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When you are the de facto underwriter in a $2 billion securities fraud scheme, every victory counts. So Credit Suisse and its lawyers at Bingham McCutchen have to be pleased with a 40-page Dec. 13 ruling by Cincinnati federal district court judge James Graham, who found that institutional investors who purchased National Century notes can’t assert Ohio’s plaintiffs-friendly blue sky law against Credit Suisse, which served as a middleman on many of National Century’s offerings. But the ruling may turn out to be more significant for what it says about the reach of state securities laws than for the protection it offers Credit Suisse in the National Century case. In a creative application of the U.S. Supreme Court’s ruling in Morrison v. National Australia Bank, Judge Graham reasoned that noteholders can’t bring Ohio state securities law claims against Credit Suisse unless their securities were actually bought or sold in Ohio. Otherwise, he found, the claims would violate the extraterritoriality principle of the Commerce Clause. “The court finds that under the transational test [established in Morrison], the conduct being regulated by the Ohio Securities Act is the sale and purchase of securities,” the judge wrote. And because none of the National Century notes at issue were bought or sold in Ohio, he granted Credit Suisse summary judgment on noteholders’ Ohio Securities Act claims. The noteholders had asserted that because Credit Suisse allegedly facilitated National Century’s fraud, which indisputably took place in Ohio, the bank was subject to Ohio’s Securities Act. (Ohio has a notably plaintiffs-friendly blue sky law, which holds defendants to a strict negligence standard, requiring no showing of intent to defraud.) Judge Graham rejected that argument. “The pertinent concern for the noteholders is not Ohio’s ability to enforce its laws against an in-state fraudster,” he wrote. “It is which states’ blue sky laws they should have a private cause of action under. There is nothing unfair about the noteholders not having a cause of action under the Ohio Securities Act when they purchased notes outside of Ohio from a seller in New York.” Given the recent trend of plaintiffs filing state law-based securities cases in order to circumvent the heightened pleading standards for federal securities claims–particularly in the burgeoning litigation between mortgage-backed bondholders and issuers–Judge Graham’s ruling may turn out to be important precedent on the relatively undeveloped question of where investors can bring blue sky cases. Credit Suisse, meanwhile, still faces plenty of potential liability in the National Century fiasco, including Ohio common law fraud claims and federal securities law allegations. (There are pending summary judgment motions before Judge Graham on these issues.) Noteholder counsel Kathy Patrick of Gibbs & Bruns told us Tuesday that she’s heartened by some of Judge Graham’s language in the Dec. 13 ruling, in which he writes that “the noteholders have presented substantial evidence in this litigation showing that Credit Suisse knew or should have known of other indications of National Century’s fraud.” Moreover, Patrick said, under Judge Graham’s reasoning, noteholders still have state-law causes of action against Credit Suisse in the states where they purchased National Century notes and in New York, where Credit Suisse sold them. “The opinion clearly recognizes that, at a minimum, claims arising under New York law are available to all plaintiffs,” she said. Jeffrey Smith of Bingham, who argued for Credit Suisse at Judge Graham’s summary judgment hearing more than a year ago, declined comment. Harold Levison of Kasowitz, Benson, Torres & Friedman, who represents noteholders MetLife and Lloyds, didn’t return our call.

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