Second Circuit – Loss Causation: Fin. Guar. Ins. Co. v. Putnam Advisory Co.

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U.S. Court of Appeals for the Second Circuit – Fraud – Loss Causation – Negligence – Sufficient Allegations

Fin. Guar. Ins. Co. v. Putnam Advisory Co.

14-1673-cv

Judges Kearse, Straub and Raggi

Background: The plaintiff argued that the defendant misrepresented its management of a collateralized debt obligation in order to induce the plaintiff to provide financial guaranty insurance. The plaintiff argued that the defendant would select collateral independently and in the interests of long investors, but in fact permitted collateral selection and acquisition process be controlled by a hedge fund, which maintained significant short positions. The plaintiff appealed from the dismissal of its fraud claim on the ground that the complaint did not adequately plead loss causation, and the plaintiff’s negligence claims on the ground that the complaint did not allege facts sufficient to establish a special relationship between the parties.

Ruling: The Second Circuit vacated the order and remanded for further proceedings. The court held that the plaintiff alleged particular facts that, when considered as a whole, plausibly allege the defendant’s alleged misrepresentations and omissions caused at least some economic harm. Additionally, there were sufficient facts alleged that evinced the defendant’s understanding that the plaintiff would rely on the defendant’s care and competence in managing the portfolio.

Sanford I. Weisburst of Quinn Emanuel Urquhart & Sullivan for the plaintiff-appellant; Thomas A. Arena of Milbank, Tweed, Hadley & McCloy for the defendant-appellee