978-1285770178 Case Printout Case CPC-07-07 Part 2

[32] Securities Regulation 349B 60.51(1)

349B Securities Regulation

When pleading loss causation, as required to state claim for securities fraud, the law does not require plaintiff to

plead facts sufficient to exclude other non-fraud explanations. Securities Exchange Act of 1934, § 10(b), 15

U.S.C.A. § 78j(b); 17 C.F.R. § 240.10b–5.

[33] Securities Regulation 349B 60.25

349Bk60.25 k. Fraud on the market; price manipulation. Most Cited Cases

Investor’s complaint sufficiently alleged investment bank’s intentional or willful conduct designed to deceive or

defraud investors by controlling the price of securities, as required to state claim for market manipulation in viola-

tion of federal securities law; allegations included that bank had structured, offered, and sold synthetic collateralized

debt obligations (CDOs) using subprime residential mortgage backed securities (RMBS) as the portfolio knowing

349BI Federal Regulation

349BI(C) Trading and Markets

349BI(C)7 Fraud and Manipulation

349Bk60.17 Manipulative, Deceptive or Fraudulent Conduct

349Bk60.25 k. Fraud on the market; price manipulation. Most Cited Cases

349B Securities Regulation

349BI Federal Regulation

349BI(C) Trading and Markets

349BI(C)7 Fraud and Manipulation

349Bk60.50 Pleading

349Bk60.51 In General

349Bk60.51(1) k. In general. Most Cited Cases

Investor’s conclusory allegations that investment bank had fiartificially inflated” price of its synthetic collateral-

ized debt obligations (CDOs) were insufficient to plead efficient market, for purposes of claim for market manipula-

tion in violation of federal securities law; complaint did not allege an open or developed market for CDO securities

or that price of the CDO securities reflected all publicly available information, and hence, any material misrepresen–

tations. Securities Exchange Act of 1934, § 10(b), 15 U.S.C.A. § 78j(b); 17 C.F.R. § 240.10b–5.

[36] Securities Regulation 349B 60.40

349Bk60.40 k. In general; control persons. Most Cited Cases

Investor stated claim for control person liability against investment bank’s subsidiary and bank’s officers by

pleading bank’s primary violation of federal securities law, and alleging that bank was parent company of subsidiary

which had served as sole credit protection buyer of synthetic collateralized debt obligations (CDOs) based on toxic

residential mortgage backed securities (RMBS), in direct conflict with investor’s interests, and that officers, with

205HI Nature and Grounds of Obligation

205HI(A) In General

205Hk2 Constructive or Quasi Contracts

205Hk3 k. Unjust enrichment. Most Cited Cases

Fact that investor in synthetic collateralized debt obligations (CDOs) had not purchased the investment directly

Lawrence Jay Lederer, Robin B. Switzenbaum, Arthur M. Stock, Steven Lawrence Bloch, Josh Michael Rubens,

Berger & Montague, P.C., Philadelphia, PA, David Scott Frydman, Frydman LLC, New York, NY, for Plaintiff.

Richard Howard Klapper, Christopher James Dunne, David Maxwell Rein, Harsh Nayan Trivedi, Jacob Eden Co-

hen, Jessica Patricia Stokes, Maya Krugman, Michael Thomas Tomaino, Jr., Theodore Edelman, William Ru-

Plaintiff Dodona I, LLC (fiDodona”) brings this suit on behalf of a putative class of investors in two securities

offerings led by defendants Goldman, Sachs & Co. (fiGS & Co”), The Goldman Sachs Group, Inc. (fiGoldman”),

Hudson Mezzanine Funding 2006–1, Ltd. (fiHudson 1 Ltd.”), Hudson Mezzanine Funding 2006–1, Corp. (fiHudson

1 Corp.”), Hudson Mezzanine Funding 2006–2, Ltd. (fiHudson 2 Ltd.”), and Hudson Mezzanine Funding 2006–2,

Corp. (fiHudson 2 Corp.”) (together with Hudson 1 Ltd., Hudson 1 Corp., and Hudson 2 Ltd., the fiHudson SPEs”),

of Civil Procedure 12(b)(6) (fiRule 12(b)(6)”). (Docket No. 48.) On April 6, 2011, the extant Hudson SPEs FN1—

Hudson 2 Ltd. and Hudson 2 Corp.—filed a separate motion to dismiss (Docket No. 53), which adopted and incor-

porated the arguments made in their co-defendants‘ motion to dismiss. For the reasons discussed below, Defendants’

motions to dismiss are GRANTED in part and DENIED in part.

FN1. According to the Amended Class Action Complaint, Hudson 1 Corp. filed for dissolution on October

these documents will be made. The Court accepts these facts as true for the purposes of ruling on the motions to

dismiss. See Spool v. World Child Int’l Adoption Agency, 520 F.3d 178, 180 (2d Cir.2008).

A. THE SYNTHETIC COLLATERALIZED DEBT OBLIGATION

The allegations in this suit relate to the subprime mortgage crisis of the late 2000s, the causes and effects of

fimimics” the cash flow of particular fireferenced” assets by means of a transaction called the credit default swap

(fiCDS”). (Compl. ¶ 31.)

A CDS functions like a credit insurance agreement covering a referenced asset: one party, the ficredit protection

buyer,” pays periodic premiums in exchange for a promise that the other party, the ficredit protection seller,” will

make an insurance payout should the asset experience a finegative credit event,” such as a payment default or credit

through the broker market in 2006, the world would think [Goldman] was very long for the foreseeable future.” (Id.

¶ 57.) Birnbaum concluded that Goldman needed to fiflip [its] risk.” (Id.)

FN2. Goldman’s first quarter for the fiscal year 2007 began on November 25, 2006, thus encompassing the

Hudson 1 and Hudson 2 offerings.

FN3. The ABX is a group of indices created to measure the performance of select groups of subprime

RMBS. fiInvestors can bet on (i.e., go ‘long’) or against (i.e., go ‘short’) the ABX indices by entering,

among other things, into CDS with a counterparty.” (Compl. ¶ 35.)

Consequently, Goldman officials embarked on a firisk reduction program.” (Id. ¶ 59.) In late 2006, Goldman

fidecided to reduce [its] overall exposure to the residential housing market … given the uncertainty of the future di–

One way Goldman began offsetting subprime risk was by shorting RMBS and mortgage-backed CDOs—in oth-

er words, betting that subprime mortgages and the securities instruments built upon them would decrease in value.

As Birnbaum explained after the fact, fi[Goldman] should not only get flat, but get VERY short.” (Id. ¶ 57.) Thus,

according to Swenson, fi[i]n November and December of 2006, we aggressively capitalized on the franchise to enter

into efficient shorts in both the RMBS and CDO space.” (Id. ¶ 55.) Goldman did this in part by fibuying protection”

D. THE HUDSON CDOS

The Hudson 1 and Hudson 2 offerings occurred during this shift in Goldman’s strategy. The Hudson 1 offering

commenced on December 5, 2006; Hudson 2 commenced two months later, on February 8, 2007.

proceeds of the offerings. The Hudson CDO offerings were implemented through the creation of the Hudson SPEs,

fispecial purpose entities” formed by Goldman for the sole purpose of issuing and selling the Hudson CDO securi–

ties. Ostrem and Herrick, who were vice presidents in SPG Trading, led the offerings.

FN4. Dodona cites and quotes from the Marketing Book in the Complaint. Defendants submitted the full

Marketing Book in support of their motions to dismiss.

The Defendants disclosed that fi[v]arious potential and actual conflicts of interest may arise” from other activi-

ties of GSI, GS & Co, and their affiliates, and that it was expected that GS & Co would have underwritten some of

the referenced RMBS. (Id., ex. A at 56–57, ex. B at 53–54.) In particular, the Offering Circulars noted that the GS &

Co and GSI might have fiinterests different from or adverse to” the note holders and might possess material, non–

WELL AS THE LIKELY LEVEL AND TIMING OF RECOVERIES ON THE REFERENCE OBLIGATIONS.”

(Id. ex. A at 8–9, ex. B at 8–9.)

Finally, the Offering Circulars identified GSI as the fiCredit Protection Buyer,” and the fiinitial Credit Protection

Buyer.” (Id., ex. A at 25, 100, ex. B at 24, 94.) More specifically, the Offering Circulars disclosed that fi[i]t is ex-

million of the Hudson 1 notes on approximately February 6, 2007 from an intermediate fund, which had purchased

its securities from GS & Co.

The credit quality of the Hudson CDOs rapidly deteriorated at the same time as the downturn of the housing

market. By September 2007, Moody’s downgraded the credit rating of certain of the Hudson 1 notes and placed on

finegative watch” certain of the Hudson 2 notes. By mid–2008, Standard & Poor’s had downgraded $286 million of

bers cited the Hudson CDOs, among several other securities offerings, as evidence that Goldman fiissued and sold to

clients RMBS and CDO securities containing or referencing high risk assets that Goldman Sachs wanted to get off

its books,” and that Goldman’s strategic shorting allowed it to fiprofit[ ] from the loss in value of the very CDO secu–

rities it had sold to its clients.” (Id. ¶¶ 108, 52.)

The Complaint quotes extensively from the testimony and documents produced to and memoranda and findings

II. LEGAL STANDARD

A. STANDARD OF REVIEW UNDER RULE 12(B)(6)

fiTo survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to ‘state a

not to assay the weight of the evidence which might be offered in support thereof.” In re Initial Pub. Offering Sec.

Litig., 383 F.Supp.2d 566, 574 (S.D.N.Y.2005) (internal quotation marks omitted). The court must accept all well–

pleaded factual allegations in the complaint as true, and draw all reasonable inferences in the plaintiff’s favor. See

Chambers v. Time Warner, Inc., 282 F.3d 147, 152 (2d Cir.2002).

[1][2] Plaintiffs claiming fraud, including securities fraud and common law fraud, must satisfy the heightened

on which that belief is formed.” Id.

B. THE EXCHANGE ACT

[3] Section 10(b) of the Exchange Act makes it unlawful fi[t]o use or employ, in connection with the purchase

or sale of any security … any manipulative or deceptive device or contrivance….” 15 U.S.C. § 78j(b). Rule 10b–5,

ket manipulation.

1. Misstatements or Omissions of Material Fact

[4] fiTo state a claim under Rule 10b–5 for misrepresentations, a plaintiff must allege that the defendant (1)

made misstatements or omissions of material fact, (2) with scienter, (3) in connection with the purchase or sale of

Warner Inc. Sec. Litig., 9 F.3d 259, 267 (2d Cir.1993). Although fiRule 10b–5 imposes no duty to disclose all mate-

rial, nonpublic information, once a party chooses to speak, it has a ‘duty to be both accurate and complete.’ ”

Plumbers’ Union Local No. 12 Pension Fund v. Swiss Reinsurance Co., 753 F.Supp.2d 166, 180 (S.D.N.Y.2010)

(quoting Caiola v. Citibank, N.A., N.Y., 295 F.3d 312, 331 (2d Cir.2002)).

[8] Whether a misstatement or omission is material is fian inherently fact-specific finding … that is satisfied