Commercial Division Blog

Posted: October 24, 2015 / Categories Commercial, Fraud/Misrepresentation

Court Analyzes Fraud Claim in Context of RMBS CDO Sale

On October 16, 2015, Justice Kornreich of the New York County Commercial Division issued a decision in Basis Pac-Rim Opportunity Fund (Master) v. TCW Asset Management Co., 2015 NY Slip Op. 51519(U), analyzing a fraud claim relating to the sale of an RMBS CDO.

Highlights from the decision include:

Material Misrepresentation:

In a securities fraud case, there are two ways to establish a material misrepresentation. The first, as in all fraud cases, is to identify a specific false statement. The second is to establish that defendants' representations, taken together and in context, would have misled a reasonable investor about the nature of the investment. With respect to the former, an expression of opinion may be actionable if the speaker does not genuinely and reasonably believe it or if it is without a basis in fact.

(Internal quotations and citations omitted).


Whether a defendant had fraudulent intent is ordinarily a question of fact which cannot be resolved on a motion for summary judgment. Direct proof of fraudulent intent does not always exist, nor does lack of such proof preclude a fraud claim because participants in a fraud do not affirmatively declare to the world that they are engaged in the perpetration of a fraud. For this reason, intent to commit fraud may be divined from surrounding circumstances.

That said, . . . the motive to earn fees alone is, without more, insufficient for the court to infer scienter.

(Internal quotations and citations omitted).


The reasonableness of [the plaintiff's] reliance is a question of fact for the jury. It requires a specific determination of what an investor in [the plaintiff's] position could be expected to know about the RMBS market.

(Internal quotations and citations omitted).

Loss Causation:

The parties both recognize that loss causation is an element a plaintiff must prove to prevail on a common law fraud claim, a requirement long recognized in securities and other fraud cases. The parties further agree that under New York common law, the causation element of a fraud claim has two distinct prongs: (1) transaction causation; and (2) loss causation.

Superficially, the difference between transaction causation and loss causation appears straightforward. Transaction causation is but-for causation, and merely requires proof that but for defendant's fraudulent misrepresentations, plaintiff would not have entered into the transaction. Loss causation, on the other hand, is the causal link between the alleged misconduct and the economic harm ultimately suffered by the plaintiff. In the securities fraud context in general, an investor may buy shares of a certain stock because her broker falsified—or neglected to mention—some detail but then suffer a loss due to a nationwide recession. Loss causation is lacking unless the fraudulent statement that induced her to invest can also be shown to have made her investment, in fact, more disposed to suffer the alleged harm—a catastrophic market collapse—than honestly described alternative investments.

(Internal quotations and citations omitted).