     15-4092-cv
     Veleron Holding, B.V. v. Morgan Stanley, et al.

                         UNITED STATES COURT OF APPEALS
                             FOR THE SECOND CIRCUIT

                                  SUMMARY ORDER
     RULINGS  BY SUMMARY ORDER DO NOT HAVE PRECEDENTIAL EFFECT. CITATION TO A SUMMARY ORDER
     FILED ON OR AFTER JANUARY 1, 2007, IS PERMITTED AND IS GOVERNED BY FEDERAL RULE OF
     APPELLATE PROCEDURE 32.1 AND THIS COURT’S LOCAL RULE 32.1.1. WHEN CITING A SUMMARY
     ORDER IN A DOCUMENT FILED WITH THIS COURT, A PARTY MUST CITE EITHER THE FEDERAL APPENDIX
     OR AN ELECTRONIC DATABASE (WITH THE NOTATION “SUMMARY ORDER”). A PARTY CITING A SUMMARY
     ORDER MUST SERVE A COPY OF IT ON ANY PARTY NOT REPRESENTED BY COUNSEL.

 1        At a stated term of the United States Court of Appeals for
 2   the Second Circuit, held at the Thurgood Marshall United States
 3   Courthouse, 40 Foley Square, in the City of New York, on the
 4   6th day of June, two thousand seventeen.
 5
 6   PRESENT: DENNIS JACOBS,
 7            DEBRA ANN LIVINGSTON,
 8            RAYMOND J. LOHIER, JR.,
 9                          Circuit Judges.
10
11   - - - - - - - - - - - - - - - - - - - -X
12   VELERON HOLDING, B.V.,
13            Plaintiff-Appellant,
14
15                -v.-                                           15-4092-cv
16
17   MORGAN STANLEY, MORGAN STANLEY CAPITAL
18   SERVICES INCORPORATED, MORGAN STANLEY
19   & CO. INCORPORATED, and MORGAN STANLEY
20   & CO. LLC,
21             Defendants-Appellees.*
22
23   - - - - - - - - - - - - - - - - - - - -X
24
25

     *    The Clerk of Court is respectfully directed to amend the official
     caption to conform with the above.

                                                1
 1   FOR APPELLANT:                AARON H. MARKS, Ronald R. Rossi,
 2                                 Emilie B. Cooper; Kasowitz,
 3                                 Benson, Torres & Friedman LLP, New
 4                                 York, NY.
 5
 6   FOR APPELLEES:                NEAL KUMAR KATYAL, Morgan L.
 7                                 Goodspeed; Hogan Lovells US LLP,
 8                                 Washington, DC.
 9
10                                Jonathan D. Polkes, Adam B. Banks;
11                                Weil, Gotshal & Manges LLP, New
12                                York, NY.
13
14        Appeal from the judgment of the United States District Court
15   for the Southern District of New York (McMahon, J.).

16        UPON DUE CONSIDERATION, IT IS HEREBY ORDERED, ADJUDGED AND
17   DECREED that the judgment of the district court be AFFIRMED.

18        Plaintiff Veleron Holding, B.V., appeals from the judgment
19   of the United States District Court for the Southern District
20   of New York (McMahon, J.), entered pursuant to jury verdict with
21   respect to a statutory claim and pursuant to a Rule 12(b)(6)
22   dismissal with respect to a contract claim. We assume the
23   parties’ familiarity with the underlying facts, procedural
24   history, and issues presented for review.

25        The plaintiff, Veleron, is a special purpose investment
26   vehicle indirectly owned by an industrial conglomerate owned
27   by Russian billionaire Oleg Deripaska. Veleron was formed to
28   make a $1.5 billion dollar investment in a Canadian auto parts
29   company called Magna. The investment went bad in the 2008
30   financial crisis.

31        In September 2007, the French bank BNP Paribas agreed to
32   finance Veleron’s Magna investment. Under a “Credit
33   Agreement,” Veleron borrowed $1.229 billion from BNP; and under
34   a “Pledge Agreement,” Veleron pledged to BNP the 20 million
35   shares of Magna it purchased with that money (and with over $300
36   million of equity contributed by a Veleron parent) as collateral
37   for the loan. Veleron pledged no other security, and no other
38   entity guaranteed the loan, so BNP had no recourse in a default


                                    2
 1   except to liquidate the pledged collateral and pursue Veleron
 2   for any outstanding deficiency.

 3        The defendants are several Morgan Stanley entities
 4   (collectively “Morgan Stanley”). Morgan Stanley was not a party
 5   to the Veleron-BNP agreements and never did any business directly
 6   with Veleron. BNP did, however, enter into an agreement with
 7   Morgan Stanley by which Morgan Stanley would be responsible for
 8   8.1% of any loss to BNP if Veleron defaulted and the collateral
 9   fell short.1 Morgan Stanley separately entered into an agreement
10   to be BNP’s disposal agent to liquidate the collateral if the
11   need arose.

12        In its recitals, the “Agency Disposal Agreement” between
13   BNP and Morgan Stanley describes the Credit Agreement and Pledge
14   Agreement from which BNP’s authority to seize and liquidate the
15   collateral is derived; and it includes Morgan Stanley’s
16   acknowledgement that BNP, “in enforcing its security under the
17   Pledge Agreement, is obligated to seek the best price available
18   in the market for transactions of a similar size and nature at
19   the time of sale, and Morgan Stanley agrees to use all reasonable
20   [efforts] to comply with such terms.” App. 1826. That
21   agreement’s operative provisions do not, however, make direct
22   reference to Veleron.

23        The Credit Agreement allowed BNP to demand immediate payment
24   if the price of Magna stock dropped beneath a specified margin
25   between the outstanding debt and the value of the collateral.
26   In September 2008, the value of Magna stock plummeted; on
27   September 29, BNP made a $92.5 million margin call; the next
28   day BNP increased the demand to $113.8 million.

29        Morgan Stanley attempted to cover its own exposure to
30   further declines in the price of Magna shares (stemming from
31   its 8.1% share of the credit risk) by shorting Magna stock on
32   September 30 and October 1. Morgan Stanley avers that its short
33   positions did not fully hedge against its risk, and it still
34   stood to lose money.


     1
          BNP entered into similar credit derivative transactions with
     several other major financial firms to hedge against its risk in the
     Veleron agreements.

                                      3
 1        On October 2, BNP sent Veleron an acceleration notice,
 2   warning that the collateral would be liquidated if Veleron did
 3   not pay immediately. When Veleron did not pay, BNP directed
 4   Morgan Stanley to liquidate the pledged collateral. On October
 5   3, Morgan Stanley launched an “Accelerated Book Build” and sold
 6   all of the Magna stock over a single day, netting $748 million
 7   and leaving a deficiency of $79 million. Veleron disputed the
 8   deficiency, arbitration ensued in London, and the dispute was
 9   settled for $25 million.

10        Veleron filed this suit against many parties; but all that
11   remains for purposes of this appeal are claims against Morgan
12   Stanley for breach of contract and for violations of § 10(b)
13   of the Securities Exchange Act of 1934 (15 U.S.C. § 78j(b)),
14   and SEC Rule 10b-5.

15        Veleron alleges that Morgan Stanley breached the Agency
16   Disposal Agreement by liquidating the Magna stock in an
17   unreasonable or negligent way. Although Veleron was not a party
18   to that agreement, it argues that it was an intended third-party
19   beneficiary. The district court rejected that argument and
20   dismissed the breach claim pursuant to Rule 12(b)(6).2

21        Veleron’s securities fraud claim survived to jury trial.
22   Veleron alleged that by taking a short position on Magna stock,
23   Morgan Stanley traded on material nonpublic information in
24   violation of a duty to Veleron, depressed the price of Magna
25   stock, and thereby reduced the proceeds of liquidation and
26   increased Veleron’s deficiency by as much as $12.6 million.

27        Before trial, the parties submitted competing jury
28   instructions. Morgan Stanley’s proposed instructions required
29   Veleron to show that (1) Morgan Stanley owed Veleron a duty of
30   trust and confidence; (2) Veleron conveyed material, nonpublic

     2
           Veleron also alleged that Morgan Stanley breached the Pledge
     Agreement between BNP and Veleron--although Morgan Stanley was not
     a party to that agreement. Veleron’s theory was that BNP had delegated
     its decision-making to Morgan Stanley, effectively making Morgan
     Stanley its nominee, and that Morgan Stanley could therefore breach
     the agreement to which it was not a party. The district court rejected
     that argument and Veleron does not raise it on appeal, abandoning
     the claim.

                                       4
 1   information to Morgan Stanley; (3) Morgan Stanley traded on that
 2   information in breach of its duty; (4) Morgan Stanley acted with
 3   scienter; and (5) Veleron suffered an economic loss proximately
 4   caused by Morgan Stanley’s trading. Veleron’s proposed
 5   instructions omitted the fourth and fifth of these elements.
 6   The district court agreed with Morgan Stanley’s enumeration of
 7   elements and Veleron did not object.

 8        During deliberations, a note from the jury asked whether
 9   Veleron “need[ed] to prove Morgan Stanley had an intent to
10   specifically defraud Veleron?” App. 1749. After consulting
11   the parties, the district court answered “yes,” but
12   “specifically in the sense that the material, nonpublic
13   information must be misappropriated from Veleron.” App.
14   1753-54. Shortly thereafter, the jury returned a unanimous
15   verdict for Morgan Stanley, concluding that Morgan Stanley had
16   not acted with scienter.

17        Veleron argues on appeal that (1) the district court erred
18   by dismissing its breach of contract claim because it was a
19   third-party beneficiary under the Agency Disposal Agreement,
20   and (2) the jury instruction on scienter and the response to
21   the jury’s question were plainly erroneous.

22        We review de novo the district court’s dismissal of a claim
23   under Rule 12(b)(6). Bayerische Landesbank v. Aladdin Capital
24   Mgmt. LLC, 692 F.3d 42, 51-52 (2d Cir. 2012).

25        We review for plain error jury instructions that went
26   without timely objection. Henry v. Wyeth Pharm., Inc., 616 F.3d
27   134, 152–53 (2d Cir. 2010).

28        1. Veleron was not a party to the Agency Disposal
29   Agreement, and it therefore cannot enforce the agreement unless
30   it was an intended third-party beneficiary. A purported
31   third-party beneficiary must establish “(1) the existence of
32   a valid and binding contract between other parties, (2) that
33   the contract was intended for [the plaintiff’s] benefit, and
34   (3) that the benefit to [the plaintiff] is sufficiently immediate
35   . . . to indicate the assumption by the contracting parties of
36   a duty to compensate [the plaintiff] if the benefit is lost.”
37   Mandarin Trading Ltd. v. Wildenstein, 944 N.E. 2d 1104, 1110
38   (N.Y. 2011) (quotation marks removed).

                                    5
 1        Neither the text nor the surrounding circumstances of the
 2   Agency Disposal Agreement “clearly evidence” that Morgan Stanley
 3   and BNP intended to benefit Veleron. See Bayerische Landesbank,
 4   692 F.3d at 52. The agreement describes the Credit Agreement
 5   and Pledge Agreement, and it identifies Veleron in that
 6   recitation; but references to Veleron are all by way of
 7   background. The agreement does not make clear reference to any
 8   duty owed to Veleron. The only obligation that might
 9   potentially qualify is the putative “best price” obligation in
10   the Agency Disposal Agreement. However, this provision does not
11   reference any specific duty in the agreements between Veleron
12   and BNP, and, on appeal, Veleron was unable to clearly direct
13   us to one. Nor does Veleron point to compelling evidence
14   supporting third-party beneficiary status on the basis of the
15   circumstances surrounding the Agency Disposal Agreement.

16        In the absence of such evidence, several provisions that
17   do appear in the Agency Disposal Agreement operate to limit
18   third-party beneficiary status. The agreement includes an
19   express anti-assignment clause, which “suggests an intent to
20   limit the obligation of the contract to the original parties[,]”
21   Subaru Distribs. Corp. v. Subaru of Am., Inc., 425 F.3d 119,
22   125 (2d Cir. 2005), an inurement clause (“This Agreement shall
23   be binding upon and [i]nure to the benefit of each party to this
24   Agreement . . . .”), and a merger clause specifying that all
25   terms of the agreement are set out in the text of the agreement
26   itself, which together tend to limit the class of potential
27   beneficiaries. Absent contrary evidence, these clauses
28   undermine any inference that BNP and Morgan Stanley intended
29   to create a third-party beneficiary.

30        Therefore, we affirm the district court’s dismissal of
31   Veleron’s third-party beneficiary contract claim.

32        2. Veleron challenges the jury instruction on scienter and
33   the answer given to the jury’s question about specific intent.
34   Because Veleron did not object contemporaneously, review is
35   deferential: to win on appeal, Veleron must show that the
36   instructions were plainly erroneous. It does not sustain that
37   burden.




                                    6
 1        The trial was conducted on a misappropriation theory of
 2   insider trading in violation of the Securities Exchange Act.
 3   To prove such a claim, a plaintiff must establish that the
 4   defendant possessed material, nonpublic information; that the
 5   defendant owed a duty to the plaintiff to keep such information
 6   confidential; that the defendant breached this duty by trading
 7   on the basis of that information; and that the defendant acted
 8   with scienter. United States v. Gansman, 657 F.3d 85, 90-91 &
 9   n.7 (2d Cir. 2011); see also Ernst & Ernst v. Hochfelder, 425
10   U.S. 185, 201-14 (1976) (discussing the scienter requirement
11   in § 10(b) actions). Veleron presented evidence that BNP’s
12   margin calls and Veleron’s inability to meet them with timely
13   payment constituted the material nonpublic information on which
14   Morgan Stanley traded when it shorted Magna. Morgan Stanley
15   presented evidence and argument that it had no duty to Veleron
16   to keep such information confidential, or, if it did, it did
17   not know that it did and therefore acted without scienter.

18        Veleron points out that the Second Circuit applies a
19   “knowing possession” standard to show breach: a defendant who
20   trades while in knowing possession of material, nonpublic
21   information presumptively trades “on the basis” of such
22   information. United States v. Teicher, 987 F.2d 112, 120-21 (2d
23   Cir. 1993). If a defendant trades while in knowing possession
24   of inside information, Veleron contends, scienter is
25   established, and the district court’s instruction on scienter
26   (in particular, its allowance of good faith) was therefore
27   plainly erroneous. This analysis, however, collapses two
28   distinct elements: scienter and breach of duty. Under the
29   “knowing possession” standard, trading while in knowing
30   possession of inside information is sufficient to establish that
31   the trades were made on the basis of the inside information--and
32   therefore that any duty to maintain that information in
33   confidence (if there is one) was breached. But it does not
34   establish awareness of a duty.

35        The district court’s instruction on scienter allowed that
36   “[g]ood faith on the part of Morgan Stanley is a complete defense
37   to a contention that Morgan Stanley acted with a culpable state
38   of mind.” App. 1733. Since “[e]stablishing a culpable state
39   of mind is part of proving the case,” the district court
40   instructed that “the burden is on Veleron to prove by a

                                    7
 1   preponderance of the evidence that Morgan Stanley acted with
 2   the requisite scienter” and “did not act in good faith.” App.
 3   1733-34.

 4        Veleron argues that the burden should have been placed on
 5   Morgan Stanley to prove good faith, but does so by assuming that
 6   good faith is an affirmative defense to be raised after the
 7   plaintiff has proved the elements for liability. However, proof
 8   of scienter is part of the affirmative case. Generally, it is
 9   “[a] mental state consisting in an intent to deceive, manipulate,
10   or defraud.” Black's Law Dictionary (10th ed. 2014). Good
11   faith is scienter’s opposite. While the district court could
12   have been clearer in articulating the nature of Veleron’s burden,
13   Veleron makes no persuasive argument that the district court’s
14   instruction was “obviously wrong in light of existing law.”
15   United States v. Youngs, 687 F.3d 56, 59 (2d Cir. 2012)
16   (describing plain error in the criminal context).

17        Veleron fares no better with the district court’s answer
18   to the jury’s question whether Veleron “need[ed] to prove Morgan
19   Stanley had an intent to specifically defraud Veleron?” App.
20   1749. The district court answered that Veleron did need to prove
21   such specific intent “specifically in the sense that the
22   material, nonpublic information must be misappropriated from
23   Veleron.” App. 1754. Veleron fails to show that this answer
24   was plainly erroneous.

25        Accordingly, and finding no merit in appellant’s other
26   arguments, we hereby AFFIRM the judgment of the district court.

27                                FOR THE COURT:
28                                CATHERINE O’HAGAN WOLFE, CLERK




                                    8
