Second Circuit affirms dismissal of PSERS from investment fraud lawsuit

By Nicholas Malfitano | Mar 1, 2016

Pennsylvania’s Public School Employees’ Retirement System (PSERS)  

NEW YORK – A federal appeals court in New York City affirmed a ruling which denied class certification to a large-scale investment fraud lawsuit, which had included Pennsylvania’s Public School Employees’ Retirement System (PSERS) as a plaintiff.

Judges Ralph K. Winter, Pierre N. Leval and Gerard E. Lynch of the U.S. Court of Appeals for the Second Circuit ruled to affirm a decision from the U.S. District Court for the Southern District of New York, which denied class certification, dismissed appellant Commerzbank’s fraud claims for lack of standing and dismissed appellant PSERS’ claims for lack of diversity jurisdiction.

In a previous opinion, the Second Circuit affirmed the denial of class certification and the dismissal of PSERS’s claim, and certified questions related to Commerzbank’s appeal to the New York Court of Appeals.

The litigation began in August 2008, with a suit from Abu Dhabi Commercial Bank on behalf of itself and all other investors similarly situated (including PSERS), which alleged Moody’s Investors Service Inc. and Standard & Poor’s, a world-renowned provider of credit ratings owned by New York-based McGraw-Hill Companies, gave inflated ratings to a structured investment vehicle (SIV) named Cheyne.

The suit says those entities collaborated with Morgan Stanley to structure the notes, and their compensation was based on the notes receiving the desired ratings. The plaintiffs alleged Morgan Stanley engaged in negligent misrepresentation, through providing inaccurate credit ratings associated with the Cheyne SIV.

Abu Dhabi Commercial Bank’s complaint alleged both common law fraud under New York law and federal subject matter jurisdiction based on diversity of citizenship. The suit later grew to include a number of entities who invested in the Cheyne SIV from October 2004 to October 2007. These new plaintiffs included PSERS, who claim to have suffered financial damages when the Cheyne SIV collapsed in 2007.

However, PSERS had previously stated they were “an arm” of the state of Pennsylvania and not a citizen of that state or any other. The appellees accordingly moved to dismiss either PSERS’s claims or the entire action, because PSERS’s presence as a plaintiff destroyed complete diversity.

Judge Shira A. Scheindlin of the U.S. District Court for the Southern District of New York ruled in February 2013 that PSERS was dismissed from the suit, since federal law “did not permit supplemental jurisdiction over a non-diverse party’s claims where jurisdiction was based on diversity, even where that party was permissively joined, as PSERS was.”

Therefore, the Court dismissed PSERS from the action to preserve its subject matter jurisdiction, and further ruled Commerzbank did not have standing to bring a fraud claim against the appellees.

(All plaintiffs other than PSERS and Commerzbank agreed to settle with the appellees in April 2013 for approximately $225 million, following mediation.)

PSERS and Commerzbank appealed this decision to the Second Circuit, who ruled in October 2014 that PSERS was rightly dismissed from the litigation and class certification was properly denied, but sent Commerzbank’s question of standing to the New York Court of Appeals.

The New York Court of Appeals, after considering the question, ruled Commerzbank did not have standing to bring its charges against the appellees under New York law.

Given the guidance from that decision, the Second Circuit opted to affirm the original District Court ruling dismissing Commerzbank for lack of standing, in addition to upholding the denial of Commerzbank’s motion to ratify its claim as “untimely.”

The appellants are represented by Daniel S. Drosman, Michael Joseph Dowd, Samuel Howard Rudman, Angel P. Lau, Darryl J. Alvarado, Hillary B. Stakem and Luke Orion Brooks of Robbins Geller Rudman & Dowd, in San Diego.

The appellees are represented by Greg Donald Andres, James P. Rouhandeh, Robert Frank Wise, Jr., Andrew Dickens Schlichter, Antonio Jorge Perez-Marques, Christopher Joseph Roche, Gina Marie Castellano, Jessica L. Turner, Paul Steel Mishkin and William Ross Miller, Jr., of Davis Polk & Wardwell, in New York City.

U.S. Court of Appeals for the Second Circuit case 13-2095

U.S. District Court for the Southern District of New York case 1:08-cv-07508

From the Pennsylvania Record: Reach Courts Reporter Nicholas Malfitano at

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