Investment advisor TCW Asset Management Company (“TCW”) scored a major victory last week when an appellate court dismissed a $128 million RMBS fraud suit that was filed against it by two Australian-based Cayman Island hedge funds: Basis Pac-Rim Opportunity Fund (Master) and Basis Yield Alpha Fund (Master) (together, “Basis”). Basis sued TCW for alleged fraud in selecting RMBS assets for, and recommending an investment in, a $400 million investment vehicle called Dutch Hill II.
On March 2, a five-judge panel of the First Department Appellate Division in New York reversed Justice Kornreich’s October 19, 2015, denial of TCW’s motion for summary judgment. The panel found that Basis failed to present evidence of loss causation, i.e., that TCW’s alleged fraud caused Basis’ loss. Once TCW made a showing that Basis’ loss was not due to any misrepresentations or omissions by TCW and that Dutch Hill II would have collapsed regardless as a result of the market crash, the burden shifted back to Basis to raise an issue of fact on loss causation. The appellate panel’s decision turned on Basis’ “complete failure” to show that its loss was caused directly by TCW’s alleged fraud, and not by intervening economic forces such as the housing market crash.
RMBS fraud plaintiffs should heed the warning of the appeals court: in the event of a market collapse coincident with loss, investors must demonstrate loss causation by showing that misstatements rather than macroeconomic forces ultimately caused the loss.
The case is Basis Pac-Rim Opportunity Fund (Master) v. TCW Asset Management Co., docket number 654033/12, in the Supreme Court of the state of New York, Appellate Division, First Department.
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