     13-2095-cv (L)
     Pennsylvania Public School Employees’ Retirement System v. Morgan Stanley & Co. Inc.

 1                            UNITED STATES COURT OF APPEALS
 2
 3                                FOR THE SECOND CIRCUIT
 4
 5                                   August Term, 2013
 6
 7   (Argued: June 20, 2014                               Decided: October 31,2014)
 8
 9      Docket Nos. 13-2095-cv(L), 13-2283-cv(XAP), 13-2286-cv(XAP),
10                             13-2287-cv(XAP)
11   - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
12   COMMONWEALTH OF PENNSYLVANIA PUBLIC SCHOOL EMPLOYEES’ RETIREMENT
13   SYSTEM, together and on behalf of all others similarly situated,
14   COMMERZBANK AG, together and on behalf of all others similarly
15   situated,
16
17                Plaintiffs-Appellants-Cross-Appellees,
18
19   ABU DHABI COMMERCIAL BANK, individually and on behalf of all
20   others similarly situated, KING COUNTY, WASHINGTON, together and
21   on behalf of all others similarly situated, SEI INVESTMENTS
22   COMPANY, together and on behalf of all others similarly situated,
23   THE BANK OF N.T. BUTTERFIELD & SON LIMITED, SFT COLLECTIVE
24   INVESTMENT FUND, DEUTSCHE POSTBANK AG, GLOBAL INVESTMENT SERVICES
25   LIMITED, GULF INTERNATIONAL BANK B.S.C., NATIONAL AGRICULTURAL
26   COOPERATIVE FEDERATION, together and on behalf of all others
27   similarly situated, STATE BOARD OF ADMINISTRATION OF FLORIDA,
28   together and on behalf of all others similarly situated, BANK
29   SINOPAC, together and on behalf of all others similarly situated,
30   BANK HAPOALIM B.M., together and on behalf of all others
31   similarly situated, KBL EUROPEAN PRIVATE BANKERS S.A.,
32
33                Plaintiffs,
34
35                       v.
36
37   MORGAN STANLEY & CO., INCORPORATED, MORGAN STANLEY & CO.
38   INTERNATIONAL LIMITED, MOODY’S INVESTOR SERVICE, INC., MOODY’S
39   INVESTOR SERVICE, LTD., THE MCGRAW-HILL COMPANIES, INC., STANDARD
40   & POOR’S RATING SERVICES,
41
42                Defendants-Appellees-Cross-Appellants,
43
44
45

                                               1
 1   CHEYNE CAPITAL MANAGEMENT LIMITED, CHEYNE CAPITAL MANAGEMENT (UK)
 2   LLP, CHEYNE CAPITAL INTERNATIONAL LIMITED, THE BANK OF NEW YORK
 3   MELLON, formerly known as The Bank of New York, QSR MANAGEMENT
 4   LIMITED,
 5
 6             Defendants.
 7   - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
 8
 9   B e f o r e:   WINTER, LEVAL, and LYNCH, Circuit Judges.
10
11        Appeal from a judgment entered in the United States District

12   Court for the Southern District of New York (Shira A. Scheindlin,

13   Judge) denying class certification, dismissing appellant

14   Commerzbank’s fraud claims for lack of standing, and dismissing

15   appellant Commonwealth of Pennsylvania Public School Employees’

16   Retirement System’s claims for lack of diversity jurisdiction.

17   We affirm the denial of class certification and the dismissal of

18   PSERS’s claim, and we certify questions dispositive of

19   Commerzbank’s appeal to the New York Court of Appeals.

20                                      LUKE O. BROOKS (Joseph D.
21                                      Daley & Daniel S. Drosman, San
22                                      Diego, CA) Robbins Geller
23                                      Rudman & Dowd LLP, San
24                                      Francisco, CA, for Plaintiffs-
25                                      Appellants-Cross-Appellees.
26
27                                      JAMES P. ROUHANDEH (Antonio J.
28                                      Perez-Marques, Paul S.
29                                      Mishkin, Jessica L. Turner, on
30                                      the joint brief) Davis Polk &
31                                      Wardwell LLP, New York, NY,
32                                      for Defendants-Appellees-
33                                      Cross-Appellants Morgan
34                                      Stanley & Co. Inc. and Morgan
35                                      Stanley & Co. Int’l Ltd.
36
37                                      Dean Ringel, Jason M. Hall,
38                                      Roxana Labatt, Cahill Gordon &
39                                      Reindel LLP, New York, NY, on

                                                      2
 1                                        the joint brief,
 2                                        for Defendants-Appellees-
 3                                        Cross-Appellants Standard &
 4                                        Poor’s Ratings Services and
 5                                        The McGraw-Hill Companies,
 6                                        Inc.
 7
 8                                        Joshua M. Rubins, James J.
 9                                        Coster, Mario Aieta, James I.
10                                        Doty, Satterlee Stephens Burke
11                                        & Burke LLP, New York, NY;
12                                        Mark A. Perry, Gibson, Dunn &
13                                        Crutcher LLP, Washington, DC,
14                                        on the joint brief, for
15                                        Defendants-Appellees-Cross-
16                                        Appellants Moody’s Investors
17                                        Service, Inc. and Moody’s
18                                        Investors Service Ltd.
19
20   WINTER, Circuit Judge:
21
22        The Commonwealth of Pennsylvania Public School Employees’

23   Retirement System (“PSERS”) and Commerzbank AG (“Commerzbank”)

24   appeal from Judge Scheindlin’s order of final judgment.   See Fed.

25   R. Civ. P. 54(b).   That judgment encompassed several previous

26   orders that, as relevant to this appeal:   (i) denied class

27   certification under Fed. R. Civ. P. 23 based on appellants’

28   failure to establish numerosity and predominance of common

29   issues; (ii) dismissed Commerzbank’s claim for lack of standing;

30   and (iii) dismissed PSERS’s claim because its presence as a party

31   would destroy complete diversity, the sole basis of subject

32   matter jurisdiction.   We affirm the denial of class certification

33   and dismissal of PSERS.   However, we hold that it was not a

34   permissible exercise of discretion for the district court to

35   limit Commerzbank’s ability to establish its standing.    We

                                      3
 1   certify to the New York Court of Appeals the question of whether

 2   a reasonable trier of fact could find that Commerzbank had

 3   acquired from a third party that had purchased securities a fraud

 4   claim against Morgan Stanley & Co. (“Morgan Stanley”).   We also

 5   certify the question whether, if Commerzbank has standing, a

 6   reasonable trier of fact could hold Morgan Stanley liable for

 7   fraud based on the present record.

 8                               BACKGROUND

 9   a)   The Cheyne SIV

10         We view all disputed facts and inferences fairly drawn from

11   those facts in the light most favorable to appellants.   Salamon

12   v. Our Lady of Victory Hosp., 514 F.3d 217, 226 (2d Cir. 2008).

13         The present dispute arose out of the collapse of the Cheyne

14   SIV, a structured investment vehicle (“SIV”) that was managed by

15   Cheyne Capital (“Cheyne”) (a defendant but not a party to this

16   appeal) and structured by appellee Morgan Stanley.   Cheyne SIV

17   was launched in 2005 and issued several classes of notes

18   amounting to several billion dollars, before its demise in 2007.

19   The notes had different maturities, return rates, and risk

20   profiles.   Because of the complexity of the SIV, the notes could

21   be purchased only by sophisticated institutional investors.

22   Three specific notes are at issue:   senior commercial paper

23   notes, senior medium term notes, and mezzanine capital notes.

24   All of them were given high ratings (the senior notes received


                                      4
 1   higher ratings) by the ratings agencies named as defendants:

 2   Standard & Poor’s Ratings Services and the McGraw-Hill Companies,

 3   Inc. (“S&P”); and Moody’s Investors Service, Inc. and its

 4   subsidiary Moody’s Investors Service Ltd..

 5         Morgan Stanley included those ratings in selling documents

 6   distributed to potential investors.   According to appellants, the

 7   ratings were unreliable because they were based on outdated

 8   models and data.   The ratings agencies are alleged to have known

 9   of this unreliability.    It is also alleged that the use of

10   unreliable models was caused by Morgan Stanley’s demand for high

11   ratings.   Thus, according to the complaint, the Cheyne SIV as a

12   whole received a triple-A rating despite being loaded with very

13   risky assets, including a significant profile of subprime

14   residential mortgage-backed securities.   As is well known, the

15   housing market collapsed in the summer of 2007.   The SIV

16   collapsed with it and declared bankruptcy in the fall of 2007.

17   b)   Procedural History

18         Following Cheyne’s collapse, this lawsuit was filed as a

19   putative class action by Abu Dhabi Commercial Bank (“ADCB”) on

20   August 25, 2008.   ADCB’s complaint alleged common law fraud under

21   New York law and based federal subject matter jurisdiction on

22   diversity of citizenship under 28 U.S.C. § 1332(a).   Two

23   additional plaintiffs later joined.   They eventually moved for

24   class certification on the common law fraud claims seeking to


                                       5
 1   represent a class of all investors in the Cheyne SIV who

 2   purchased notes during a class period from October 2004 to

 3   October 2007.   The district court denied that motion, holding

 4   that plaintiffs failed to establish numerosity and the

 5   predominance of common issues.   Interlocutory review was denied.

 6   Plaintiffs’ counsel were then allowed to contact other investors,

 7   which led to the addition of twelve new plaintiffs, including

 8   Commerzbank and PSERS.

 9        In January 2012, appellants filed the complaint operative

10   for purposes of this appeal.   Appellees responded with motions to

11   dismiss and for summary judgment on the fraud-related claims

12   shortly thereafter.   In their motion for summary judgment,

13   appellees raised, inter alia, the issues before us on appeal:

14   whether Commerzbank had acquired from the original purchaser of

15   some of the notes the purchaser’s fraud claim against Morgan

16   Stanley, and whether Morgan Stanley had made actionable

17   misrepresentations.

18        In responding to the motion for summary judgment, all

19   fifteen plaintiffs, including appellants, were limited by the

20   district court to a single three-page “reliance declaration”

21   necessary to establish the reliance of each plaintiff on the

22   alleged misstatements as required to support a valid fraud claim

23   under New York law.   With regard to Commerzbank’s claim, that

24   declaration stated that Commerzbank had acquired Dresdner Bank AG


                                      6
 1   (“Dresdner”) through a merger in 2009, and that Dresdner had

 2   earlier purchased Cheyne SIV notes from Allianz Dresdner Daily

 3   Asset Fund (“DAF”), the original purchaser, at par –- face value

 4   -- after which DAF was “wound down.”   The declaration further

 5   stated that, under German law, “all of Dresdner’s assets,

 6   liabilities, rights and obligations passed automatically by

 7   operation of law to Commerzbank.”

 8        On August 17, 2012, the district court granted appellees’

 9   motion for summary judgment in part.   As relevant to this appeal,

10   the court held that Commerzbank had failed to establish standing

11   to sue under New York law.   It held that, for a subsequent holder

12   of a note to have standing to sue entities involved in the

13   issuance of the note for torts committed in the issuance, the

14   prior holder of a note must assign its tort claims at the time of

15   transfer, and that a simple transfer of the note did not assign

16   those claims.   The court determined that Commerzbank’s statement

17   in the reliance declaration had not shown that Dresdner acquired

18   DAF’s tort claims through the transfer and merger.   Commerzbank’s

19   claims were, therefore, dismissed.   The court did not reach

20   appellees’ argument that DAF had not reasonably relied on the

21   Cheyne SIV credit ratings.

22        The district court also dismissed claims against Morgan

23   Stanley for fraud on the grounds that the only misstatements

24   alleged were made by the ratings agencies themselves and that


                                      7
 1   these were not attributable to Morgan Stanley.   Therefore, the

 2   court reasoned, Morgan Stanley could not be held liable for fraud

 3   based on third-party misstatements under New York law.

 4        Commerzbank moved for reconsideration of the dismissal of

 5   its fraud claims.   Attached to the motion was a new declaration

 6   (“Williams declaration”) that explained the transfer of rights

 7   from DAF to Dresdner to Commerzbank.   Ten days later, Commerzbank

 8   also filed a Fed. R. Civ. P. 17(a)(3) “ratification” of its claim

 9   and another declaration (“Shlissel declaration”).   These

10   documents were a far more thorough explanation of how DAF was

11   unable, and could not have intended, to retain any interest in

12   the notes, including a right to sue.   The court refused to

13   consider the two documents because they were untimely and denied

14   reconsideration.

15        In November 2012, appellees discovered that PSERS had

16   previously represented that it was an arm of the state of

17   Pennsylvania –- now conceded –- and not a citizen of that or any

18   state, as required by 28 U.S.C. § 1332(a).   See infra n.1.

19   Appellees accordingly moved to dismiss either PSERS’s claims, or

20   the entire action, because PSERS’s presence as a plaintiff

21   destroyed complete diversity.   The district court held that 28

22   U.S.C. § 1367 did not permit supplemental jurisdiction over a

23   non-diverse party’s claims where jurisdiction was based on

24   diversity, even where that party was permissively joined, as


                                      8
 1   PSERS was, under Fed. R. Civ. P. 20.          The court therefore

 2   dismissed PSERS from the action to preserve its subject matter

 3   jurisdiction.

 4         All plaintiffs other than appellants agreed to settle

 5   following mediation.      The action was dismissed with prejudice,

 6   and the court entered a Fed. R. Civ. P. 54(b) final judgment

 7   incorporating its previous dismissals of PSERS and Commerzbank.

 8   This appeal followed.

 9                                    DISCUSSION

10   a)   Dismissal of PSERS as a Non-Diverse Plaintiff

11         There being no disputed facts, PSERS’s dismissal for lack of

12   subject matter jurisdiction is reviewed de novo.            Salamon, 514

13   F.3d at 226.

14         Subject matter jurisdiction is based on 28 U.S.C. § 1332,1

15   which requires “complete diversity,” i.e. all plaintiffs must be

16   citizens of states diverse from those of all defendants.             Exxon

17   Mobil Corp. v. Allapattah Servs., Inc., 545 U.S. 546, 553 (2005).

18   The party asserting jurisdiction bears the burden of proof.

19   DiTolla v. Doral Dental IPA of N.Y., 469 F.3d 271, 275 (2d Cir.

20   2006).




           1
            “The district courts shall have original jurisdiction of all civil
     matters where the matter in controversy exceeds the sum or value of $75,000,
     exclusive of interest and costs, and is between . . . citizens of different
     states . . . .” 28 U.S.C. § 1332(a)(1).


                                           9
 1        As an arm of the state of Pennsylvania, PSERS concedes that

 2   it is not a citizen of any state.     Therefore, it cannot be

 3   “diverse” for purposes of Section 1332.    Moor v. Cnty. of

 4   Alameda, 411 U.S. 693, 717 (1973) (the “arm or alter ego” of a

 5   state is not a citizen for diversity purposes (quoting State Hwy.

 6   Comm’n of Wyo. v. Utah Constr. Co., 278 U.S. 194, 199 (1929))).

 7        PSERS nonetheless claims that the district court had

 8   supplemental jurisdiction under 28 U.S.C. § 1367, which permits

 9   the exercise of diversity jurisdiction over related claims,

10   “includ[ing] claims that involve the joinder or intervention of

11   additional parties,” subject to relevant statutory exceptions.

12   28 U.S.C. § 1367(a).   The issue is whether PSERS’s inclusion as a

13   party is consistent with Section 1367(b), an exception preventing

14   the exercise of supplemental jurisdiction over joined parties in

15   diversity cases when their inclusion “would be inconsistent with

16   the jurisdictional requirements of section 1332.”

17        In Exxon, the Supreme Court considered the question of

18   whether the Section 1367(b) exception prevented supplemental

19   jurisdiction over plaintiffs who failed to meet the Section 1332

20   amount-in-controversy requirement, and held that it did not.    545

21   U.S. at 559-60.   In its discussion, the Supreme Court articulated

22   a “contamination theory” governing the interaction of Sections

23   1332 and 1367.    In explaining the theory, the Court noted that,

24   while “original jurisdiction” may not literally be required over


                                      10
 1   each individual plaintiff, the view that the inclusion of a non-

 2   diverse party “somehow contaminates every other claim in the

 3   complaint, depriving the court of original jurisdiction . . . can

 4   make some sense in the special context of the complete diversity

 5   requirement . . . [because it] eliminates the justification for

 6   providing a federal forum.”    Id. at 560, 562.

 7        We elaborated on the contamination theory in Merrill Lynch &

 8   Co. v. Allegheny Energy, Inc., 500 F.3d 171, 179 (2d Cir. 2007).

 9   Our discussion there stated:

10                  Exxon makes clear that its expansive
11             interpretation of § 1367 does not extend to
12             additional parties whose presence defeats
13             diversity. The reason for the different
14             treatment of these two § 1332 requirements is
15             found in their differing purposes. The
16             purpose of the amount-in-controversy
17             requirement, on one hand, is fulfilled by a
18             single claim of sufficient importance to
19             warrant a federal forum and is not negated by
20             additional, smaller claims. A failure of
21             diversity, on the other hand, contaminates
22             the action, so to speak, and takes away any
23             justification for providing a federal forum.
24                  It follows that a defect of the latter
25             sort eliminates every claim in the action,
26             including any jurisdictionally proper action
27             that might otherwise have anchored original
28             jurisdiction, and removes the civil action
29             from the purview of § 1367 altogether.
30             Further, it is clear that a diversity-
31             destroying party joined after the action is
32             underway may catalyze loss of jurisdiction.
33
34   Id. (all internal citations and quotations omitted).   This

35   discussion thus adopts the line hinted at in Exxon, namely, that

36   while the amount-in-controversy requirement is somewhat


                                      11
 1   malleable, complete diversity of all parties is an absolute,

 2   bright-line prerequisite to federal subject matter jurisdiction.

 3   We follow this rationale and hold that PSERS’s dismissal was

 4   proper, because inclusion of its claim destroyed complete

 5   diversity and would have otherwise “catalyze[d] loss of [federal]

 6   jurisdiction.”   Id.

 7        PSERS attempts to distinguish Merrill Lynch by noting that

 8   it, PSERS, was permissively joined as a plaintiff under Fed. R.

 9   Civ. P. 20, while Merrill Lynch involved compulsory joinder of a

10   defendant under Rule 19.   It further seeks to explain away

11   Exxon’s discussion as dicta.   We concede that PSERS’s argument

12   for a distinction between parties permissibly and compulsorily

13   joined is not without some appeal.   Moreover, on these particular

14   facts, the contamination theory is less obviously applicable

15   because PSERS is not “non-diverse” but is simply not a citizen.

16   And, because it is the arm of a non-forum state, there is an

17   arguable need for a federal forum.

18        Nonetheless, the discussions of complete diversity in Exxon

19   and Merrill Lynch follow a long line of cases holding that the

20   jurisdictional requirements of diversity should track easily

21   adjudicated bright lines following Section 1332(a)(3)’s language

22   of “between citizens of different states.”   Weighing the need in

23   particular cases for a federal forum is not subject to bright

24   lines at all and is in tension with the statutory language, which


                                     12
 1   omits consideration of such a need.         We, therefore, hold that

 2   federal subject matter jurisdiction under Section 1332(a)(3)

 3   requires complete diversity of all parties, regardless of how

 4   they joined the action.       We note that in addition to being

 5   sensible and workable, this rule tracks the statutory language,

 6   follows Merrill Lynch, and accords with a decision of the D.C.

 7   Circuit, see In re Lorazepam & Clorazepate Antitrust Litig., 631

 8   F.3d 537, 541 (D.C. Cir. 2011) (holding that the D.C. Circuit’s

 9   absolute, complete diversity requirement remained intact after

10   Exxon).2

11         We thus affirm the dismissal of PSERS’s claim.

12   b)   Denial of Class Certification

13         District courts’ denials of motions for class certification

14   are reviewed for abuse of discretion.         Teamsters Local 445

15   Freight Div. Pension Fund v. Bombardier, Inc., 546 F.3d 196, 201

16   (2d Cir. 2008).     The party seeking certification must establish

17   the Fed. R. Civ. P. 23 requirements by a preponderance of the

18   evidence.    Id. at 202.

19         Under Rule 23, a movant seeking certification of a class

20   must establish:     (i) numerosity, (ii) commonality, (iii)

21   typicality, and (iv) adequacy.        Fed. R. Civ. P. 23(a)(1)-(4); id.


           2
             PSERS makes an alternative argument that diversity jurisdiction exists
     under the Class Action Fairness Act, 28 U.S.C. § 1332(d)(2)(A). This argument
     was not raised in the district court and, as was conceded at oral argument,
     has no merit unless we reverse the denial of class certification. Because we
     affirm that denial, we need not address the argument.

                                          13
 1   at 201-02.   The district court’s analysis of the Rule 23 factors

 2   determined that appellants had failed to demonstrate either

 3   numerosity or the predominance of common issues.    Fed. R. Civ. P.

 4   23(b).   It did not abuse its discretion in doing so.

 5        Numerosity is presumed for classes larger than forty

 6   members.   Consol. Rail Corp. v. Town of Hyde Park, 47 F.3d 473,

 7   483 (2d Cir. 1995).   Appellants submitted evidence of the

 8   existence of over 100 potential class members based on the number

 9   of investors who purchased the various SIV notes.   However, the

10   numerosity inquiry is not strictly mathematical but must take

11   into account the context of the particular case, in particular

12   whether a class is superior to joinder based on other relevant

13   factors including:    (i) judicial economy, (ii) geographic

14   dispersion, (iii) the financial resources of class members, (iv)

15   their ability to sue separately, and (v) requests for injunctive

16   relief that would involve future class members.    Robidoux v.

17   Celani, 987 F.2d 931, 936 (2d Cir. 1993).

18        The district court concluded that the Robidoux factors

19   “weigh heavily in favor of concluding that joinder is not

20   impracticable.”   Specifically, the class was limited and

21   identifiable, and composed of sophisticated SIV investors, all of

22   whom had millions of dollars at stake and were able to pursue

23   their own claims.




                                      14
 1        Appellants contend that this determination was error because

 2   the court failed to resolve a dispute over the class’s size, and

 3   because the class was simply too large not to be certified on

 4   that basis.   Although the purported class was large and

 5   relatively diverse geographically, the district court was within

 6   its discretion to conclude that the size, sophistication, and

 7   individual stakes of the parties counseled in favor of joinder.

 8   See id. at 936 (“Determination of practicability [of joinder]

 9   depends on all the circumstances surrounding a case, not on mere

10   numbers.”); accord Deen v. New Sch. Univ., No. 05 Civ. 7174

11   (KMW), 2008 WL 331366, at *3 (S.D.N.Y. Feb. 4, 2008) (denying

12   certification to a putative class of 110 where plaintiffs

13   “provide[d] no evidence that joinder . . . would be difficult to

14   accomplish, or . . . would be somehow less efficient than class

15   certification”); Ansari v. N.Y. Univ., 179 F.R.D. 112, 115-16

16   (S.D.N.Y. 1998) (denying certification despite geographic

17   dispersion where the identity of the potential plaintiffs was

18   known and the potential class members likely had the financial

19   resources to individually bring suit).   We would add that, given

20   the different classes of notes, and their differences in maturity

21   dates, rates of return, and risk-profile, the efficiencies

22   available through class certification are less than the number of

23   potential class members would make them appear.




                                     15
 1        Appellants’ argument regarding commonality is based on a

 2   relatively recently created “fraud-created-the-market” theory,

 3   i.e., that but for the defendant’s fraud, no market for the notes

 4   would have existed at all.   The district court rejected this

 5   theory and determined that the putative class members would face

 6   differing individual issues of reliance, loss causation, and

 7   damages.   See Amgen Inc. v. Conn. Ret. Plans & Trust Funds, 133

 8   S. Ct. 1184, 1193 (2013) (absence of fraud-on-the-market theory

 9   “would ordinarily preclude certification of a class action

10   seeking money damages because individual reliance issues would

11   overwhelm questions common to the class”).

12        The fraud-created-the-market theory is a matter of first

13   impression for us but has been rejected or questioned by four

14   other circuits.   See Nuveen Mun. High Income Opportunity Fund v.

15   City of Alameda, 730 F.3d 1111, 1121 n.4 (9th Cir. 2013); Malack

16   v. BDO Seidman LLP, 617 F.3d 743, 756 (3d Cir. 2010); Ockerman v.

17   May Zima & Co., 27 F.3d 1151, 1160 (6th Cir. 1994); Eckstein v.

18   Balcor Film Investors, 8 F.3d 1121, 1130-31 (7th Cir. 1993).

19        Whatever may be the merits of this putative doctrine in

20   other contexts, we see no reason to give it weight here.   The

21   complaint raises only New York common law fraud claims.    While

22   the theory is used to argue that none of the notes would have

23   been sold but for the fraud, that argument establishes only “but-

24   for” causation; it does not establish reliance.   It is quite


                                     16
 1   possible that some buyers of the notes might have known the

 2   underlying facts, believed in the models, and held the same rosy

 3   view of the residential housing market as did many government and

 4   private financial officers.       Appellants thus seek to use the

 5   theory to eliminate the need to prove reliance, a traditional

 6   element of common law fraud.        No hint has been offered by New

 7   York courts that such a radical doctrinal shift is in the offing.

 8         Even in the case of the fraud-on-the-market theory,3

 9   recognized for purposes of federal securities fraud, we

10   “repeatedly have refused to apply [it] to state common law

11   cases.”   Secs. Investor Prot. Corp. v. BDO Seidman, LLP, 222 F.3d

12   63, 73 (2d Cir. 2000).      Moreover, the record here is replete with

13   significant differences in the investment decision processes of

14   the various putative class members, a variance compounded by the

15   differences between the three types of notes offered by Cheyne.

16   As the district court noted, some investors were permitted only

17   to invest in top-rated instruments, while others were permitted



           3
            We note that although the fraud-created-the-market doctrine uses a
     name similar to the accepted fraud-on-the-market doctrine, the two have little
     to do with each other. “Fraud-on-the-market” is based on the efficient market
     hypothesis, which postulates that an efficient market incorporates fraudulent
     statements into a price viewed by investors as based on available accurate
     information. See In re Initial Pub. Offerings Secs. Litig., 471 F.3d 24, 42
     (2d Cir. 2006) (rejecting application of the fraud-on-the-market theory to
     establish classwide reliance because a “primary market for newly issued
     securities is not efficient or developed under any definition of these terms,”
     so the normal linkage between price and available information is not
     applicable) (internal quotation marks and alterations omitted). “Fraud-
     created-the-market” asserts that, absent the fraud, the securities in question
     were unmarketable.


                                          17
 1   to invest in lower or unrated securities.          Particularly in the

 2   context of a newly issued instrument, the district court did not

 3   err in concluding that class-wide reliance was not established as

 4   a common issue.4

 5   c)   Commerzbank’s Right to Sue Under New York Law

 6         Commerzbank argues that the district court erred in its view

 7   of the requirements for assignment under New York law and in

 8   refusing to consider the additional documentation meant to meet

 9   the standard it applied.       We agree that the district court erred

10   in refusing to consider the additional evidence.            However, we

11   certify the questions of:       (i) whether a trier of fact could find

12   that Commerzbank’s evidence of a transfer of the right to sue

13   meets the requirements of New York law; and (ii) whether, if it

14   does, a trier of fact could find Morgan Stanley liable for fraud

15   on the record established in the summary judgment proceeding.

16         1)   Abuse of Discretion

17         We review the district court’s refusal to consider

18   Commerzbank’s evidence of a transfer of DAF’s fraud claim for

19   abuse of discretion.      Universal Church v. Geltzer, 463 F.3d 218,

20   228 (2d Cir. 2005).


           4
            Although the district court did not reach the issues of adequacy or
     typicality, we note that the same elements of the case that undercut
     plaintiffs’ commonality and numerosity arguments –- the size of the individual
     claims, the sophistication of the parties, and, most importantly, the
     variances in each putative class member’s investment strategy and decision-
     making process and in the notes themselves, cut against class certification on
     those elements as well.


                                          18
 1        The district court required all fifteen plaintiffs involved

 2   at the time of the dismissal to demonstrate each plaintiff’s

 3   evidence of reliance on the allegedly false ratings in a three-

 4   page document, thereby rejecting their request to provide more

 5   documentation.    There was no indication that the separate issue

 6   of a transfer of rights, or standing, might arise from, much less

 7   be dependent on, that declaration.

 8        After the district court used Commerzbank’s small portion of

 9   the three-page statement to raise this issue and to dismiss

10   Commerzbank’s claim, the district court denied the motion to

11   reconsider without considering the additional evidence proffered.

12   The district court determined that the level and type of detail

13   provided by Commerzbank in the three-page reliance declaration

14   (of all plaintiffs) was a “tactical decision[]” by which

15   Commerzbank was bound.   However, as our certification of this

16   question indicates, the standing issue is sufficiently

17   complicated that a single paragraph, or perhaps even the entire

18   three pages, was unlikely to suffice to provide the detail needed

19   for an informed decision.   Commerzbank’s “tactical decision” was

20   thus the result of being put in an impossible position by the

21   district court.   The court should either have allowed more room

22   for explication originally, called for more explication when it

23   decided to raise the transfer of right to sue issue, or have




                                      19
 1   considered the new evidence proffered in the motion for

 2   reconsideration and ratification.5

 3        We do not preclude district court efforts to force counsel

 4   to make their points efficiently, but where it appears that

 5   limits on pages are arbitrarily preventing adequate elaboration

 6   of a party’s position, some flexibility must be shown by district

 7   courts.   It was not a permissible exercise of discretion for the

 8   district court not to have shown such flexibility in this matter.

 9   We now turn to this evidence proffered in the motion for

10   reconsideration.

11        2)   Evidence of a Right to Sue Under New York Law

12        Generally speaking, under New York law, only the original

13   purchaser of a note has standing to sue for fraud, because only

14   it could have relied upon the fraudulent statements.           See

15   Fraternity Fund Ltd. v. Beacon Hill Asset Mgmt., LLC, 479 F.

16   Supp. 2d 349, 373 (S.D.N.Y. 2007).        The right to sue for fraud

17   may be assigned in New York, however, subject to limitations

18   inapplicable here.     See Banque Arabe et Int’l D’Investissement v.

19   Md. Nat’l Bank, 57 F.3d 146, 151 (2d Cir. 1995).           Federal courts

          5
            The district court denied Commerzbank’s Fed. R. Civ. P. 17(a)(3)
     motion to ratify its claim by a successor entity to DAF. That motion was made
     in the alternative to its motion to reconsider, and we decline to reach it in
     light of our certification of the ultimate issue of standing. We note,
     however, that the rule permits ratification of a claim within a “reasonable
     time” after a standing objection is raised, the breadth of which is left to
     the district court to determine. See Stichting Ter Behartiging v. Schreiber,
     407 F.3d 34, 43-44 (2d Cir. 2005). Commerzbank’s motion was made on September
     10, 2012, after summary judgment and even after the filing of the motion to
     reconsider, when the matter was raised as early as defendants’ answers in
     March 2011 and again in its motion for summary judgment on January 23, 2012.

                                          20
 1   have found that an assignment is defined in New York as “a

 2   transfer or setting over of property, or of some right or

 3   interest therein, from one person to another, and, unless in some

 4   way qualified, it is properly the transfer of one whole interest

 5   in an estate or chattel or other thing.”   Int’l Design Concepts,

 6   LLC v. Saks, Inc., 486 F. Supp. 2d 229, 236 (S.D.N.Y. 2007)

 7   (internal quotation marks omitted).   The question in this case is

 8   whether Commerzbank has offered sufficient evidence to allow a

 9   trier of fact to find that DAF assigned its entire interest in

10   the notes to Dresdner, including, therefore, its right to sue for

11   fraud.

12        The original reliance declaration stated only that Dresdner

13   bought the notes “at par” from DAF and that DAF was wound down

14   ten months later.   We need not decide whether these statements

15   alone are sufficient to permit an inference of transfer because,

16   as discussed supra, it was not a permissible exercise of

17   discretion not to consider the additional evidence submitted.

18   The Williams and Shlissel declarations –- from the New York

19   counsel of Commerzbank and CEO of the successor entity to DAF,

20   respectively -- are significantly more thorough with respect to

21   the issue of transfer.   Among other things, they describe in more

22   detail the circumstances surrounding DAF’s sale to related entity

23   Dresdner, including the fact that DAF suffered no loss on the

24   sale because Dresdner bought the already-downgraded securities at


                                     21
 1   par, that neither DAF nor the company that administered its trust

 2   retained any claims or causes of action, and that all parties

 3   believed any claims would be automatically transferred under

 4   German law.

 5        The question, therefore, is whether, based on the

 6   declarations and documentary evidence presented by Commerzbank, a

 7   reasonable trier of fact could find that DAF validly assigned its

 8   right to sue for common law fraud to Dresdner in connection with

 9   its sale of Cheyne SIV notes.

10        3)   Certification

11        We believe that resolution of this dispositive question

12   would require us to pass upon a question open under New York

13   caselaw, and that the question should be resolved by the New York

14   Court of Appeals upon a certificate from this court.    See 22

15   N.Y.C.R.R. § 500.27; 2d Cir. R. 0.27.2.

16        We are not aware of any “controlling precedent of the Court

17   of Appeals.”   22 N.Y.C.R.R. § 500.27(a).   On the one hand, New

18   York law is clear that specific incantations of “assignment” are

19   unnecessary to perfect a transfer.     See Leon v. Martinez, 84

20   N.Y.2d 83, 88 (1994).     Moreover, we have elsewhere noted a

21   general trend in New York toward adopting principles of free

22   assignability of claims, including those of fraud.    Banque Arabe,

23   57 F.3d at 153 (citing N.Y. Gen. Oblig. Law §§ 13–105 & 13–107

24   (McKinney 1978); ACLI Int'l Commodity Servs., Inc. v. Banque


                                       22
 1   Populaire Suisse, 609 F. Supp. 434, 441–42 (S.D.N.Y. 1984)).

 2   However, there is also a strain of New York law that treats tort

 3   and contractual claims in a particular instrument separately.

 4   See Fox v. Hirschfeld, 157 A.D. 364, 142 N.Y.S. 261, 262-63 (1st

 5   Dep’t 1913) (assignment of all rights “in and to the within

 6   contract” did not include assignment of the right to sue for

 7   fraud).

 8        We believe these jurisprudential trends present an as-yet

 9   unresolved issue when applied to this case.   Specifically, it is

10   unclear whether the intent of parties to transfer a whole

11   interest, combined with the absence of limiting language,

12   suffices to transfer an assignor’s tort claims, or whether an

13   additional, more specific statement of an intent to transfer tort

14   claims is required.   We certify that issue to the New York Court

15   of Appeals.

16        The parties also disagree, of course, regarding Morgan

17   Stanley’s liability for the allegedly fraudulent ratings.    The

18   need to resolve that dispute depends on the antecedent issue of

19   Commerzbank’s standing.   However, in the event that the New York

20   Court of Appeals allows Commerzbank’s claim to proceed, we

21   further ask it to resolve, and certify to it, the question of

22   Morgan Stanley’s potential liability on the present record.

23        The district court held that, as a matter of New York law,

24   the allegedly fraudulent ratings could be attributed only to the


                                     23
 1   ratings agencies themselves.   Cf. Eurycleia Partners, LP v.

 2   Seward & Kissel, LLP, 849 N.Y.S.2d 510, 512 (1st Dep’t 2007)

 3   (lawyers and auditors not responsible for fraudulent

 4   representations originally made by hedge fund).   Because Morgan

 5   Stanley did not issue the ratings, the district court held that

 6   it could not be directly liable and that there was no claim of

 7   aiding-and-abetting liability.   Appellants argue that Morgan

 8   Stanley is nonetheless liable because it exerted pressure on the

 9   ratings agencies to obtain the fraudulently high ratings, even

10   participating in a “scheme” to do so.   Indeed, the district court

11   noted that appellants had presented some evidence that Morgan

12   Stanley had “manipulated the Cheyne SIV modeling process to

13   create the ratings it desired,” and had otherwise influenced the

14   process beyond simply hiring the agencies.   This would suffice

15   under some New York decisions to impose liability on “parties who

16   make, authorize or cause a [fraudulent] representation to be

17   made.”   See Metro. Life Ins. Co. v. Morgan Stanley, No.

18   651360/2012, 2013 N.Y.Misc. LEXIS 3056, at *34 (N.Y. Sup. Ct.

19   July 8, 2013) (Morgan Stanley could be held liable for false

20   ratings it influenced with false statements and disseminated).

21   Other New York decisions, however, which were discussed

22   extensively by the district court, Abu Dhabi Commercial Bank v.

23   Morgan Stanley & Co., 888 F. Supp. 2d 431, 448-54 (S.D.N.Y.

24   2012), seem to foreclose suits against third parties based on the


                                      24
 1   misrepresentations of another, even where that party was alleged

 2   to have known about the misstatement; see Mateo v. Senterfitt,

 3   918 N.Y.S.2d 438, 440 (1st Dep’t 2011); Eurycleia, 849 N.Y.S.2d

 4   at 512.

 5        Therefore, we certify to the New York Court of Appeals a

 6   second question to be resolved if that court holds that

 7   Commerzbank may bring a fraud claim against Morgan Stanley.   That

 8   question is whether, on the record established during the summary

 9   judgment proceedings, a reasonable trier of fact could find

10   Morgan Stanley liable for fraud under New York law.

11                                CONCLUSION

12        For the foregoing reasons, we affirm the district court in

13   part, holding that:   (i) PSERS’s dismissal on grounds that its

14   status as a party destroyed complete diversity under 28 U.S.C. §

15   1332 was correct; and (ii) the district court’s denial of class

16   certification under Fed. R. Civ. P. 23 was within its discretion.

17        However, we find that the district court erred in refusing

18   to consider Commerzbank’s proffered evidence with regard to a

19   transfer of the fraud claim it seeks to bring.   We further

20   conclude that the question of standing turns on an unresolved

21   issue of state law, and thus certification to the New York Court

22   of Appeals pursuant to Second Circuit Local Rule § 0.27.2 and New

23   York Court of Appeals Rule § 500.27, is appropriate.   We also

24   certify a second question:   whether, if Commerzbank can pursue


                                      25
 1   its fraud claim, a reasonable trier of fact could find Morgan

 2   Stanley liable based on the evidence adduced during the summary

 3   judgment proceedings.   This panel will retain jurisdiction to

 4   render a final decision once either certification is denied or we

 5   have the benefit of the Court of Appeals’s view of the correct

 6   legal standard and its application to this case.   The parties are

 7   ordered to bear equally any costs that may be required by the

 8   Court of Appeals as part of certification.

 9

10                               CERTIFICATE

11   Commonwealth of Pennsylvania Public School Employees’ Retirement

12                  System v. Morgan Stanley & Co. Inc.

13   13-2095-cv(L), 13-2283-cv(XAP), 13-2286-cv(XAP), 13-2287-cv(XAP)

14        The following questions are hereby certified to the New York

15   Court of Appeals pursuant to Second Circuit Local Rule § 0.27 and

16   New York Court of Appeals Rule § 500.27, as ordered by the Second

17   Circuit:

18        Based on the declarations and documentary evidence presented

19   by Commerzbank, could a reasonable trier of fact find that DAF

20   validly assigned its right to sue for common law fraud to

21   Dresdner in connection with its sale of Cheyne SIV notes?   If so,

22   based on the record established in the summary judgment

23



                                     26
1   proceedings in the district court, could a reasonable trier of

2   fact find Morgan Stanley liable for fraud under New York law?

3        The Court of Appeals may, of course, reformulate these

4   issues or resolve other matters it deems relevant.

5

6




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