Overview
This Thursday, Judge Scheindlin denied reconsideration of Moody's, S&P's and Morgan Stanley's motions to dismiss claims brought by investors to recover losses stemming from the October, 2007 collapses of Rhinebridge and Cheyne, structured investment vehicles. (Our previous post on her denial of the motions to dismiss is here.) Defendants' motions for reconsideration were based on new authority regarding negligent misrepresentation claims in securities cases: the Second Circuit’s May 10, 2012 decision in City of Omaha, Nebraska Civilian Employees’ Retirement System v. CBS Corp., and its May 18, 2012 summary order in Stephenson v. PricewaterhouseCoopers, LLP. Judge Schiendlin, however, was not persuaded that either case cast doubt on her previous decision.
Defendants had sought dismissal of investors' New York common law negligent misrepresentation claims on two grounds relevant to their motions to reconsideration. First, they argued that "credit ratings are predictive opinions about future events" and therefore "cannot be actionable in a negligence context." In denying defendants' motions to dismiss, Judge Scheindlin noted that defendants relied exclusively on authority interpreting and applying Sections 11 and 12 of the Securities Act, explaining:
[a]lthough cases interpreting Section 10(b) of the Securities Act are helpful to federal courts applying New York law, the same is not true for Sections 11 and 12.In support of reconsideration, defendants argued that CBS makes clear that opinions are not actionable based on allegations of negligence. But Judge Scheindlin thought it was just more of the same:
While Fait and CBS do seem to represent a trend in the Second Circuit, unless and until the Second Circuit explicitly rules that a New York state law negligent misrepresentation claim cannot be based on an opinion under any circumstances, this Court must follow established state law — particularly when issued by the highest court of the state. If, and when, the Second Circuit explicitly rules that a New York state law claim for negligent misrepresentation may never be based on an opinion, then plaintiffs’ claim here must be dismissed. Until that time, however, defendants have not met the standard for reconsideration of this Court’s opinion.Second, defendants argued that because investors were not "known parties" to the rating agencies or Morgan Stanley, they did not have the kind of special relationship necessary (under Credit Alliance) to make out a negligent misrepresentation claim under New York law. In denying the motions to dismiss, Judge Scheindlin found that defendants:
...need not know the identity of each particular plaintiff to satisfy the Credit Alliance test...rather plaintiffs are a known party if they are members of a "settled and particularized class," as opposed to an "indeterminate class."In urging reconsideration, defendants argued that Stephenson squarely held that "membership in alleged 'select' group of qualified potential investors is insufficient as a matter of law to satisfy the 'known party' element" and therefore mandated dismissal. Judge Scheindlin disagreed:
Stephenson is neither controlling nor contrary to the May 4 Opinion. Because Stephenson is an unpublished summary order, it does not have precedential effect. A summary order cannot serve as the basis for reconsideration. Moreover, Stephenson is distinguishable ....The plaintiff in Stephenson was not a member of a "settled and particularized class" rather, he was “nothing more than a ‘prospective limited partner[], unknown at the time and who might be induced to join [the partnership]."It's worth noting that plaintiffs amended their complaints to add these negligent misrepresentation claims after the New York Court of Appeals' December 20, 2011 opinion in Assured Guaranty clarified that New York’s Martin Act does not preempt common law claims in the securities context.