Justice Shirley Werner Kornreich
Two Australian-based Cayman Islands investment funds alleged they were fraudulently induced by defendant TCW Asset Management Company, an investment advisory firm, to invest over $28 million in a collateralized debt obligation (CDO) called Dutch Hill Funding II Ltd. The court denied TCW’s motion to dismiss plaintiffs’ fraud claims, finding it was able to infer scienter from the complaint because it states a plausible theory of why TCW would lie about its residential mortgage backed securities (RMBS) selection process. Without such lies, nobody would have been willing to invest in TCW-managed RMBS CDOs because the market for generic long RMBS bets was virtually non-existent. It stated TCW will have ample opportunity in discovery to show its selection process was as advertised and devoid of any nefarious intent. It dismissed plaintiffs’ third-party beneficiary claim, holding TCW must give plaintiffs copies of all agreements governing TCW’s involvement with Dutch Hill so plaintiffs can determine if breach of contract claim possible. Plaintiffs cannot maintain an unjust enrichment claim as their investment in Dutch Hill is governed by written contracts.