The Second Circuit affirmed dismissal of Commerzbank AG’s fraud claims concerning a collapsed structured investment vehicle against Morgan Stanley on February 23.  Commonwealth of Pennsylvania Pub. Sch. Employees’ Ret. Sys. v. Morgan Stanley & Co., No. 13-2095-CV (2d Cir. Feb. 23, 2016).

The case has had a rather convoluted procedural history.  Commerzbank brought the action both on notes it purchased for itself and on notes purchased by Allianz-Dresdner Daily Asset Fund (“DAF”) and subsequently sold to Dresdner Bank A.G. (“Dresdner”), a company that Commerzbank later acquired.  Judge Scheindlin of the Southern District previously dismissed Commerzbank’s fraud claims regarding notes initially purchased by DAF for lack of standing.  Under New York law, the record holder of a rated note may not bring fraud claims on behalf of prior holders without an assignment of the fraud claim.  In the case of Commerzbank, Judge Scheindlin found that there was no evidence of such an assignment.

The Second Circuit reversed, holding that the District Court erred in refusing to consider certain evidence of the assignment, and certified questions of state law to the New York State Court of Appeals.  However, New York’s highest Court held that the sale of notes did not confer standing on the buyer to sue for common law fraud under New York law.  Consequently, the Second Circuit affirmed the dismissal of the fraud claims on standing grounds.