978-1285770178 Case Printout Case CPC-07-07 Part 3

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subject Pages 11
subject Words 3948
subject Authors Roger LeRoy Miller

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the existence of a fraud; (2) defendant's knowledge of the fraud; and (3) that the defendant provided substantial as-
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© 2012 Thomson Reuters. No Claim to Orig. US Gov. Works.
“[v]ery interesting.” (Compl. ¶ 110.)
An email dated October 26, 2006, from Arbind Jha to several Goldman executives, including Goldman's CEO
and Ostrem and Herrick, stating: “Risk reduction is primarily due to pricing of $2bn Hudson Mez synthetic CDO
deal (SPG Secondary desk bought $325k/bp BBB and $350k/bp BBBRMBS Subprime protection)[.]” (Id. ¶ 56.)
An email dated December 15, 2006 from Birnbaum that was copied to Swenson and stated: “we've had good
traction moving risk through our franchise on a variety of fronts: ABX, single names, super-senior, Hudson 2.”
(Id. ¶ 64.)
An email dated December 20, 2006, from Stacey BashPolley to Ostrem, Swenson, and Birnbaum, among oth-
said: “Need you to send message to peter ostrem and darryl herrick telling them what a great job they did. They
structured like mad and travelled the world, and worked their tails off to make some lemonade from some big old
lemons.” (Id. ¶ 70.)
Fifth and finally, the Complaint alleges that, because of GS & Co's role as an underwriter and more generally
through Goldman's performance of due diligence and reliance on Clayton, Defendants had access to nonpublic in-
tion to dismiss.” San Leandro Emergency Med. Grp. Profit Sharing Plan v. Philip Morris Cos., 75 F.3d 801, 812
(2d Cir.1996).
However, Goldman's suddenand prescientshift to reducing subprime risk supports the inference that it pos-
sessed some unique insight; it is not unreasonable to infer that GS & Co's role as underwriter and the due diligence
Goldman performed provided Defendants with material nonpublic information supporting that decision. See In re
denWurttemberg v. Goldman, Sachs & Co., 821 F.Supp.2d 616 (S.D.N.Y.2011), which Defendants cite as support-
ing dismissal. Landesbank also concerned a RMBS-backed CDO, called “Davis Square,” which GS & Co under-
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wrote and issued. The plaintiff-investor in Landesbank, claiming common law fraud, alleged that GS & Co knew
man/GS & Co's due diligence, it also contains particularized allegations about how the Hudson CDOs fit within
Goldman's risk reduction program, and how at least some of Goldman's officers were on notice that the Hudson
CDOs were “junk.” These allegations are supported by quotes from Goldman-authored documents, complete with
dates and names. See, e.g., In re Ambac Fin. Grp., Inc. Sec. Litig., 693 F.Supp.2d 241, 268 (S.D.N.Y.2010) (finding
sufficient allegations of recklessness where complaint cited emails and memo received by defendants indicating
from which he diligently made “lemonade.” (Compl. ¶¶ 70, 110.) Thus, Dodona has adequately alleged that
the conduct of Ostrem and Herrick constituted recklessness. In addition, the Complaint alleges that the
Hudson CDOs were created, directed, and controlled by GS & Co and Goldman. Scienter may therefore be
imputed to the Hudson SPEs. See Teamsters Local 445 Freight Div. Pension Fund, 531 F.3d at 195.
was not in any way extraordinarily riskyand the actions that Goldman took coupled with the language regarding
“junk” and “lemons” that appears in emails. See In re Ambac, 693 F.Supp.2d at 269. Indeed, Defendants' actions
themselvescreating CDOs, selecting the referenced RMBS, and then betting heavily against themindicate that
“the company in fact saw the risks and, in consequence, maneuvered to avoid them.” In re Citigroup, Inc. Sec. Litig.,
753 F.Supp.2d at 237 (finding that plaintiffs pled scienter via recklessness); cf. ATSI, 493 F.3d at 101 (“[S]hort sell-
poorly.
b. Motive and Opportunity
The Complaint could also be read to support an allegation that Defendants possessed a motive and opportunity
to perpetrate the alleged fraud because they “benefited in some concrete and personal way from the purported
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© 2012 Thomson Reuters. No Claim to Orig. US Gov. Works.
synthetic CDOs which Morgan Stanley had designed to fail so it could profit from short positions on those same
CDOs. The Court found that
[Plaintiffs] have pled what amounts to self-dealing by Morgan Stanley, insofar as Morgan Stanley was betting
against, or ‘shorting,’ the synthetic CDOs that it had itself created. The engineered fragility of the CDOs and
Morgan Stanley's position on both sides of the deal adequately alleges motive.
mortgage related assets “because there will be very good opportunities as the market goes into what is likely to be
even greater distress and we want to be in position to take advantage of them.” (Compl. 63.) Similarly, Birnbaum
“concluded that [Goldman] should not only get flat, but get VERY short.” (Id. ¶ 57.) Coupled with GSI's significant
short position on the Hudson CDOs, these statements indicate motive and opportunity.
Offering Circulars. Specifically, Dodona alleges that the Marketing Defendants did not disclose to investors (1) that
the Hudson CDOs were structured and issued as part of Goldman's strategy to reduce its exposure to subprime-
mortgage risk and to profit by betting against them; and (2) that the Marketing Defendants did not “genuinely be-
lieve that the Hudson CDOs would have a realistic chance of being profitable for investors....” (Compl. ¶ 176.)
The Complaint cites the following statements in the Marketing Book and the Offering Circulars as misleading:
• The Hudson CDOs were designed “to create a consistent, programmatic, approach to invest in attractive relative
value opportunities in the RMBS and structured product market.” (Id. ¶¶ 85, 175.)
“INFORMATION CONTAINED IN THIS OFFERING CIRCULAR ... DOES NOT OMIT ANYTHING
LIKELY TO AFFECT THE IMPORT OF SUCH INFORMATION.” (Id. ¶ 88, 96, 175.)
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and from the overall investment activity of the Initial Purchaser [GS & Co], including in other transactions with
the Issuer [Hudson 1/2 Ltd].” (Id.)
Dodona's Complaint does not rest on allegations that those overt statements were, standing alone, false, but ra-
reason or reasons why the statement is misleading.” 15 U.S.C. § 78u4(b).
However, since Dodona's allegations of misrepresentation sound in omission, the question remains whether the
Marketing Defendants had a duty to disclose either of the omissions alleged; and, if so, whether disclosures or pub-
licly available information discharged them of that duty. See In re Time Warner Inc. Sec. Litig., 9 F.3d at 267 (“an
omission is actionable under the securities law only when the [defendant] is subject to a duty to disclose the omitted
investment and risk-management “strategy,” or how the Hudson CDOs might fit into some overarching plan. Nor
are there any independent statutory or regulatory disclosure obligations that would have required the Marketing De-
fendants to reveal such a strategy. See In re Morgan Stanley Info. Fund Sec. Litig., 592 F.3d 347, 360 (2d Cir.2010)
(failure to meet “[a]ffirmative [d]isclosure [o]bligations” is one form of omission that can create federal securities
law liability). Since “[s]ilence, absent a duty to disclose, is not misleading under Rule 10b–5,” Basic Inc., 485 U.S.
in its entirety, it is clear that the alleged omission amounts to an allegation that Defendants inaccurately represented
the risk, of which they were actually aware, associated with investing in the Hudson CDOs. Contrary to Defendants'
contentions, the alleged omission is therefore more substantial than a failure to disclose “mere disbelief” or “opin-
ions.” (Def. Br. at 1719 (Docket No. 49).) Since the Offering Circulars contained affirmative representations re-
garding the risks of investing,FN12 the Marketing Defendants had a duty to ensure that those statements were accurate
ments of SEC Rule 144A (“Rule 144A”), 17 C.F.R. § 230.144A, which exempts registration for sales of re-
stricted or controlled securities to “Qualified Institutional Buyers.” Rule 144A does not require risk disclo-
sures, but the Offering Circulars made them anyway.
Dodona has adequately alleged an actionable omission because, assuming it is right about the known risks, the
risk disclosures in the Offering Circulars were inaccurate and therefore misleading. The Goldman-authored emails
© 2012 Thomson Reuters. No Claim to Orig. US Gov. Works.
“[v]ery interesting.” (Compl. ¶ 110.)
An email dated October 26, 2006, from Arbind Jha to several Goldman executives, including Goldman's CEO
and Ostrem and Herrick, stating: “Risk reduction is primarily due to pricing of $2bn Hudson Mez synthetic CDO
deal (SPG Secondary desk bought $325k/bp BBB and $350k/bp BBBRMBS Subprime protection)[.]” (Id. ¶ 56.)
An email dated December 15, 2006 from Birnbaum that was copied to Swenson and stated: “we've had good
traction moving risk through our franchise on a variety of fronts: ABX, single names, super-senior, Hudson 2.”
(Id. ¶ 64.)
An email dated December 20, 2006, from Stacey BashPolley to Ostrem, Swenson, and Birnbaum, among oth-
said: “Need you to send message to peter ostrem and darryl herrick telling them what a great job they did. They
structured like mad and travelled the world, and worked their tails off to make some lemonade from some big old
lemons.” (Id. ¶ 70.)
Fifth and finally, the Complaint alleges that, because of GS & Co's role as an underwriter and more generally
through Goldman's performance of due diligence and reliance on Clayton, Defendants had access to nonpublic in-
tion to dismiss.” San Leandro Emergency Med. Grp. Profit Sharing Plan v. Philip Morris Cos., 75 F.3d 801, 812
(2d Cir.1996).
However, Goldman's suddenand prescientshift to reducing subprime risk supports the inference that it pos-
sessed some unique insight; it is not unreasonable to infer that GS & Co's role as underwriter and the due diligence
Goldman performed provided Defendants with material nonpublic information supporting that decision. See In re
denWurttemberg v. Goldman, Sachs & Co., 821 F.Supp.2d 616 (S.D.N.Y.2011), which Defendants cite as support-
ing dismissal. Landesbank also concerned a RMBS-backed CDO, called “Davis Square,” which GS & Co under-
wrote and issued. The plaintiff-investor in Landesbank, claiming common law fraud, alleged that GS & Co knew
man/GS & Co's due diligence, it also contains particularized allegations about how the Hudson CDOs fit within
Goldman's risk reduction program, and how at least some of Goldman's officers were on notice that the Hudson
CDOs were “junk.” These allegations are supported by quotes from Goldman-authored documents, complete with
dates and names. See, e.g., In re Ambac Fin. Grp., Inc. Sec. Litig., 693 F.Supp.2d 241, 268 (S.D.N.Y.2010) (finding
sufficient allegations of recklessness where complaint cited emails and memo received by defendants indicating
from which he diligently made “lemonade.” (Compl. ¶¶ 70, 110.) Thus, Dodona has adequately alleged that
the conduct of Ostrem and Herrick constituted recklessness. In addition, the Complaint alleges that the
Hudson CDOs were created, directed, and controlled by GS & Co and Goldman. Scienter may therefore be
imputed to the Hudson SPEs. See Teamsters Local 445 Freight Div. Pension Fund, 531 F.3d at 195.
was not in any way extraordinarily riskyand the actions that Goldman took coupled with the language regarding
“junk” and “lemons” that appears in emails. See In re Ambac, 693 F.Supp.2d at 269. Indeed, Defendants' actions
themselvescreating CDOs, selecting the referenced RMBS, and then betting heavily against themindicate that
“the company in fact saw the risks and, in consequence, maneuvered to avoid them.” In re Citigroup, Inc. Sec. Litig.,
753 F.Supp.2d at 237 (finding that plaintiffs pled scienter via recklessness); cf. ATSI, 493 F.3d at 101 (“[S]hort sell-
poorly.
b. Motive and Opportunity
The Complaint could also be read to support an allegation that Defendants possessed a motive and opportunity
to perpetrate the alleged fraud because they “benefited in some concrete and personal way from the purported
© 2012 Thomson Reuters. No Claim to Orig. US Gov. Works.
synthetic CDOs which Morgan Stanley had designed to fail so it could profit from short positions on those same
CDOs. The Court found that
[Plaintiffs] have pled what amounts to self-dealing by Morgan Stanley, insofar as Morgan Stanley was betting
against, or ‘shorting,’ the synthetic CDOs that it had itself created. The engineered fragility of the CDOs and
Morgan Stanley's position on both sides of the deal adequately alleges motive.
mortgage related assets “because there will be very good opportunities as the market goes into what is likely to be
even greater distress and we want to be in position to take advantage of them.” (Compl. 63.) Similarly, Birnbaum
“concluded that [Goldman] should not only get flat, but get VERY short.” (Id. ¶ 57.) Coupled with GSI's significant
short position on the Hudson CDOs, these statements indicate motive and opportunity.
Offering Circulars. Specifically, Dodona alleges that the Marketing Defendants did not disclose to investors (1) that
the Hudson CDOs were structured and issued as part of Goldman's strategy to reduce its exposure to subprime-
mortgage risk and to profit by betting against them; and (2) that the Marketing Defendants did not “genuinely be-
lieve that the Hudson CDOs would have a realistic chance of being profitable for investors....” (Compl. ¶ 176.)
The Complaint cites the following statements in the Marketing Book and the Offering Circulars as misleading:
• The Hudson CDOs were designed “to create a consistent, programmatic, approach to invest in attractive relative
value opportunities in the RMBS and structured product market.” (Id. ¶¶ 85, 175.)
“INFORMATION CONTAINED IN THIS OFFERING CIRCULAR ... DOES NOT OMIT ANYTHING
LIKELY TO AFFECT THE IMPORT OF SUCH INFORMATION.” (Id. ¶ 88, 96, 175.)
and from the overall investment activity of the Initial Purchaser [GS & Co], including in other transactions with
the Issuer [Hudson 1/2 Ltd].” (Id.)
Dodona's Complaint does not rest on allegations that those overt statements were, standing alone, false, but ra-
reason or reasons why the statement is misleading.” 15 U.S.C. § 78u4(b).
However, since Dodona's allegations of misrepresentation sound in omission, the question remains whether the
Marketing Defendants had a duty to disclose either of the omissions alleged; and, if so, whether disclosures or pub-
licly available information discharged them of that duty. See In re Time Warner Inc. Sec. Litig., 9 F.3d at 267 (“an
omission is actionable under the securities law only when the [defendant] is subject to a duty to disclose the omitted
investment and risk-management “strategy,” or how the Hudson CDOs might fit into some overarching plan. Nor
are there any independent statutory or regulatory disclosure obligations that would have required the Marketing De-
fendants to reveal such a strategy. See In re Morgan Stanley Info. Fund Sec. Litig., 592 F.3d 347, 360 (2d Cir.2010)
(failure to meet “[a]ffirmative [d]isclosure [o]bligations” is one form of omission that can create federal securities
law liability). Since “[s]ilence, absent a duty to disclose, is not misleading under Rule 10b–5,” Basic Inc., 485 U.S.
in its entirety, it is clear that the alleged omission amounts to an allegation that Defendants inaccurately represented
the risk, of which they were actually aware, associated with investing in the Hudson CDOs. Contrary to Defendants'
contentions, the alleged omission is therefore more substantial than a failure to disclose “mere disbelief” or “opin-
ions.” (Def. Br. at 1719 (Docket No. 49).) Since the Offering Circulars contained affirmative representations re-
garding the risks of investing,FN12 the Marketing Defendants had a duty to ensure that those statements were accurate
ments of SEC Rule 144A (“Rule 144A”), 17 C.F.R. § 230.144A, which exempts registration for sales of re-
stricted or controlled securities to “Qualified Institutional Buyers.” Rule 144A does not require risk disclo-
sures, but the Offering Circulars made them anyway.
Dodona has adequately alleged an actionable omission because, assuming it is right about the known risks, the
risk disclosures in the Offering Circulars were inaccurate and therefore misleading. The Goldman-authored emails

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