As we blogged about before, an Italian bank that provided $180 million in credit protection on a CDO called “Pyxis” sued U.S. hedge fund Magnetar and others for allegedly conspiring to secretly place risky assets into Pyxis so that Magnetar could bet against the CDO and profit from its collapse. This evening, two [UPDATE: three] of the defendants moved to dismiss. The CDO arranger, Credit Agricole, moved to dismiss because (among other reasons) the core allegation was based on speculation from news accounts relating to other deals:
Intesa, a sophisticated, self-proclaimed leading European financial institution, brings this action in an attempt to capitalize on press reports and cases relating to transactions which did not involve CA-CIB. The core of Intesa’s theory appears to be that because certain press reports stated, based on anonymous sources, that certain conduct allegedly occurred in these other transactions, the same conduct must have occurred in the transaction in which Intesa was involved. This widely discredited pleading tactic is not sufficient to support any claim.
. . .
Intesa alleges here that Magnetar made an equity investment in Pyxis (i.e., took a long position). From there, Intesa cites general and anonymous reports of Magnetar’s trading strategy to speculate that Magnetar must also have taken a short position on Pyxis, and that its short position must have been larger than its long position, but it offers no factual allegations whatsoever as to whether Magnetar took a short position on the CDO, and if so, the size of that position relative to its long position on Pyxis.
Defendant Putnum, the collateral manager of Pyxis, moved to dismiss because (among other reasons) there were insufficient allegations of scienter:
At bottom, Intesa alleges that Putnam, a large and respected financial institution, knowingly engaged in a billion dollar fraud to earn ordinary collateral manager fees. There is no allegation that Putnam received anything other than its fully disclosed contractual fee for serving as the collateral manager or that the fees it earned in this capacity were outsized or extraordinary in any respect. In fact, a significant portion of Putnam’s fee was subordinated to the payments owed by Pyxis to noteholders; if the CDO failed, Putnam would not receive its full fee. These allegations fall well short of establishing scienter.
UPDATE: Since the original post, Magnetar itself also moved to dismiss:
As the Complaint makes clear, this case is all about a $180 million side deal—effectuated through a derivative contract known as a credit default swap (“CDS”)—between plaintiff Intesa and defendant Calyon CIB referencing certain notes owned by Calyon. . . . . But the Complaint does not, and cannot, allege that any Magnetar defendant: (a) even knew about Intesa’s CDS with Calyon, let alone ever met with, spoke to, communicated with, traded with, negotiated with, or contracted with Intesa; (b) was ever present when the other defendants met with, spoke to, communicated with, traded with, negotiated with, or contracted with Intesa; (c) ever made, assisted in, or participated in the preparation or dissemination of any statement, oral or written, to Intesa about the CDS, the collateral selection process, or collateral valuations (or anything else for that matter) for the Pyxis CDO; or (d) ever selected, directly or indirectly, any specific collateral owned by the Pyxis CDO. Unable to allege any such facts, the Complaint instead relies on sweeping and wholly conclusory allegations largely based on unsubstantiated, anecdotal stories from newspapers and other media sources—which themselves rely on anonymous sources and proffer theories that have never been subject to the scrutiny of a trier of fact—reporting on other alleged transactions or the alleged misconduct of other parties.
Credit Agricole is represented by Skadden. Putnam is represented by Milbank. Magnetar is represented by Kirkland.