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Current Developments in the Commercial Divisions of the
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Posted: November 10, 2016

CDO Fraud Claim Upheld; Disclaimers Did Not Shield Defendant from Liability

On November 3, 2016, the First Department issued a decision in Aozora Bank, Ltd. v. J.P. Morgan Securities LLC, 2016 NY Slip Op. 07260, holding that a plaintiff adequately had plead a claim for fraud in connection with the sale of a collateralized debt obligation notwithstanding the seller’s disclaimers, explaining:

The complaint alleges that plaintiff, while aware or on notice of the concentration of Bear Stearns underwritten assets in the collateralized debt obligation (CDO) at issue, was unaware of how this compared to other CDOs generally or those managed by the same collateral manager. On this motion, defendants have not shown that the disclaimers in the offering documents put plaintiff on notice that defendants had already colluded with the collateral manager to accept into the CDO toxic assets from Bear Stearns’s own balance sheet. The complaint, while in part pleaded on information and belief, had sufficient facts to support the reasonable inference of fraud and scienter. Given defendants’ alleged knowledge of the toxicity of the assets going into the CDO, the fact that the assets technically met the criteria for eligibility in the offering materials did not, as a matter of law, make the representation of the assets as “high grade” true.

(Internal quotations and citations omitted).

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