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Pennsylvania Pension Fund Dismissed from Investment Fraud Lawsuit

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A New York City federal appeals court affirmed a previous ruling that excluded Pennsylvania’s Public School Employees’ Retirement System (PSERS) as a plaintiff from a fraud lawsuit. The same court also dismissed appellant Commerzbank’s claims on lack of standing.

Penn Record has more on the ruling.

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.

More on the ruling can be found here.

 

Photo by Douglas Palmer via Flickr CC License

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