Quinn Emanuel Strikes Out in CDO Fraud Case
In twin rulings issued on Tuesday, U.S. District Judge Robert Sweet in Manhattan dismissed securities fraud claims against financial firms that marketed and managed a $900 million collateralized debt obligation known as Pyxis ABS CDO 2006-1. The rulings are a blow to Quinn Emanuel Urquhart & Sullivan, which alleged that — contrary to what the defendants told investors — the hedge fund Magnetar Capital secretly assembled the CDO and then bet against it.
In one of his rulings, Sweet dismissed securities fraud and negligent misrepresentation claims brought by Financial Guaranty Insurance Co. against Putnam Advisory Company LLC, Pyxis's collateral manager. FGIC alleged that it agreed to provide credit protection for the CDO only because Putnam misrepresented that it would be choosing the collateral for the Pyxis portfolio, not Magnetar. Sweet dismissed the allegations without prejudice, ruling that FGIC failed to prove that the alleged misrepresentations caused its losses. FGIC also failed prove that it had the sort of "prior relationship" with Putnam that could give rise to a negligent misrepresentation claim, Sweet ruled.
Sweet separately dismissed a similar lawsuit that a Pyxis investor brought against Magnetar and Credit Agricole S.A.'s Calyon unit, which marketed the Pyxis CDO. The investor, the Italian bank Intesa Sanpaolo SpA, alleged that it was duped by Magnetar and Calyon into putting $180 million into the CDO. Sweet dismissed the claims as time-barred. Sweet reached the same conclusion back in February, but he gave the Italian bank leave to amend its complaint. This time he dismissed the case for good.
At their core, both lawsuits were premised on a single alleged misrepresentation — namely, that Putnam was controlling the collateral selection process for the CDO. According to FGIC and Intesa, what actually happened was that Magnetar assembled the CDO and then gambled that it would fail without telling investors.
Quinn Emanuel represented both FGIC and Intesa. Lea Haber Kuck and Gregory Litt of Skadden, Arps, Slate, Meagher & Flom represented Credit Agricole/Calyon. Putnam had a team at Milbank Tweed Hadley & McCloy including Sean Murphy and Thomas Arena. A Kirkland & Ellis team including Joseph Serino Jr. represented Magnetar.
Skadden's Kuck declined to comment. Quinn Emanuel's Philippe Selendy didn't immediately return a call seeking comment.