating by then, Moody's had not.

Still, ADCB has produced the following evidence which supports a reasonable inference that ADCB relied on ratings from both Rating Agencies in deciding to invest in Cheyne: (1) an April 13, 2005 e-mail from Morgan Stanley to ADCB that lists expected ratings from both Rating Agencies;

(2) testimony that ADCB relied on the ratings in making its decision to invest;

(3) an internal memorandum proposing that ADCB invest in Cheyne and specifically listing the ratings as a criteria;

and (4) a declaration stating that although ADCB understood that the ratings on which it based its decision to invest were preliminary, ADCB would not have consummated its investment had Cheyne launched with different ratings on August 3, 2005.

Thus, there is a disputed issue of fact as to whether ADCB relied on ratings issued by both Moody's and S & P.

12. GIS

Defendants argue that there is no genuine issue of fact as to whether GIS relied on the ratings because: (1) GIS decided to invest before the ratings were issued; (2) GIS conducted its own analysis on which it relied; and (3) GIS purchased CCNs, which it knew were not rated by S & P.

As discussed above, none of these facts are fatal to GIS's ability to demonstrate reliance.

In November 2004, Morgan Stanley informed GIS that it was bringing a new SIV to market which was expected to have high ratings from both Moody's and S & P.

David Wilson—GIS's 30(b)(6) designee—testified that the initial decision to invest in Cheyne was made in June, 2005.

GIS further asserts that it made its decision based on the preliminary/provisional ratings that it expected the MCNs to have, that its decision was not final until the SIV launched on August 3, 2005, and that it would have backed out had the MCNs not received the expected ratings.

To demonstrate that it relied on the ratings despite conducting its own analysis and even though the CCNs were not rated by S & P, GIS offers testimony that: (1) it purchased MCNs in addition to CCNs; (2) the ratings of the MCNs that the CCN contained were “very important” to its decision to purchase CCNs; and (3) the CCNs contained an MCN to junior notes ratio of 6.5 to 1.

Moreover, as discussed above, investors did not have sufficient information to conduct a full analysis of Cheyne.

Thus, whether GIS relied on ratings issued by both rating agencies is a disputed issue of fact. However, as with SinoPac, GIS may only recover from S & P on its purchase of CCNs to the extent it can demonstrate measurable losses stemming from the performance of the S & P-rated MCNs contained within the CCNs.

13. SEI Strategies

SEI Strategies has provided testimony that “[t]he rating reports from the credit rating agencies [were] always at the forefront” of its investment decision and that “the ratings opened the door for [SEI Strategies] to ... even be able to consider this SIV for investment. [SEI Strategies] would not have looked at it had it not carried those ratings.”

SEI Strategies further proffers testimony that it reviewed the ratings contained in the IMs prior to investing in Cheyne.

This testimony satisfies plaintiff's burden regarding reliance at the summary judgment phase.

14. King County

King County, too, provides testimony that it relied on the ratings in making its investment decision.

Further, King County provides evidence that its investment policies and Washington state law governing its investments required it to rely on the ratings.

Defendants argue that this evidence is insufficient to create an issue of fact regarding King County's reliance in light of: (1) testimony that King County did no due diligence and spent no time or effort considering its decision to invest in Cheyne;

and (2) evidence that “[a]n expert panel appointed by King County itself found the county's investment process so deficient that it recommended ‘emergency’ legislative action to strip the county personnel of investment duties without delay, privately describing those investment practices as ‘atrocious.’ ”

While a jury may find such evidence persuasive if it is admissible and presented by defendants at trial, I cannot give it more weight than the testimony offered by King County.

Thus, a genuine issue of fact remains as to whether King County relied on the ratings.

E. Loss Causation

Defendants argue that summary judgment is appropriate because “plaintiffs have no evidence, let alone clear and convincing evidence, that ‘out of the myriad of factors' that impacted plaintiffs' investments, ‘it was the alleged misrepresentations ... that caused any loss.’ ”

In support of this assertion, defendants make four arguments: (1) plaintiffs' losses were caused by an unprecedented market disruption; (2) at the time of the rating downgrades, plaintiffs had suffered no loss at all; (3) the risks that materialized and caused plaintiffs' losses were disclosed; and (4) some of the senior noteholder plaintiffs have no evidence of damages.

1. The Cause of Plaintiffs' Losses

Defendants assert that plaintiffs' losses were caused by the unprecedented and market-wide liquidity crisis that began in 2007.

Defendants buttress this assertion with testimony from plaintiffs describing the liquidity crisis as a “black swan event,” a “100–year flood,” and “the largest financial crisis since the Great Depression.”

First, as discussed above, according to Moody's, an Aaa rating describes assets that “should survive the equivalent of the U.S. Great Depression, undoubtedly with downgrades but with no loss to Aaa holders.”

Second, “[p]laintiffs need not demonstrate that defendants' misstatements or omissions caused all of plaintiffs' losses.”

Summary judgment is inappropriate so long as plaintiffs provide evidence “that would allow a factfinder to ascribe some rough proportion of the whole loss to [the defendant's alleged] misstatements.”

Defendants argue extensively that given the structure of the Cheyne SIV and the nature of commercial paper, the notion that plaintiffs' losses were caused by anything other than the liquidity crisis is “at odds with the evidence, logic and the law.”

These arguments are almost identical to those made by defendants in King County I in their motion to dismiss.

I considered those arguments at great length and held that:

To hold that plaintiffs failed to plead loss causation solely because the credit crisis occurred contemporaneously with [the collapse of the SIV at issue in King County ] would place too much weight on one single factor and would permit S & P and Moody's to blame the asset-backed securities industry when their alleged conduct plausibly caused at least some proportion of plaintiffs' losses.

Thus, I have already determined that plaintiffs' position on loss causation is both logical and legally viable.

In King County I, I allowed that “S & P and Moody's argument may yet prevail at a later stage in this case,” and that “[i]f defendants ultimately prove that plaintiffs' losses were, in fact, caused entirely by an intervening event, then defendants will prevail either at summary judgment or at trial.”

To prevail on summary judgment, though, it is insufficient for defendants to offer evidence that plaintiffs' losses were caused by the liquidity crisis; rather, defendants must demonstrate that a jury could not reasonably infer from the available evidence that some portion of plaintiffs' losses were caused by defendants' fraud. This is not the case here. In great detail, plaintiffs proffered factual evidence from which a jury could infer that their losses were a direct and foreseeable result of defendants' false or misleading ratings.

Plaintiffs have also submitted an expert declaration demonstrating that some of their losses are attributable to defendants' conduct.

Defendants counter with admissions from plaintiffs that the Cheyne SIV's losses were market-driven.

However, those “admissions” may have been based on information provided by defendants and Cheyne, all of whom had incentives to blame the market for Cheyne's losses. Finally, I cannot assess the credibility of witnesses or weigh the evidence on a motion for summary judgment.

2. Whether Plaintiffs Suffered Losses When the Ratings Were Downgraded

Defendants argue that:

Plaintiffs did not suffer any losses when the Cheyne SIV entered enforcement and its notes were downgraded. Had the SIV sold its assets at the market prices then, the senior noteholders would have recovered in full, and the capital noteholders would have recovered all or nearly all of their investments as well.

This argument is legally irrelevant and defies common sense. Rated notes do not trade in an efficient market like shares of publicly-traded stock.

The lack of an efficient market means that a credit downgrade may not lead to an immediate and measurable drop in the price of the assets.

Rather, a plaintiff may demonstrate loss causation by showing a causal link between the fraud and a “decrease in the amount of money returned to [plaintiffs] over the course of the securitization.”

Defendants' argument also makes the bizarre assumption that all of the Cheyne SIV's assets could have been liquidated without any liquidation discount. Unloading the SIV's assets on the market in an unplanned, disorderly sale would have likely resulted in even more losses than plaintiffs actually suffered.

3. Disclosure of the Risks

Defendants argue that summary judgment is appropriate because plaintiffs provided no evidence that the ratings concealed a risk which caused plaintiffs' losses.

The IMs and the marketing books contained the following disclaimers: (1) that the SIV was required to mark its assets to market frequently and thus faced “market risk, which could lead to realized losses if it becomes a forced seller of assets in a declining market environment”;

and (2) that the SIV could “be forced to sell its assets at below market value in a fire sale, resulting in losses to investors.”

For a disclaimer to be sufficient, “ ‘[t]he cautionary words must be specific, prominent, and must directly address the risk that plaintiffs' claim was not disclosed.’ ”

The issue, then, is whether these disclosures are insufficient because they do not disclose the possibility that the ratings assigned to Cheyne: (1) were unsupported by facts or reasoned analysis; and (2) misstated the likelihood of collapse. While plaintiffs may have understood that there were certain risks inherent in the structure of SIVs, plaintiffs may not have understood that ratings reported by NRSROs such as Moody's and S & P might lack factual support or fail to accurately report the risky nature of this investment. Thus, a disputed issue of fact remains as to whether the ratings concealed a risk which caused some portion of the plaintiffs' losses.

4. The Senior Noteholders' Evidence of Damages

While defendants do not dispute that the MCN-holding plaintiffs

lost one hundred percent of their principal investments,

defendants argue that some of the senior noteholder plaintiffs have no evidence of damages. In support of this, defendants provide evidence that, other than King County and PSERS, all of the senior noteholder plaintiffs exchanged their Cheyne SIV notes for unrated Gryphon notes which are backed by the same collateral that backed the Cheyne SIV.

Defendants argue that because these plaintiffs “continue to hold and receive payments on those notes and will do so for the next 10–30 years,” the extent of their losses is speculative and unknowable.

This is a deeply flawed argument.

Plaintiffs provide the following background regarding the Gryphon

2. On July 17, 2008, all of Cheyne Finance's assets were sold. A vertical slice of Cheyne's portfolio was sold through a competitive auction process that involved 11 bidders. The winning bid came in at 43.9% of notional value. The remaining assets were then sold to Goldman Sachs International (“GSI”) at the same price as in the auction. The assets purchased by GSI were then sold to a new entity, Gryphon Funding Limited (“Gryphon”). The Senior Noteholders chose whether to receive cash (from the sale of a vertical slice) or new long-term Gryphon notes (cash flow from the remaining Cheyne assets in Gryphon).

3. King County and PSERS chose the cash option described in ¶ 2, above. Accounting for the cash payment at liquidation and other principal payments, King County and PSERS incurred losses in excess of 30% on their investment in the Cheyne SIV. Following the Cheyne SIV's insolvency, SEI, SEI Strategies, SFTCIF, FSBA, Commerzbank and Butterfield elected to take the Gryphon option.

Defendants' argument that these plaintiffs' damages are unknowable rests on two assumptions: (1) that the Gryphon notes represent a continuation of plaintiffs' investment in Cheyne; and (2) that damages can only be calculated when plaintiffs have liquidated any vestiges of their investment in Cheyne. Neither assumption is correct.

The Gryphon notes' offering memorandum states:

The Gryphon Offers are not part of the Receivership or the Receivership Process. None of SIV Portfolio plc (in receivership), Cheyne Finance LLC or the Receivers [ ] have any role whatsoever in, and are not in any way affiliated with or responsible for, the Issuer or the Gryphon Offers.

Thus, plaintiffs' possession of the Gryphon notes is not a continuation of their investment in Cheyne, but a new investment concerning a completely different note. If King County and PSERS invested the cash they received from the sale of the vertical slice in a new investment, the subsequent success or failure of that investment would have no bearing on the measure of the damages they suffered due to Cheyne's collapse.

Likewise, the performance of the Gryphon notes after plaintiffs acquired them is irrelevant to the measure of damages.

Defendants also argue that the economic loss of the Gryphon note-holding plaintiffs is not ascertainable because these plaintiffs have yet to sell their notes. This is not so. In Merrill Lynch & Co. v. Allegheny Energy, Inc., the Second Circuit held that while “in securities cases there is a presumption that shares are purchased for the purpose of investment and their true value to the investor is the price at which they may later be sold,”

such a presumption does not apply to common law fraud claims arising from the sale of a business as opposed to publicly-traded securities. In AIG Global Securities Lending Corp. v. Banc of America Securities, LLC, the court cited to and extended the holding of Allegheny Energy, ruling that the presumption is similarly inapplicable to fraud claims arising out of the sale of mortgage-backed securities. In discussing the adequacy of plaintiffs' loss causation proof on a motion for a new trial under Rule 59, the court reasoned:

[The] presumption does not apply here, where the plaintiffs do not allege that they suffered losses from selling the Certificates at some reduced price after the fraud was uncovered. Rather, the plaintiffs allege that they suffered losses when, after the securitization went into early amortization, there was not enough money in the Trust to pay them back. The plaintiffs purchased the Trust Certificates with the expectation that they would receive a stream of interest payments for the life of the securitization and, at the end of the securitization, the return of their principal. Therefore, the plaintiffs' loss was not a decrease in market price, but a decrease in the amount of money returned to them over the course of the securitization.

The AIG Global court thus held that plaintiffs could recover for an approximation of their losses even though they still held Trust Certificates.

Applying the reasoning of these cases, the damages of the senior noteholders holding Gryphon notes should be reduced by an approximation of the value of the Gryphon notes as of the day plaintiffs acquired them in return for the remainder of their interest in Cheyne. Plaintiffs have provided evidence that the return on the Gryphon notes will not match the expected revenue stream of the senior notes, and that the reduced bid prices for the notes reflect this decreased value.

Further, plaintiffs' expert has suggested a method of valuation for the Gryphon notes.

I do not now suggest a particular method for calculating the losses of the Gryphon note-holding plaintiffs—it would be inappropriate to make such a determination before the close of expert discovery and full briefing as to the proper method for measuring damages. That said, plaintiffs have provided sufficient evidence to raise a disputed issue of fact as to whether the Gryphon note-holding senior noteholders have suffered measurable economic losses.

F. Aiding and Abetting

1. The Rating Agencies

Because plaintiffs' fraud claims against Morgan Stanley are dismissed, plaintiffs' claims against the Rating Agencies for aiding and abetting Morgan Stanley's fraud must also be dismissed.

To establish that the Rating Agencies aided and abetted each others' fraud, plaintiffs must offer evidence giving rise to a reasonable inference that each Rating Agency had actual knowledge of fraud by the other.

Plaintiffs have provided no evidence that either Moody's or S & P knew what was going on at the other Rating Agency, nor have plaintiffs provided evidence that either Rating Agency provided substantial assistance to the other—and indeed, it would be odd for them to substantially assist each other given that they are competitors. Accordingly, plaintiffs' claims against the Rating Agencies for aiding and abetting fraud is dismissed.

2. Morgan Stanley

To avoid summary judgment on the aiding and abetting claims, plaintiffs must provide evidence that Morgan Stanley had actual knowledge of the Rating Agencies' fraud.

Where the defendant had no independent duty to plaintiffs, even “ignorance of ‘red flags' or obvious warning signs of fraudulent activity cannot establish a [defendant]'s actual knowledge sufficient to support a claim of aiding and abetting fraud.”

Despite this high bar, plaintiffs have offered sufficient evidence from which a jury could infer that Morgan Stanley: (1) had actual knowledge of the Rating Agencies' fraud; and (2) provided substantial assistance to the Rating Agencies in perpetrating the fraud.

Plaintiffs have offered evidence suggesting that despite misgivings, Morgan Stanley manipulated the Cheyne SIV modeling process to create the ratings it desired. Gregg Drennan, Morgan Stanley's lead structurer, wrote that Morgan Stanley had “develop[ed] a new model for the [Cheyne SIV] transaction” and “adapt[ed] and creat[ed] a new form of SIV methodology that was presented to the rating agencies and the client for their approval.”

Drennan also described Morgan Stanley as “pushing the envelope” on SIVs.

Morgan Stanley pushed forward with Cheyne despite misgivings.

Perhaps most relevant is evidence provided by plaintiffs indicating that Morgan Stanley pressured the Rating Agencies to issue ratings it did not believe were accurate. In an e-mail to Drennan, Lapo Guadagnuolo—an S & P analyst involved in rating the Cheyne SIV—informed Morgan Stanley that S & P was only willing to assign a BBB rating to the MCNs.

The next day, Drennan replied to both Guadagnuolo and Perry Inglis—Guadagnuolo's boss—indicating Morgan Stanley's view that “the position the committee is taking is very inappropriate.”

S & P acquiesced and assigned the MCNs an “A” rating.

Drennan boasted that Morgan Stanley's efforts “did get us the rating we wanted in the end.”

From this exchange —in combination with the additional evidence presented by plaintiffs—a jury could reasonably infer that: (1) the Rating Agencies assigned the MCNs ratings that they did not believe were accurate: (2) Morgan Stanley had actual knowledge that the Rating Agencies were assigning ratings they did not believe in; and (3) Morgan Stanley not only substantially assisted the Rating Agencies in perpetrating a fraud, but actively encouraged them to do so. Accordingly, summary judgment on plaintiffs' aiding and abetting fraud claim against Morgan Stanley is denied.

VI. ADDENDUM

Plaintiffs are hereby ordered to show cause, by August 31, 2012, as to why their negligent misrepresentation claims against the Rating Agencies should not be dismissed based on the Second Circuit's recent holding in Anschutz Corp. v. Merrill Lynch & Co. Plaintiffs are also ordered to show cause as to why their negligent misrepresentation claims against Morgan Stanley should not be dismissed in light of my holding that there is no evidence of an actionable misrepresentation that may be attributed to it.

VII. CONCLUSION

For the reasons set forth above, plaintiffs' claims for fraud against Morgan Stanley and aiding and abetting fraud against the Rating Agencies are dismissed. Further: (1) NACF's claims against Moody's for fraud and Morgan Stanley for aiding and abetting Moody's fraud are dismissed; (2) SEI's and Butterfield's claims are dismissed; and (3) Commerzbank's claims based on DAF's purchase of notes are dismissed. The Clerk of the Court is directed to close this motion (Docket No. 358). A conference is scheduled for September 19, 2012 at 3:00 p.m.

SO ORDERED.