FILED: NEW YORK COUNTY CLERK 10/22/2010

NYSCEF DOC. NO. 5

INDEX NO. 650673/2010 RECEIVED NYSCEF: 10/22/2010

SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK

LORELEY FINANCING (JERSEY) NO. 7, LIMITED; LORELEY FINANCING (JERSEY) NO. 25, LIMITED; LORELEY FINANCING (JERSEY) NO. 31, LIMITED; and LORELEY FINANCING (JERSEY) NO. 32 LIMITED, Plaintiffs, -vCRÉDIT AGRICOLE CORPORATE AND INVESTMENT BANK and CRÉDIT AGRICOLE SECURITIES (USA) INC., Defendants.

Index No. 650673/2010

COMPLAINT

Plaintiffs Loreley Financing (Jersey) No. 7, Limited ("LFJ 7"), Loreley Financing (Jersey) No. 25, Limited ("LFJ 25"), Loreley Financing (Jersey) No. 31, Limited ("LFJ 31"), and Loreley Financing (Jersey) No. 32, Limited ("LFJ 32") (collectively and separately, the "Loreley Companies" or "Plaintiffs"), by and through their undersigned counsel, by way of Complaint against defendants Crédit Agricole Corporate and Investment Bank ("Calyon CIB") and Crédit Agricole Securities (USA) Inc. ("Calyon (USA)") (collectively and separately, "Calyon" or "Defendants"), hereby allege and say as follows: SUMMARY OF THE ACTION 1) This action relates to a multi-billion dollar securitization business that Calyon

built, and then abandoned, virtually overnight. As further described below, Calyon defrauded Plaintiffs during both the construction and the dismantling of its business strategy. 2) Specifically, Calyon fraudulently induced Plaintiffs to purchase $70.5 million of

notes issued in connection with three collateralized debt obligation transactions ("CDOs"), commonly known as Orion 2006-1, Ltd. ("Orion 2006-1"), Pyxis ABS CDO 2006-1, Ltd. ("Pyxis 2006-1"), and Millstone IV CDO, Ltd. ("Millstone IV").

3)

Calyon’s fraud involved two basic strategies: (a) Calyon secretly allowed a hedge

fund, Magnetar Capital LLC ("Magnetar"), to select weak and poor quality collateral for at least two of the CDOs in which Plaintiffs invested, so that Magnetar – directly contrary to the interests of Plaintiffs and the other long investors – could bet against the deals by taking short positions and profit when they failed; and (b) Calyon decided to exit the business of arranging CDOs comprised of asset backed securities ("ABS") in February 2007, but failed to disclose that fact to Plaintiffs while, at the same time, unloading its unwanted, poor-quality assets into a third CDO it marketed and sold to Plaintiffs – thereby rendering illusory the subordination that was supposed to protect Plaintiffs’ senior notes. 4) By early 2005, the market for CDOs – in particular, CDOs supported with ABS

concentrated in the U.S. residential mortgage sector – had become a profitable business line for many of Calyon's competitors. Though Calyon had made some forays into the space, it lagged behind those competitors. Calyon's thirst for the lucrative fees being earned by its competitors clouded Calyon's sense of business ethics. 5) What started as an ambitious business plan by Calyon evolved into fraud. That

fraud began with the launch of the first of what have come to be known as the "Constellation CDOs." Eager to churn out CDOs, Calyon allowed Magnetar to secretly control the selection of collateral for at least two of the Constellation CDOs, Orion 2006-1 and Pyxis 2006-1, knowing that Magnetar would select only weak and poor quality assets and bet against the success of the CDOs by taking short positions and profit when the deals failed. Calyon falsely represented to the Loreley Companies that independent, qualified collateral managers would select high-quality assets for those transactions, and that certain structural features – which were in reality designed by Magnetar to fund its short positions – had legitimate business purposes aligned with the long investors' interests. 6) By late 2006, after marketing and selling Plaintiffs two of the Magnetar-

sponsored CDOs at issue in this case (Orion 2006-1 and Pyxis 2006-1), Calyon determined that the landscape had changed. Upon information and belief, by that time, Calyon had accumulated -2-

on its own books upwards of $15 billion of U.S. mortgage-related assets, including residential mortgage-backed securities ("RMBS") and CDO positions tied to U.S. residential mortgages. Calyon determined that the value of these assets was deteriorating and at risk. Moreover, in December 2006, most of Calyon's U.S.-based CDO personnel defected to a competitor, Mizuho Securities ("Mizuho"), leaving Calyon ill-prepared to manage its CDO business. Calyon

therefore developed, but did not disclose, a strategy to unload its U.S. mortgage-related positions and related CDO positions. 7) Calyon marketed and sold to Plaintiffs the third CDO at issue in this case,

Millstone IV, on the basis of the purportedly "Super High Grade" credit quality of its underlying assets, even though Calyon knew that those assets were of poor quality. In reality, Calyon stuffed the Millstone IV CDO with weak and poor quality assets that it wanted to unload, including over $90 million of Magnetar-sponsored CDO notes, thereby rendering illusory the subordination that was supposed to protect Plaintiffs’ senior notes. At the same time, Calyon

concealed its motivation for unloading those assets: the material fact that it had decided, no later than three months before the Millstone IV CDO closed, to wind down and exit the business of arranging CDOs of ABS. 8) In May 2010, the New York Attorney General reportedly opened an investigation

into wrongdoing in the CDO and mortgage security market. The probe is reported to include Calyon within its purview. The U.S. Department of Justice also, in or about May 2010,

reportedly expanded its probe into the CDO market well beyond the much publicized investigation of Goldman Sachs & Co. The SEC has, according to a Wall Street Journal report on June 19, 2010, stepped up its investigation of Magnetar. 9) Through its conduct as described further herein, Calyon induced the Loreley By this action, the Loreley

Companies to purchase CDO notes totaling $70.5 million.

Companies seek, inter alia, rescission and the return of the purchase prices paid to Calyon for those notes, as well as damages and other relief.

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THE PARTIES 10) Plaintiff LFJ 7 is a company organized under the laws of the Bailiwick of Jersey,

Channel Islands, with its registered office located at 26 New Street, St. Helier, Jersey JE2 3RA. 11) Plaintiff LFJ 25 is a company organized under the laws of the Bailiwick of Jersey,

Channel Islands, with its registered office located at 26 New Street, St. Helier, Jersey JE2 3RA. 12) Plaintiff LFJ 31 is a company organized under the laws of the Bailiwick of Jersey,

Channel Islands, with its registered office located at 26 New Street, St. Helier, Jersey JE2 3RA. 13) Plaintiff LFJ 32 is a company organized under the laws of the Bailiwick of Jersey,

Channel Islands, with its registered office located at 26 New Street, St. Helier, Jersey JE2 3RA. 14) Upon information and belief, defendant Calyon CIB is a limited liability

company, organized under the laws of France, with its New York branch located at 1301 Avenue of the Americas, New York, New York 10019. 15) Upon information and belief, defendant Calyon (USA) is a corporation organized

under the laws of the State of New York, with its office located at 1301 Avenue of the Americas, New York, New York 10019. JURISDICTION AND VENUE 16) Jurisdiction and venue are proper in the Supreme Court of the State of New York,

New York County. 17) Calyon CIB has a foreign bank branch licensed by the New York Superintendent

of Banking to conduct business in New York. 18) Calyon (USA) is a corporation organized under the laws of the State of New

York, with its principal place of business located in New York, New York. 19) Both Calyon CIB and Calyon (USA) engage in a continuous and systematic

course of business from their shared offices located at 1301 Avenue of the Americas, New York, New York. Numerous employees integral to the transactions at issue (including but not limited to Alexander Rekeda, Zain Abdullah, Paolo Torti, Bertrand Delaunay, Sandeep Khare, and Carl Schuman) held themselves out to investors, Plaintiffs and their investment advisors, non-parties

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IKB Deutsche Industriebank AG and IKB Credit Asset Management GmbH (collectively and separately, "IKB"), as representatives of both Calyon CIB in New York, and Calyon (USA). 20) Calyon CIB has promoted its New York location as offering a full range of

corporate, investment banking and capital markets products and services. Marketing materials for each of the transactions at issue in this case specifically listed 1301 Avenue of the Americas, New York, New York as Calyon CIB's address. 21) The CDOs at issue in this litigation were arranged, marketed and negotiated by

Calyon in New York. As set forth below, those activities included, inter alia, meetings and negotiations between employees of the Loreley Companies' investment advisors and Calyon's New York employees, as well as the drafting and circulation of marketing materials and pitch books by Calyon in New York. In addition, documents associated with each of the CDOs at issue in this case were, upon information and belief, negotiated by Calyon (USA)'s and Calyon CIB's New York employees. 22) This action is appropriately assigned to the Commercial Division of the Supreme

Court of the State of New York, County of New York, pursuant to the Rules of the Commercial Division of the Supreme Court, as set forth in §202.70 of the Uniform Rules for the New York State Trial Courts. FACTUAL ALLEGATIONS RELEVANT TO THE CAUSES OF ACTION 1 I. Background 23) In 2002, CIBC (i.e., Canadian Imperial Bank of Commerce) and IKB initiated a

commercial paper conduit known generally as the "Rhineland Programme." This included the establishment of Rhineland Funding Capital Corporation ("RFCC"), a Delaware corporation with its principal place of business in New York, New York, and various purchasing entities located in the Bailiwick of Jersey in the Channel Islands, including the Loreley Companies.
1

Unless indicated as having been made on information and belief, Plaintiffs' allegations herein are made on direct knowledge, matters of public record or on information provided to them by IKB. -5-

" of debt and equity securities to investors. IKB investment recommendations to the Loreley Companies. identified and recommended investments in CDOs to the Loreley Companies. 25) As Plaintiffs’ investment advisor. and issues various classes. a CDO is a transaction in which a special purpose vehicle (known as an "Issuer") purchases. the Loreley Companies bought from Calyon notes issued in connection with the three CDOs that are the subject of this action. 26) In June 2006. such as bonds or loans.5 10 35. the proposed CDO investment was then presented to the Loreley Companies for their decision on whether or not to purchase it. or "tranches.5 CDO Orion 2006-1 Pyxis 2006-1 Millstone IV TOTAL II. Pyxis 2006-1. in the aggregate amount of $70. or takes the risk of.5 14. and June 2007. IKB performed diligence prior to making any If. The cash -6- . CDO Structure 27) Purchaser LFJ 7 LFJ 25 LFJ 31 LFJ 32 Rating AAA AAA AAA AA Generally stated. known generally as the RFCC investment committee. a portfolio of assets (typically known as a "reference pool. Orion 2006-1. IKB served as investment advisor to the Loreley Companies and. the proposed CDO investment was presented to an investment committee. September 2006. If approved by the RFCC investment committee. recommended a particular CDO investment for potential purchase by one or more of the Loreley Companies.5 million as follows: Class of Notes A A-2 A-3 B Amount ($Millions) 10. Unless and until recommended by IKB." "collateral pool" or "collateral"). and are long-term buy-and-hold investors. in that capacity.24) The Loreley Companies invested in CDOs. and Millstone IV.5 70. following its diligence. no investment in a CDO was ever purchased by the Loreley Companies." "underlying assets.

the structure of the transaction. the credit quality. including the holders of notes issued in connection with the CDO. 28) The Issuer's portfolio of underlying assets is often managed by an independent "collateral manager" in accordance with the relevant documents governing the particular CDO. Some CDOs are not managed and have what are commonly called "static" asset portfolios. The availability of junior tranches to absorb losses creates structural subordination for the senior tranches and is a factor which permits their higher credit ratings. among other things. the junior tranches of a CDO (the most junior of which is typically the "equity" tranche) absorb losses first and have the highest risk of loss. a CDO is structured as follows: Special Purpose Vehicle CDO underlying assets Cash flows AAA AA A BBB Losses Equity -7- .flows from the collateral are used to repay the Issuer's obligations to investors. and have the lowest risk of loss. 29) The prospects of the securities issued in connection with a CDO being repaid in full depends upon. according to a defined priority (known as a "waterfall"). 30) The senior tranches of a CDO typically receive principal and interest first. and subsequent performance of the collateral. generally starting with the most senior tranches and down through the waterfall to the most junior tranches. 31) In its most basic form. Conversely.

Plaintiffs’ investment advisor. and (b) the amount of subordination is set properly. and unless stated otherwise. Ratings agencies also assign ratings to the underlying assets that are either held by the Issuer or referenced by the Issuer's underlying assets. those consisting of AAA. and making allowed substitutions in the collateral for the For the purposes of this complaint. AA. there is a collateral manager. and A-rated underlying assets – usually require less subordination than similarly rated tranches of "mezzanine" CDOs. reinvesting payment proceeds from maturing underlying assets. and who undertook to manage the underlying collateral pool so as to select only the highest quality collateral within the criteria established for the transaction. IKB. sought out managed CDO transactions for Plaintiffs with collateral managers possessing independence and skill." the highest rating available. 36) For managed CDO transactions. 34) Conversely. 35) The risk on properly structured AA and AAA senior tranches issued in connection with a CDO backed by either "high grade" or "mezzanine" collateral is minimized if: (a) the collateral includes only securities of proper credit quality with low expected loss rates. except for the equity tranche. the greater the required subordination – usually because lower quality underlying assets have a higher default risk and lower recovery rates. The lower the credit quality of the underlying assets. any reference to a particular rating refers to the Standard & Poor’s ratings categories. with a sufficient safety margin to absorb expected losses so that the risk of default affecting the senior tranches is minimized.g. The proportionate size of the more junior tranches required to support the AAA rating on the more senior tranches typically varies with the credit quality of the underlying assets.. monitoring the credit status of the individual underlying assets.32) Ratings agencies typically assign credit ratings to the various tranches of a CDO. -82 . 37) Managing a CDO portfolio typically involves selecting the initial collateral pool. which contain assets taken from the lower-rated (but investment grade) "mezzanine" portion of their underlying transactions' capital structure. 2 33) The most senior tranches of CDOs are typically rated "AAA. thereby reducing risk and enhancing performance for the benefit of investors such as Plaintiffs. senior tranches of CDOs with "high grade" portfolios – e.

Thus. the manager's expertise with the assets and ability to manage within established constraints is paramount to the success of the CDO. 39) As explained by Adam Giddy. Market consensus is that the manager is the most important factor in a performance of a CDO. therefore. can greatly affect the performance of a CDO and either raise or lower its risk profile. As a result of the latitude afforded the collateral manager to actively adjust the composition of the collateral pool to take advantage of market opportunities and to anticipate or respond to credit events. 38) Collateral managers are paid a fee for their services. "The CDO Product. arrangers of CDOs (like Calyon) increasingly marketed and sold "synthetic" CDO structures. 40) Moreover. This manager is also responsible for the ongoing trading activities during a reinvestment period to realize gains and minimize losses.e. the former co-head of Citigroup's global CDO business." Testimony of Nestor Dominguez before the Financial Crisis Inquiry Commission. Professor of Finance at the Stern School of Business at New York University: [A]sset selection and substitution decisions fall under the purview of a collateral manager. 41) During the 2005-2007 period. April 7. the total deal issuance). Professor of Finance at the Stern School of Business at New York University (emphasis added). A collateral manager. as stated by Nestor Dominguez. typically a percentage (or basis points) of the notional value of the transaction (i. purchase the collateral pool.benefit of investors." by Ian Giddy. the expertise and qualifications of a collateral manager are of material importance to potential investors – as they were to Plaintiffs’ investment decisions. and maintain the portfolio within the constraints of the transaction structure. and manage and trade the collateral pool for the benefit of the debt and equity issued by the CDO. 2010.. the cost of which is ultimately paid for by the investors in the CDO. in which the underlying collateral pool did not -9- . in testimony before the Financial Crisis Inquiry Commission: "The collateral manager's role was to conduct diligence concerning the underlying assets.

IKB also developed internal rating systems for collateral managers. write-down or rating deterioration).consist solely of cash assets. 42) A CDS is a bilateral derivatives contract in which a "protection buyer" pays a "protection seller" periodic "premiums" – similar to insurance premiums – in return for a promise that the protection seller will pay the protection buyer should certain "credit events" occur (usually events of payment default. 47) Indeed. loss. to create CDOs to the order and specifications of investors who desired to short (i. but rather included credit default swaps ("CDS") that were intended to replicate the performance of cash assets that the CDS referenced. including Calyon. III. resulting in more and significant underwriting and placement fees.e. But they also became the driving force for certain CDO arrangers. billion-dollar CDOs often could be assembled in weeks. IKB focused on managed transactions involving independent collateral managers who would identify and select high quality collateral for the benefit of CDO investors. thereby enhancing the likely performance of the transaction and lowering its risk profile. The Requirements for the Loreley Companies’ Investments in CDOs 46) As a part of IKB’s processes for recommending investments to the Loreley Companies. such as Plaintiffs. IKB's diligence for the Loreley Companies included in-person interviews and reviews of collateral managers’ stated investment preferences. recommend an -10- .. 44) During the CDO boom. 43) Many arrangers of CDOs favored synthetic or hybrid CDOs (i. CDOs with synthetic components) because they did not require the purchase of a substantial amount of cash assets.. By using CDS. synthetic and hybrid deals made for quick assembly of CDOs. bet against) them. 45) The Orion 2006-1 and Pyxis 2006-1 CDOs were hybrid CDO structures which included both cash assets and CDS in their underlying collateral pool.e. as a general matter. a process that could take several months. and would not.

("NIBC"). 2006. 2006. 52) No later than June 2005 – when representatives of Calyon and IKB attended a global ABS conference – Calyon was aggressively soliciting IKB for the business of the Loreley Companies as a part of Calyon's ongoing effort to become a major player in the global CDO market. and investment procedures. Dr. on or about May 17. Calyon representatives asked during that meeting what it would take for IKB to -11- . Klaus Bauknecht and representatives of NIBC Credit Management. Plaintiffs' objectives. including Arjun Kakar. as indicators of the risks associated with the assets that IKB recommended to the Loreley Companies. as well as the ratings assigned to the CDOs' underlying collateral. Inc. Calyon representative Benjamin Lee attended a meeting in New York with IKB representative Dr.investment to the Loreley Companies in a CDO if they did not approve of the collateral manager for that CDO. Klaus Bauknecht) in Calyon's rented offices. 48) The Loreley Companies’ investment decisions also relied on. inter alia. among other things. 51) At the meeting held on or about May 17. Bauknecht reviewed. inter alia. Bauknecht stressed the importance of having highquality collateral in the transaction. It was represented to IKB as investment advisor to Plaintiffs that NIBC was the collateral manager for the Orion 2006-1 deal. a meeting was held among representatives of Calyon (including Loic Fery and Ralf Otzen) and IKB (including Dr. 50) For instance. IKB communicated to Calyon that the Loreley Companies had a low appetite for credit risk and no appetite for principal loss. 53) At that conference. Calyon representatives attended meetings IKB held with collateral managers for the purpose of conducting diligence for its investment recommendations to the Loreley Companies. including Plaintiffs' requirements for collateral quality. requirements. concerning the Orion 2006-1 CDO. the ratings assigned to proposed CDO investments. Dr. 49) Upon information and belief. Calyon knew of the Loreley Companies' investment criteria because.

the Loreley Companies investments focused on highly-rated tranches. (a) that the Loreley Companies were interested in managed CDO deals. of CDOs managed by experienced collateral managers who would exercise independent judgment in purchasing and managing the collateral for the benefit of investors. The offering memoranda typically described the structural characteristics of the CDO and defined eligibility criteria for the collateral that may be purchased by the Issuer of the CDO as further set forth in an indenture governing the terms of the issued securities. Kubis explained. (b) that IKB's assessment of the collateral manager was critical to each investment decision. Kubis explained the investment objectives of the Loreley Companies with respect to the potential purchase of notes issued in connection with CDOs of ABS. During those calls – and in response to Mr. like other CDO arrangers. 57) IKB repeatedly informed Calyon of the Loreley Companies' investment requirements and collateral manager protocols.recommend investments in Calyon-arranged CDO deals to the Loreley Companies. Uta Kubis of IKB had multiple phone conversations with Ralf Otzen of Calyon in which Ms. Calyon clearly knew this. (c) that IKB had a collateral manager rating -12- . in and around the spring of 2006. final offering memoranda or circulars. Otzen's inquiries regarding the types of investments in which IKB was interested in recommending to the Loreley Companies – Ms. Calyon. 55) Indeed. among other things. IKB indicated to Calyon what types of investments IKB would consider to recommend for investment. preliminary offering memoranda or circulars. inter alia. For example. and other presentations. among other things. the collateral managers' collateral selection processes. pitch books. in considering whether to recommend that the Loreley Companies invest in Calyon-arranged CDOs. generally marketed CDOs to investors and their advisors using materials that included. 56) Plaintiffs’ investment decisions also relied upon marketing materials provided by Calyon. primarily AAA and AA. IKB reviewed with Calyon. 54) To minimize risk.

and (d) that. upon information and belief. 61) Notwithstanding the rapid development of Calyon's CDO business. 58) Furthermore. Byers attended a meeting at an outdoor café in Barcelona with Calyon's Alexander Rekeda. 59) No later than June 15. about the investment requirements of the Loreley Companies. Calyon's parent corporation (Crédit Agricole) set a goal for Calyon to become a member of the world's top five companies in structured credit and securitizations. During that conference. including Calyon's involvement in CDOs. and transactions involving asset-backed commercial paper conduits (like the Rhineland Programme). through its employee. 60) The Calyon Fraudulent Scheme Upon information and belief. 2006. the Loreley Companies could invest lower in the investment structure. Calyon's Constellation CDO Fraud A. in the course of 2005. IV. Calyon knew. Byers learned about those details in and around 2005. in May 2006 it still lagged behind several of its competitors. 2005 "Strategic Development Plan" for 2006 to 2008. Byers was at that time leaving UBS and had committed to working for Calyon. Calyon's structured credit activity grew significantly in the second half of 2005. Paul Byers. and IKB's Uta Kubis and Dr. Klaus Bauknecht.S. (the final day of the 2006 global ABS conference) Calyon was keenly aware of criteria and requirements applied by IKB in connection with its recommendations to the Loreley Companies with respect to purchases of CDO notes. particularly synthetic and hybrid CDOs. In its December 15. For example. Calyon participated both in major asset-backed securitization issues in the U. while he was still employed by UBS and engaged in discussions with IKB personnel regarding the participation of UBS as a potential provider of liquidity for the Rhineland Programme. Calyon set ambitious goals to expand its securitization and structured credit businesses. starting in 2005. Mr. for deals involving the higher-rated managers. Calyon – in an -13- .and assessment system. NIBC's Alex Stetkyvich. Mr. Upon information and belief. Mr.

64) Upon information and belief. which together with Orion 2006-1.000 1. Magnetar grew rapidly.5 billion under management to approximately $9 billion.380. according to reports." Magnetar "contributed to billions in losses on Wall Street.479. which closed on May 26. from its launch in 2005 through 2007.000.100. Pyxis 2006-1 Cetus 2006-3 Orion 2006-2 CDO Ltd.000 1. Magnetar helped fuel Calyon's desire for growth by sponsoring five Calyon and Magnetar worked together to create the first of the Calyon-arranged CDOs. 2006. Illinois. and as public reports have begun to reveal. Constellation CDOs – Orion 2006-1. the former global head of equities at Citadel Investment Group.559. was only able to close approximately one CDO per month. to the chagrin of management. Ltd.000. Magnetar was founded by Alec Litowitz.000 1.300." Magnetar derived those profits from -14- . 2008.effort to keep up with its rivals – set a goal to close four or five CDO deals a month but. from approximately $1. 62) However. In fact. that growth occurred largely because Magnetar facilitated the creation of CDOs with portfolios secured by RMBS (or through CDS referenced RMBS) for the purpose of shorting these same CDOs – the very market it was creating.000 420. becoming a major player in structured credit – especially CDOs – within just two years. Volans Funding 2007-1 63) Closing 5/26/2006 10/3/2006 11/28/2006 12/7/2006 3/14/2007 Deal Size 1.000.000 Arranger Calyon Calyon Calyon Calyon Calyon Located in Evanston. totaled approximately $6 billion: Collateral Manager NIBC Putnam GSC Partners NIBC Vero Capital Deal Name Orion 2006-1. 65) As reported in a January 14. Wall Street Journal article entitled "A Fund Behind Astronomical Losses. Magnetar grew 600%.000. Magnetar then sponsored four additional Constellation CDOs. even as the fund itself profited from the subprime-mortgage crisis.

” and (b) “designed structures to exploit that[. Calyon – made available short positions on the CDO's collateral. which invested in the equity tranches of CDO deals secured by RMBS (or through CDOs with CDS that referenced RMBS). Magnetar "facilitated the creation of a few of the worst- performing collateralized debt obligations. describes.]'" On information and belief. Specifically. the same collateral and the same deal Magnetar was shorting). the investment scheme of Magnetar and its complicit arranging banks. which were created by Magnetar in collusion with arrangers. using industry sources. Yves Smith states (a) the Magnetar net-short strategy only worked if the CDOs it sponsored failed. Magnetar approached deal-hungry investment banks like Calyon with a seductive offer. provided the investment bank – e.. Magnetar designed those structures through investment funds it controlled. A corollary requirement was control by Magnetar over deal structure. They bet against the better slices. and the collateral included in the CDO (i. on information and belief. 67) As 2010 public reports have now revealed.] * * * -15- . Magnetar would purchase the equity tranche of the CDO it sought to create. which throws out a lot of cash for perhaps a year or two and then starts to decay quickly. and Sumitomo Bank..g. short the very same deals they created[. formation. to effectuate its short strategy. Magnetar was among the hedge funds referenced in the article as having (a) "realized early on that the loans and securities that went into CDOs were extremely toxic. including Calyon. and (b) to make that strategy succeed. 66) According to that article.the so-called Constellation CDOs. a financial services consultant and author who worked previously at Goldman Sachs & Co.. 68) A 2010 book authored by Yves Smith. Magnetar ensured inclusion of the riskiest "crap" assets in the CDOs it created: Magnetar owns the [CDO's] equity layer. Magnetar used the cash payments it received as holder of the equity tranche to fund its short trades during the (relatively) brief time between closing and the deal's collapse. and bear the names of astral entities. McKinsey & Co.e." Further.

among other things. With Magnetar. Magnetar influenced the transaction by mandating a certain equity return. Magnetar would not make its target returns on the equity tranche alone. As recounted in ECONNED." 71) Moreover. report published by ProPublica (a non-profit investigative news service). The deals had to fail for them to succeed. and (b) the ratios of Magnetar's short positions to its long positions have varied from deal-to-deal. at 258-59 (Palgrave MacMillan 2010).e..It only works if the deal is so bad that the equity. investment banks had to go out and find buyers of the equity. knew about and facilitated Magnetar's net short strategy. Magnetar was betting on the failure of the very deals it was creating. i." including Calyon's role in creating it. and the traders would in turn line up suitable investments with the CDO manager. Yves Smith. 70) CDO arrangers." ProPublica further outlined its source materials and the shroud of secrecy surrounding the Magnetar scheme: Key details of the Magnetar trade remain shrouded in secrecy and the fund declined to respond to most of [its] questions. -16- . "[u]sually. the size of Magnetar's short positions exceeded the size of its long positions. It was common for funds like Magnetar to let a trading desk know what parameters it wanted. even though both of them understand that Hedgie's interest lies in having the CDO crater. but could be as much as 6-to-1 net short or even higher. are all toast. 72) As recounted by ProPublica. "Dealer [Calyon] winks back at Hedgie [Magnetar] and pretends he believes Hedgie is serious about ‘hedging’ his CDO investment. including Calyon. ECONNED. 69) Upon information and belief: (a) Magnetar was net short the Constellation CDOs. riskiest) crap. exposed accounting fraud at Lernout & Hauspie) and Jake Bernstein (an award-winning investigative reporter formerly affiliated with the Texas Observer). outlines what has now come to be known as the "Magnetar Trade. Wall Street was overjoyed. 2010.e. the buyer came right to the bank's doorstep. plus the higher layers. which meant the CDO would have to hold the 'spreadiest' (i. an April 9. In other words. authored and investigated with extensive source citation by Jesse Eisinger (a former Wall Street Journal reporter who..

" Id. ProPublica continues.* * * Only a small group of Wall Street insiders was privy to what has become known as the Magnetar Trade. 77) Magnetar also hired Jim Prusko in connection with its CDO shorting franchise. 75) ProPublica also reported that CDO managers and arrangers such as Calyon knew Magnetar "used the equity to fund the shorts." 74) The ProPublica report further reveals that "Magnetar and Deutsche were deeply involved in creating Orion [2006-1]. President and CIO of prospective CDO manager Ischus Capital Management. But interviews with participants. secretive corner of Wall Street. ("Putnam") in Boston. thousands of pages of documents and details about the securities that until now have not been publicly disclosed shed light on an arcane. fearing their careers would be hurt if they spoke publicly. there are two managers with whom we are already on our third deal … I think the cumulative business will be worthwhile even if you feel the first deal is too skinny. Orion 2006-1. Prusko had previously worked for investment manager Putnam Investments. -17- . Michael Henriques. the investment banking arm of French bank Crédit Agricole. In doing so. 78) In an email ProPublica uncovered dated September 8. (emphasis added). 2006. A critical aspect of that control was dictating a deal's collateral pool composition." 76) As further reported by ProPublica. (emphasis added). Instead. 73) According to ProPublica.' a banker who worked on it recalls them emphasizing. Prusko stated to Andrew Shook. 'We want to make sure we control the deal. the investors worked with Alex Rekeda" – a young and relatively inexperienced professional "who was then working [in New York] for Calyon. Magnetar "didn't reach for a Wall Street powerhouse to put the deal together. later quit – and joined Magnetar. LLC ("Ischus"): "Our goal is to partner with managers and do a series of deals." Id. Deutsche Bank's leader on the Orion 2006-1 CDO. Magnetar partnered with Deutsche Bank to buy the equity of its maiden deal. Nearly all those approached by Pro Publica declined to talk on the record. e-mails. a/k/a Putnam Advisory Company. LLC.

upon information and belief. however. Magnetar also insisted on having a "veto" right as to any asset before that asset could become part of a CDO's portfolio of collateral. 83) On information and belief. 82) Upon information and belief. Magnetar identified risky RMBS and CDS referencing RMBS that it required to be included in the collateral pool for its CDOs. 80) One of the managers Magnetar partnered with was Prusko's former employer.. but unknown and undisclosed to investors such as the Loreley Companies. that is. Putnam.e. having put up the equity. so that Magnetar could control the selection of collateral it was going to short.. the very reason for the Constellation CDO's "hybrid" (i. Magnetar controlled these deals. to allow for Magnetar's heavy bets that the deals would fail. were not disclosed or known to – nor could they have been known to – the Loreley Companies until revealed in 2010. would not. such as Orion 2006-1 and Pyxis 2006-1. which (nominally) acted as the collateral manager of Pyxis 2006-1. 81) Magnetar's partnerships with Putnam and NIBC. that: (a) Calyon designed Orion 2006-1 and Pyxis 2006-1 as hybrid synthetic and cash CDOs specifically to facilitate Magnetar's net short positions. gets veto power over the bonds in the CDS. The collateral managers for Magnetar-sponsored transactions. Another was NIBC. coupled with its net short strategy.e. (b) -18- .79) Upon information and belief. Magnetar – unbeknownst to the Loreley Companies or their investment advisor. In reality. Rather. As stated in ECONNED. Magnetar]. partially synthetic) structure was to provide a vehicle for Magnetar's net short positions. select underlying assets for the CDOs unless Magnetar approved such assets. "Hedgie [i. which (nominally) was the collateral manager of Orion 2006-1. Calyon affirmatively and materially misrepresented and concealed the manner in which portfolios for the Orion 2006-1 and Pyxis 2006-1 CDOs were selected. 84) It was known within Calyon. but well known to arrangers such as Calyon – bought the cooperation of CDO collateral managers by promising deal volume." Moreover.

Senate Permanent Subcommittee on Investigations on or about April 27. stating "we will not assemble a portfolio we are not proud of and feel strongly about in the name of a spread target.(c) For Magnetar-sponsored CDO transactions. 2006. on information and belief.S. -19- . Placing the risky equity was so important to banks that they typically gave those who bought it a say in how the deal was structured. 2010. of these facts. independent collateral manager selecting or managing the collateral for the benefit and in the best interests of the CDOs' "long" investors. Paulson & Company – Tourre states "[t]hat's what we've been seeing for most Magnetar-sponsored transactions. Magnetar had privileges. There. Magnetar specifically identified and attached the "target" portfolio Prusko wanted for a prospective CDO deal: "I have attached the target portfolio that I would like for this deal with target spreads that I believe are very achievable in the current market. there was no true. But people involved in Magnetar's deals say the hedge fund took a different tack [sic]. pushing for riskier bonds to go inside its CDOs. The Loreley Companies did not know. This document was made public (and marked as Exhibit #108) during the hearings conducted by the U. which were materially misrepresented and concealed by Calyon. dated October 3. from Prusko to Ischus. nor could they have known. Like all investors. Ischus refused." 86) 87) Ischus did not serve as manager for that or any other Magnetar-sponsored CDO. ("Goldman") employee Fabrice Tourre ("Tourre") to ACA Management ("ACA"). 88) As ProPublica further reported: Since it was the sponsor. email from the now-infamous Goldman Sachs & Co. equity buyers had to weigh risk and reward. 2006." (Emphasis added). while outlining the management fee structure for ACA – which the SEC alleges was fraudulently suborned by Goldman at the behest of another short investor. 2007. such as Orion 2006-1 and Pyxis 2006-1." In a later email. 85) In an email dated September 29. the goal being to maximize returns while minimizing the chances that your investment will blow up. also uncovered by ProPublica. The true facts have begun to surface only in 2010. Similarly telling is a January 10.

upon information and belief. they would never have purchased Orion 2006-1 or Pyxis 2006-1. at the same time." Calyon thus created these CDOs under the guise of bona -20- . Calyon had to lie to the CDO "long" investors and their investment advisors. 89) Neither the Orion 2006-1 nor the Pyxis 2006-1 CDOs was managed by an independent collateral manager as Calyon represented. there would have been no takers in an open market trade given the significant size of the short positions they set out to acquire. as recounted in ECONNED. including Plaintiffs. 93) Indeed. Calyon arranged those transactions at the behest of. a "big short position … would show up quickly and blow spreads out incredibly wide. 92) Calyon arranged Orion 2006-1 and Pyxis 2006-1 to induce long investors. For an arranger like Calyon. to get the deals done. such as the Loreley Companies and IKB. The equity tranche of a CDO is generally the hardest for an arranger to sell because it is unrated and the most subordinated tranche. and for the benefit of Magnetar – knowing that Magnetar was controlling the deals. 91) Magnetar's burgeoning short franchise dovetailed with Calyon's need to find an equity purchaser in order to close more CDO transactions in 2006. into funding the pay-off on Magnetar's short positions achieved through the purchase of CDS protection. without the creation of a CDO by a complicit arranger like Calyon. eager to close deals. the prospect of Magnetar committing in advance to buy the equity tranche in multiple CDOs was extremely enticing – even though. dictating the collateral pool composition and. (Emphasis added).Doing that would make it more likely that Magnetar's bets against the CDO would pay off. Rather. 90) Calyon concealed and materially misrepresented the true nature of the Orion Had the Loreley 2006-1 and Pyxis 2006-1 CDOs to IKB and the Loreley Companies. Companies known the truth. betting on the deals' failure. Had Magnetar sought a direct counter-party for its short trades.

who contribute hundreds of millions of dollars to the CDO Issuer in exchange for notes. The Dealer has thus passed its long position to the CDO investors who have no idea that the CDO came about on the order of a short investor that sponsored and controlled the deal. That is precisely what happened in the Orion 2006-1 and Pyxis 2006-1 CDOs. Plus..fide long investments that. the Dealer is itself "long"]. The cash infused by the long investors is then used to pay the short investor when the deal it created fails. "The Dealer has now committed to sell CDS protection against … assorted BBB trash [i. At closing. there would be no CDO. arranger.e.. the Dealer buys protection from the CDO Issuer that is back-to-back with the short protection that the Dealer has sold to the Hedgie.e. and thus there could be no Magnetar short. the Hedgie (i. so Dealer needs to get rid of this risk as quickly as possible. qualified manager acting in the interests of the CDO long investors.e. inter alia. At the same time. Without Calyon. such as the Loreley Companies. Calyon) thus arranges and markets a CDO to long investors. initial purchaser.. At the moment this is exclusively the Dealer's risk. Calyon generated substantial fees on Orion 2006-1 and Pyxis 2006-1 in its roles as. Calyon misrepresented that the portfolios were selected based on the experience and judgment of an independent. That means coming up with investors in the CDO. 95) Calyon – in the case of Orion 2006-1 and Pyxis 2006-1 – was the lynchpin to the fraudulent scheme. 94) For its part. Calyon) through CDS on the bonds referenced in the synthetic portion of the CDO portfolio. -21- . Magnetar) purchases "short" protection from the Dealer (e.. unbeknownst to the Loreley Companies.g. 98) This net short trade could only have been accomplished by Magnetar in complicity with Calyon." 97) The "Dealer" (i. and placement agent for each CDO. Calyon was rewarded with a total of five Constellation CDOs by Magnetar. were vehicles sponsored and controlled by the party betting heavily on the transactions' failure. 96) As recounted in ECONNED.

So. these structures went terrifically bad.99) Upon information and belief. at 259 (alterations in original). The commentary is right … without someone willing to fund the equity of a CDO there was no way to get one done. The size of their "Constellation" program was the most amazing thing I've seen in my entire career. but it usually took a little while from a timing perspective for that to happen. as explained in an email by an industry insider who worked on these transactions. Magnetar made the logical leap … they'd fund the equity necessary to create the structures and then short a multiple of the bonds their equity money had allowed to be created. And. The expected defaults and losses generated by the assets Magnetar selected were sufficient to eliminate. -22- . Magnetar created a class of CDOs for the sole purpose of shorting them: At their peak. But that subordination was an illusion. $368. Magnetar did not simply hedge a class of assets through a "long/short" strategy.4 million for Pyxis 2006-1 and $265 million for Orion 2006-1. they realized that while most other hedge funds were content shorting the BBB tranches from subprime RMBS.e. The gravy was that the equity was typically good for one or two VERY HEFTY cashflow distributions. ECONNED. the subordination that was represented to exist. So. Rather. 100) Calyon represented that the notes the Loreley Companies purchased in connection with the Pyxis 2006-1 and Orion 2006-1 had a specific amount of structural subordination. or substantially impair. … Magnetar's idea was that CDOs were destined for long term failure–that the leverage on leverage based on cr*p assets made the BBB tranches long-term zeros.. i. and Calyon's representations – including the subordination representations made in the offering memoranda for each deal – were false. shorting the BBB tranches from RMBS CDOs was a much more slam dunk of a trade. their carry cost of the shorts was offset by the one or two equity payments. Magnetar was *THE* driver of RMBS [residential mortgage backed security] CDO issuance.

given its expertise and its relationships in the sector. Calyon insisted on acting as an intermediary between IKB and each of the collateral managers. Specifically. it was ideally situated to sell to the Loreley Companies investments in CDOs that met their objectives. listing its track record with billions of dollars in structured credit transactions that either had already closed or were in the pipeline.101) As Magnetar and Calyon expected. both Pyxis 2006-1 and Orion 2006-1 experienced events of default before each deal's reinvestment period expired. and on May 18. On November 21. Calyon also boasted about its strategic plan to further expand its ABS-CDO business and claimed to have long-term partnerships with more than 20 top collateral managers. 2008 the ratings agency Moody's downgraded the Class A-2 notes that LFJ 25 had purchased to a rating of B1. 2008 further downgraded them to a Ca rating. 106) However. No later than June 2005. Calyon promoted itself as a leader in structured finance CDOs. Orion 2006-1 experienced an event of default. and strictly controlled the flow of information between the two. 105) Calyon represented that. 102) Likewise. the ratings agency Fitch downgraded to a rating of BB. and in September 2008. Even when IKB attempted to communicate with collateral managers directly – for example when IKB -23- . Calyon was aggressively marketing CDO deals to IKB as investment advisor to the Loreley Companies. both deals were downgraded by ratings agencies to "junk" status within the reinvestment period. 2007. 2010. B. 103) Calyon's Fraudulent Sale of Orion 2006-1 and Pyxis 2006-1 to the Loreley Companies Calyon was aware that IKB acted as the investment advisor to the Loreley Companies and set out to sell CDOs to the Loreley Companies. 2008. 104) As part of its effort to sell CDOs to the Loreley Companies.the Orion 2006-1 Class A notes that LFJ 7 purchased. Fitch further downgraded those notes to a CC rating. Pyxis 2006-1 experienced an event of default and on June 10. on December 4. On March 26.

" 109) In March 2006. selecting appropriate. high quality assets. 1." and "employs proprietary -24- ." 110) Calyon repeatedly represented – via. Calyon provided IKB with a 56-page marketing presentation for Orion 2006-1. knowledge and resources … contributed to the development of proprietary ABS and CDO technology to analyze portfolio performance under a wide range of economic scenarios. its marketing presentations – that NIBC was a collateral manager that would manage the Orion 2006-1 CDO consistent with the Loreley Companies' investment objectives by. on information and belief. Inc. 108) In February 2006. it knew that IKB was familiar with and thought highly of NIBC." and that its "extensive experience. NIBC. Inc. 111) For example. Calyon provided IKB with another 56-page presentation for Orion 2006-1. for example. The cover page of this presentation represented that Orion 2006-1 was "Managed by NIBC Credit Management. in its March 2006 marketing presentation.asked for information on asset cash flows and defaults from NIBC. the collateral manager for Orion 2006-1 – NIBC referred IKB to Calyon. and because. The cover page of this presentation represented that Orion 2006-1 was "Managed by NIBC Credit Management. Calyon devoted an entire 25-page section to the collateral manager. Indeed. Calyon represented that NIBC "[a]s both an investor and issuer of CDOs … has a thorough understanding of CDO structures." 112) Calyon further stressed in its marketing presentation that NIBC "[i]dentifies assets within the framework set by [NIBC's] Investment Committee. 107) Orion 2006-1 Calyon approached IKB in early 2006 in an effort to sell or persuade IKB to recommend investments by the Loreley Companies in notes to be issued in connection with the Orion 2006-1 CDO. inter alia. Calyon touted NIBC's skill and abilities – and highlighted NIBC's involvement in the deal – because of the high value that IKB and the Loreley Companies placed on a deal's collateral manager and management processes.

Furthermore. LFJ 7 accepted IKB's recommendation and approved investment in Orion 2006-1 Class A notes. Rather than selecting "strong" assets as Calyon specifically represented. -25- . both quantitatively and qualitatively. 116) In reasonable and justifiable reliance on Calyon's misrepresentations and omissions. Magnetar – in complicity with Calyon." 113) The March 2006 presentation also represented that NIBC put special "emphasis … on selecting 'strong' assets which have a higher likelihood of being upgraded than downgraded." According to the presentation. but invisibly to the Loreley Companies and IKB – controlled Orion 2006-1. and Calyon's agreement to arrange the deal at Magnetar's behest in order to facilitate Magnetar's net short strategy. four separate NIBC teams analyzed. credit analysis and judgment. and a Surveillance Team – a painstaking and "multi-layered" process "designed to have multiple 'sets of eyes' for each investment. an Investment Team." 114) Consistent with these representations. acquisition and disposition of the Collateral Debt Securities" based on its "research. the May 2006 offering memorandum for the Orion 2006-1 CDO represented that "the Collateral Manager [NIBC] will select and manage the Collateral" and "will manage the selection. weak. Magnetar. focusing on a bottom up approach. a CDO Compliance Team." 115) Calyon's representations were material and knowingly or recklessly false when made because. low quality assets were included in the transaction. selected and managed investments – an Investment Committee. even under moderately stressful economic scenarios" and that NIBC's "[p]rimary focus [was] to identify opportunities in the US structured credit markets through emphasis on credit and structuring while minimizing … risk. Calyon concealed material information from the Loreley Companies and IKB regarding Magnetar's role in constructing and controlling the deal. IKB recommended that LFJ 7 invest in the Orion 2006-1 CDO. inter alia. This scheme was perpetrated by Calyon to trick Plaintiffs into purchasing the "long" side of a CDO transaction secretly controlled by the net "short" side. partnered with NIBC. and dictated the selection of the Orion 2006-1 assets in furtherance of its net short strategy.modeling to perform credit and risk analysis.

loss severities. Calyon approached IKB in an effort to persuade IKB to recommend that the Loreley Companies purchase notes to be issued in connection with the Pyxis 2006-1 CDO. in detail. LFJ 7 presently owns Orion 2006-1 Class A notes with a face amount of $10. 120) During that month." The presentation stated that Putnam "develops multiple scenarios to test the structure's durability. the Class A notes were rated AAA by S&P and Fitch. would engage in to assemble the Pyxis 2006-1 collateral pool. and Aaa by Moody's. Calyon provided IKB with two marketing presentations for Pyxis 2006-1. analyzes "each transaction … to better understand its collateral composition" and conducts a "[s]tructural analysis [that] includes understanding rating levels." 121) Each of these presentations included approximately 20 pages that described. prepayments speeds and interest rates. LLC. 2." which "involves running multiple stress scenarios by varying inputs such as default frequency vectors." -26- . the rigorous asset-selection process that Putnam. 118) When purchased by LFJ 7. what tranche to invest in. it was represented that Putnam offered "best in class CDO management capability. the collateral manager. how much to invest and at what price in order to achieve acceptable risk-adjusted returns for its clients. 119) Pyxis 2006-1 In or around July 2006. allow Putnam to decide if to invest.5 million." Indeed. "[t]he results of [Putnam's] analysis. The cover page for both of these presentations represented that Pyxis 2006-1 was "Managed by The Putnam Advisory Company. combined with the prudent application of judgment.117) LFJ 7 purchased from Calyon CIB Orion 2006-1 Class A notes. 122) For example. one of the July 2006 presentations touted the detailed diligence that Calyon represented that Putnam Putnam conducts in deciding on a deal's collateral pool." According to the presentation. Calyon knew LFJ 7 was relying on Calyon's materially false statements and material omissions. each approximately 50 pages long.

This scheme was perpetrated to trick Plaintiffs into purchasing the "long" side of a CDO transaction. 127) Rather than selecting assets with the "prudent application of judgment … to achieve acceptable risk adjusted return" as Calyon represented.123) Calyon further represented in the July 2006 presentation that "Putnam should actively drive the product structure. and C notes. that was secretly controlled by the net "short" side. Magnetar. the October 2006 offering memorandum for Pyxis 2006-1 represented that the "Fixed Income Group" of Putnam "will select and manage the Collateral" and "will manage the assets of the Issuer. Furthermore. 126) Calyon's representations were material and knowingly or recklessly false when made because. B. Calyon represented of Putnam's "rigorous portfolio construction" and "fundamental security selection. Pyxis 2006-1." The offering memorandum touted Putnam's vast experience in managing structured assets. IKB recommended that LFJ 25 invest in the Pyxis 2006-1 CDO. -27- . Magnetar – in complicity with Calyon. Calyon represented that "Putnam seeks to design and undertake transactions that have a high probability of success. and controlled the selection of the Pyxis 2006-1 collateral." 124) In a July 7. partnered with Putnam. Calyon concealed material information from the Loreley Companies and IKB regarding Magnetar's role in constructing and controlling the deal." In that same document. weak and poor quality assets were intentionally selected. inter alia. 2006 pitch book for Pyxis 2006-1. but invisibly to IKB and the Loreley Companies – controlled Pyxis 2006-1." and that "[d]ay-to-day portfolio management" will "be the joint responsibility of [Putnam's] CDO & Portfolio Credit Team. and Calyon's agreement to arrange the deal at Magnetar's behest in order to facilitate Magnetar's net short strategy." 125) Consistent with these representations. LFJ 25 accepted IKB's recommendation and approved investment in Pyxis 2006-1 Class A. 128) In reasonable and justifiable reliance on Calyon's materially false representations and omissions.

5 years after closing for Orion 2006-1 and five years after closing for Pyxis 2006-1). those notes were rated AAA by S&P and Fitch. for Orion 2006-1 (which was supposedly managed by NIBC) and Pyxis 2006-1 (which was supposedly managed by Putnam). 2006. In reality. influencing the selection of weak and poor quality collateral. misrepresented the true purpose of these deal features. in which Mr. 133) For example. 132) Orion 2006-1 and Pyxis 2006-1. LFJ 25 presently owns Pyxis 2006-1 Class A-2 notes with a face amount of $10 million. Magnetar funded its net short positions with the cash-flow it received from its equity holdings in the CDOs it created. and Aaa by Moody's. Calyon knew that LFJ 25 was relying on Calyon's materially false statements and omissions. This fact was known to Calyon but unknown and undisclosed to the Loreley Companies.129) LFJ 25 bought from Calyon CIB Pyxis 2006-1 Class A-2 notes. 131) Transaction Features of the Orion 2006-1 and Pyxis 2006-1 CDOs As detailed above. Ralf Otzen of Calyon forwarded to Uta Kubis of IKB a note from Benjamin Lee of Calyon. For example. Without knowing the equity investor was controlling the deals. 134) Calyon. and was net short the deals. 130) When purchased by LFJ 25. like other Constellation CDOs. Lee represented that the reason the IC Test was -28- . And Calyon misrepresented them as benign to IKB and the Loreley Companies. on or about April 12. 3. these features appeared facially benign. however. the tests for overcollateralization coverage (the "OC Test") and interest coverage (the "IC Test") – which were common in the market and normally would restrict (or eliminate) cash flow to the equity and more junior tranches during periods of transaction distress – did not become applicable until the end of the reinvestment period (which was 4. This delay was designed to allow the equity tranche holders (Magnetar) to receive cash flow even in times of market distress. the structural features were designed to provide Magnetar with a cheap source of funds to pay for its net short positions. were structured for the benefit of the equity tranche.

which became a staple characteristic of the Constellation CDOs. the actual purpose of the absence of the IC Test was so that Calyon could facilitate Magnetar's funding of its net short positions on the very same transaction. Lee falsely indicated that the reason Calyon decided not to have an OC Test for Pyxis 2006-1 during the reinvestment period was because after the reinvestment period "[ratings] downgrades are more likely. But Calyon also had to misrepresent the terms to investors because if Calyon disclosed their true purpose. 136) The Pyxis 2006-1 CDO also included an issuance of Class X notes." Contrary to this express representation. Calyon was required to insert these terms as part of the quid pro quo for Magnetar's equity sponsorship of the CDOs. Magnetar owned the Class X notes and/or used them in a way that resulted in the equity being partially unfunded. the purpose for these features. By being the holder of the Class X notes and equity-holder. the Loreley Companies. 137) The actual purpose for all of these features was to allow Magnetar to fund – in an Calyon concealed from and inexpensive way – its bet against the deal as a whole. 135) Similarly. 138) The presence of these terms in the Orion 2006-1 and Pyxis 2006-1 CDOs only further confirms Magnetar's control of the deals. Ralf Otzen forwarded to Uta Kubis a note from Benjamin Lee in which Mr. on September 19. the actual purpose of the delay of the applicability for the OC Test was so that Calyon could facilitate Magnetar's funding of its short positions on the very same transaction. in turn. Contrary to this express representation. in at least some of these transactions. Upon information and belief. -29- . misrepresented to IKB and. Magnetar ensured returns on its investment by receiving cash flow distributions. Upon information and belief. Class X notes were among the CDOs' most subordinated notes (along with the equity) yet they returned significant excess cash flow to the investor from the beginning of the transactions.absent from the Orion 2006-1 CDO structure was because Orion 2006-1 was a hybrid CDO containing "pay as you go" CDS. Calyon would have revealed the Magnetar strategy and alerted those investors to the fraudulent design of the CDO transactions. 2006.

(c) acting as a warehouse lender prior to and during the CDO ramp-up period. as necessary. Calyon. Calyon made an aggressive move to expand its CDO business by acquiring the CDO management firm Omicron Investment Management. (d) acting as a credit default swap counterparty in connection with synthetic or hybrid CDOs. 142) Given this fee structure. received millions of dollars in investment banking and placement fees at closing based on a percentage of the notional value of the CDO. Indeed. structuring and closing deals as fast as it could (albeit not as many as it would have liked). -30- . and the nature and quality of the collateral.S. Calyon's Roles as Arranger 139) As a CDO arranger. (e) marketing and selling the CDO's notes to investors to complete the transaction. and (f) communicating with each CDO's collateral manager. like other arrangers. Calyon. in February of 2006. in connection with which it provided financing for the assets to be sold to the CDO. 140) In addition. Calyon performed multiple roles. 141) In exchange for discharging its responsibilities. Calyon had substantial expertise and depth in securitization and structured credit and was deeply involved in arranging CDOs backed by U. 143) By 2006. sub-prime mortgage assets.V. Those activities included: (a) structuring and modeling each CDO. the collateral manager. The CDO's structural characteristics and collateral eligibility criteria were typically established by the arranger. both in its CDO business generally and specifically to market and sell CDOs to IKB and the Loreley Companies. (b) interfacing with the ratings agencies to achieve targeted ratings for the CDO's tranches. like other arrangers. Calyon had an incentive to place as many large CDOs into the market as the market would consume. as Calyon did with IKB and the Loreley Companies. often provided other written or oral representations regarding the structure of the CDO. And Calyon did so.

Calyon was ranked seventh worldwide in ABS/MBS securitizations (according to Thompson Media and a November 2006 Crédit Agricole investor presentation). $1.25 billion Millstone III HG ABS CDO. $307 million Confluent Fund. with a trading platform covering the entire structured credit product spectrum. 145) During this time. $2. €250 million Grand Avenue ABS CDO. $1.3 billion Sheffield CDO of CDO. $300 million G-Square HG ABS CDO. €2. $1. $1. $1.5 billion Gloucester Street HG ABS CDO. $2 billion CLOME CLO. $1. $2 billion -31- .5 billion ZOO ABS CDO II.2 billion Primus CDO Squared. including. the following: • • • • • • • • • • • • • • • • • • • • • Lincoln Avenue ABS CDO. $1 billion LCM CLO. €300 million GSC Partners CDO.8 billion Vero ABS CDO.5 billion Omicron CDO of CDO. Calyon promoted its experience and expertise in documents entitled Structured Credit Presentation.5 billion FFTW HG ABS CDO. $1. listing billions of dollars of structured credit transactions that had already closed.2 billion TSAR 16 HG ABS CDO. or which were in the pipeline.5 billion Brigantine HG ABS.5 billion Orion 2006-1 ABS CDO. $1. it claimed to be a leading specialist in CDO structuring. $1. $1.2 billion Davis Square HG ABS CDO. $1.5 billion Orion 2006-2 ABS CDO. by September 2006. upon information and belief. $2 billion Monroe Harbour HG ABS CDO. In November 2006.144) Calyon's structured finance business was developing so rapidly that.

$2.5 billion Bishopsgate CDO. Trees & Watts MFS investment manager Henderson Global Investors Church Tavern Advisors Stanfield Capital Partners AXA Cypress Tree Vanderbilt Capital Advisors M&G Investments Caja San Fernando Winchester Capital LCM Ofivalmo Wharton Asset Management -32- .1 billion Upon information and belief. $2 billion Midgard CDO Squared. $1. $1.5 billion Cetus 2006-3 (28 Nov 06). $5.2 billion Millstone IV (22 Jun 07). including the following: • • • • 147) Pyxis 2006-1 (3 Oct 06).2 billion Volans 2007-1 (14 Mar 07).6 billion Embla CDO. Calyon had completed at least a further $5. €12.• • • • • 146) Selecta CDO. Francis. by July 2007. $10 billion Cypress Tree CDO. Calyon also claimed to have long-term relationships with top collateral managers. $1. $10 billion Upon information and belief.0 billion of CDO transactions. including the following: • • • • • • • • • • • • • • • • • TCW Primus Dynamic Credit Partners Fischer.

S. "virtually all of the essential personnel" of Calyon's "Cash CDO line of business … abruptly resigned en masse to become employed by Mizuho. residential mortgage market. In its subsequent suit against Mizuho. 151) Upon information and belief. for example. residential mortgage market.S. the core of its CDO business team. having arranged $75 billion in CDO deals." as Calyon described it in a complaint it later filed against Mizuho. Calyon's Millstone IV Fraud A.• • • • 148) Delaware Investments NIBC Credit Management WSq Investment Management P&G Alternative Investments Upon information and belief. the head of Calyon's cash CDO business. VI.2 billion of securities being "ramped" (i. 152) Calyon carried the risk of loss on these securities unless it could off-load them by. made an undisclosed internal decision no later than -33- . on information and belief.. 149) The Departure of Calyon's CDO Team In December 2006. placing them in a CDO. by early 2007. and with the loss of the core of its CDO team. financed the purchase of. according to a collateral composite prepared by Calyon. Calyon. The departing employees included Alexander Rekeda. Facing this risk. bought into a warehouse lending facility supplied by Calyon) for inclusion in what became the Millstone IV cash CDO. by late 2006 or early 2007. and retained on its balance sheet for possible resale) many billions of dollars of CDO and RMBS securities with substantial exposure to the U. approximately $1. 150) Calyon thus lost to Mizuho. had "warehoused" (i." This event appears to have accelerated Calyon's reconsideration of its exposure to the U. and Paolo Torti. a competitor in New York. this risk included.e.e. Calyon found itself holding the risk on billions of dollars of CDOs and ABS securities that it wanted to unload.. As of January 2007. Calyon described the departure of its staff as a "mass exodus. the sole ABS/CDO trader performing the warehousing function for Calyon. Calyon.

" An exit deal is the capital market's equivalent of a going-out-of-business sale.. Financial Review at 30 (June 2007) published in or about August. mortgage-related market by completing the ramping and closing of the Millstone IV CDO. clients. General Electric announced in July 2007 its intention to exit the subprime mortgage business. E-Trade announced its intention to exit the wholesale mortgage business. and investors consider such a decision to be a material event which requires disclosure. that no new CDO transactions were initiated after February 2007 – in other publicly disseminated documents. 157) In recognition of the materiality of this information. 153) As Calyon later revealed in its published semi-annual financial reports for 2007. to effectuate that internal decision. -34- . its counterparties. including arranging and underwriting CDOs.S. a December 20. Calyon embarked on a strategy to eliminate at least $1. Ratings agencies and investors analyze exit transactions with heightened scrutiny because of the likelihood that they may include assets that an arranger could not otherwise dispose of. 2007. For instance." See Calyon Update of Shelf-Registration Statement Document 2006. to exit the U. Likewise. 156) Historically.e. only after the Millstone IV CDO closed. in reality. in September 2007. Calyon thereafter repeated that pronouncement – i. residential mortgage securities market. and a June 2008 shareholders newsletter. This is especially true when the bank – like Calyon – is exiting a business line in which it has made concerted and very public efforts to promote. 155) Calyon concealed the fact that the Millstone IV CDO was.2 billion of its exposure to the U. investment banks and issuers publicly announce their plans to exit particular lines of business. 2007 press release. a means of disposing of inventory upon an exit from the market.S.February 2007. including an August 2007 investor presentation. an "exit deal. when an investment bank such as Calyon concludes that it is exiting a business line in which it had been an active participant. 154) On information and belief. "[n]o new CDO derivatives transactions [were] initiated since the US mortgage crisis began in February 2007. that is.

at least another $344 million of the $851 million ramped after Calyon implemented its decision to exit the CDO market consisted of assets originated in 2007. by January 2007 Calyon was. information and belief.2 billion of what became the Millstone IV collateral portfolio. on information and belief. housing market As stated. 159) Millstone IV. Calyon has a portfolio of ABS that are in the structuring phase.S. its exit CDO. as well as CDO tranches not yet sold. declaring its intent to exit the CDO of ABS business only after it had already completed that exit. holding the risk of approximately $1. Calyon transferred $410 million of its own risk into the portfolio. LLC. in fact. with a description stating "n/a" under the heading "Recent Transactions. making it unlikely that such a large volume of older deals was purchased for Millstone IV from the secondary market in 2007. 158) The fact that Millstone IV was an exit deal would have been particularly important to the Loreley Companies and IKB because (a) the collateral for that transaction had been acquired many months. This was at a time when. That $410 million of assets was originally issued in 2006 or earlier. housing market was in crisis. and (c) by February 2007 Calyon had clearly determined the U.Calyon made no such announcement. (b) Calyon's entire cash CDO group unceremoniously left the firm in December 2006. was the last ever CDO of ABS that Calyon closed. 161) From February to June 2007. Calyon internally -35- . Similarly. before closing. on exposure into Millstone IV. upon information and belief. precipitating Calyon's de-risking strategy in February 2007." 160) Calyon did not waste its final opportunity to offload its U.S. which was the collateral manager for the Millstone IV CDO." 163) Upon information and belief. if not years. Calyon ramped another $851 million of assets for Millstone IV. Of that. Millstone IV is the last deal listed on the website of Church Tavern Advisors. 162) Calyon indicated in its financial reports in August 2007 that "[a]s part of its cash CDO activity.

This collateral was far more difficult for an investor to analyze because the collateral underlying the CDO bucket was unidentified. 2007) that the Millstone IV Class A-3 notes purchased by LFJ 31. were supported by $68 million in subordinated tranches. the Class B notes would not be economically impacted. Calyon knew exactly what was in the Millstone IV CDO bucket.5 million in subordinated tranches. 164) Moreover. 166) Calyon represented to Plaintiffs (including via the final offering circular dated June 21. until the CDO suffered losses of $44. This meant that until the CDO suffered losses of $68 million. consisted of notes of other CDOs (commonly called the "CDO bucket"). 169) Approximately 25% of that CDO bucket. This meant that. 168) Approximately 19% of the Millstone IV collateral pool. However.believed that the U. 2007) that the Millstone IV Class B notes purchased by LFJ 32. which were originally rated AAA. which were originally rated AA. consisted of notes from Magnetar-sponsored Constellation CDOs.5 million. or $95 million.S. including the following: -36- . a material requirement for IKB to recommend the Millstone IV deal to the Loreley Companies was the subordination that was supposed to protect their more senior investments in the CDO from losses. the Class A-3 notes would not be economically impacted. 167) Calyon's representations regarding subordination as to the Millstone IV Class A-3 and Class B notes were knowingly false when made. or $369 million. 165) Calyon represented to Plaintiffs (including via the final offering circular dated June 21. were supported by $44. mortgage market – the very asset class it was ramping for Millstone IV – was in crisis.

2007.000. 174) On or about March 16.000. Calyon knew or recklessly disregarded the fact that the subordination it represented to IKB and the Loreley Companies did not exist.00 $13.00 20.500. Lacerta ABS CDO Ltd.000.000.00 15. Auriga CDO Ltd. 173) In or around March 2007.00 4.000.000.000." a statement Calyon knew to be materially false.000.000.000. Calyon approached IKB in an effort to convince IKB to recommend to the Loreley Companies investments in notes to be issued in connection with the Millstone IV CDO. Calyon knew or recklessly disregarded the fact that each of these Constellation CDOs had been built to fail. Indeed.00 6. Auriga CDO Ltd. ACA Aquarius 2006-1 170) As the co-inventor of the Magnetar scheme.250. The cover page for this presentation described Millstone IV as a "Super High Grade ABS CDO. -37- . This meant that. Draco Ltd.00 8. 172) The CDOs in the Millstone IV collateral pool were of such poor quality that 19 of them (out of a total of 28) were downgraded as of August 2007. the expected default on those assets was sufficient to eliminate the structural subordination and cause actual losses to the Loreley Companies. Calyon provided IKB with a 44-page marketing presentation for Millstone IV. Draco Ltd. 171) Thus.400. at inception.00 9. The $95 million of Constellation CDOs in Millstone IV was enough to entirely eviscerate the subordination Calyon represented to have existed for both the Class A-3 and Class B notes purchased by the Loreley Companies.000 TRANSACTION Vertical Virgo Ltd. Calyon expected or should have expected that at least $95 million in losses would be suffered in the deal.000. MKP Vela CBO Ltd.000.TRANCHE VRGO 2006-1A A1J VELA 2006-1A A LCERT 2006-1A A1 DRACO 2007-1A A1J AURIG 2006-1A B AURIG 2006-1A C DRACO 2007-1A A1J ACABS 2006-AQA A1J FACE AMOUNT 20.

177) Calyon was fully aware of the Loreley Companies' investment objectives. Calyon marketed the Millstone IV CDO to Plaintiffs as a "Super High Grade" CDO with underlying assets predominantly rated AA and above. by virtue of the inclusion of the Magnetar-sponsored Constellation CDOs and other weak and poor quality assets. 179) Each of Calyon's statements that Millstone IV was a "Super High Grade ABS CDO" was materially false when made. IKB recommended that LFJ 31 and LFJ 32 invest in the Millstone IV CDO. Those documents each described the subordination structure and other key information regarding the various tranches of notes being marketed to IKB for the Loreley Companies. April 4. 2007. March 19. 178) Calyon also indicated that it structured Millstone IV to provide more protection for investors from subprime-related risk than its other CDOs created with lower-rated assets in the collateral pool. Consistent with those objectives. Calyon knew LFJ 31 was relying on Calyon's materially false statements and omissions. The cover pages for each presentation also falsely described Millstone IV as a "Super High Grade ABS CDO. 2007. and May 10. 2007. 2007. 2007. 181) In addition. -38- .5 million. 2007. 184) At that time. those notes were rated AAA by S&P and Aaa by Moody's. March 30. 182) In reasonable reliance on these materially false representations and omissions. the Millstone IV CDO lacked the subordination for the Class A-3 and Class B tranches that Calyon represented to the Loreley Companies. LFJ 31 presently owns Millstone IV Class A-3 notes with a face amount of $35. when Calyon had secretly decided to exit the CDO business. 180) Millstone IV was actually an exit deal designed to shift the risk of assets away from Calyon.175) Calyon also provided IKB with similar 40-plus page presentations on or about April 4. LFJ 31 and LFJ 32 accepted IKB's recommendation and approved the proposed investment in Millstone IV notes. 2007. on or about March 14. 183) LFJ 31 bought Millstone IV Class A-3 notes from Calyon CIB. Calyon provided IKB with five separate term sheets for the Millstone IV CDO. April 11. 2007. and May 10." 176) Likewise.

On December 18. LFJ 32 presently owns Millstone IV Class B notes with a face amount of $14. and false when made. 191) Plaintiffs did not know and could not have known prior to 2010 of the facts demonstrating that Calyon had engaged in the fraudulent scheme alleged herein. These representations and omissions were made intentionally or with reckless disregard for the truth. the Loreley Companies have suffered injury as to each of the Orion 2006-1. incomplete.185) LFJ 32 bought Millstone IV Class B notes from Calyon CIB. -39- . VII. 193) Calyon’s representations and omissions as described above with respect to the Plaintiffs repeat and reallege the preceding allegations as though fully set forth involvement and roles of NIBC and Putnam as collateral managers of the Orion 2006-1 and Pyxis 2006-1 CDOs. and the involvement and role of Magnetar in connection with the Orion 2006-1 and Pyxis 2006-1 CDOs were material. 189) On December 18. The Injuries Caused by Calyon's Misconduct 190) As a result of the defaults that eventually did occur. 186) At that time those notes were rated AA by S&P and Aa2 by Moody's. 187) 188) By November 2007. 2007.5 million. CAUSES OF ACTION FIRST CAUSE OF ACTION (Rescission Based Upon Fraudulent Inducement: Orion 2006-1 and Pyxis 2006-1) 192) herein. 2007 Moody's also downgraded to a Ca (also a junk rating) the Millstone IV class B notes that LFJ 32. the Millstone IV CDO experienced an event of default. Calyon knew LFJ 32 was relying on Calyon's materially false statements and omissions. misleading. Pyxis 2006-1 and Millstone IV notes that they purchased. Moody's downgraded to a Caa1 (a "junk" rating) the Millstone IV class A-3 notes that LFJ 31 purchased.

and false when made. 195) Calyon’s representations and omissions as described above with respect to the value. Calyon intentionally failed to provide. These representations and omissions were made intentionally or with reckless disregard for the truth.194) Calyon’s representations and omissions as described above with respect to the quality of the assets comprising the collateral pool for the Orion 2006-1 and Pyxis 2006-1 CDOs were material. and false when made. misleading. -40- . credit quality. 196) Calyon’s representations and omissions as described above with respect to the structural features of the Orion 2006-1 and Pyxis 2006-1 CDOs were material. and false when made. incomplete. misleading. complete. Calyon had an affirmative duty to provide full. complete. and accurate disclosures of these material facts. full. incomplete. 197) Calyon’s representations and omissions as described above with respect to the nature of the Orion 2006-1 and Pyxis 2006-1 CDOs. incomplete. These representations and omissions were made intentionally or with reckless disregard for the truth. incomplete. 199) Based upon its superior knowledge and expertise. or recklessly disregarded its obligation to provide. and risk of loss for the notes purchased by LFJ 7 and LFJ 25 in connection with the Orion 2006-1 and Pyxis 2006-1 CDOs were material. misleading. its incomplete and misleading disclosures. including that the above-described notes were consistent with the investment requirements of LFJ 7 and LFJ 25. These representations and omissions were made intentionally or with reckless disregard for the truth. with the knowledge that IKB was acting as investment advisor to LFJ 7 and LFJ 25 and the intention and expectation that LFJ 7 and LFJ 25 would act thereon. were material. and accurate disclosures of these material facts. and false when made. and in light of the fact that LFJ 7 and LFJ 25 did not have access to material facts that were uniquely within Calyon’s knowledge. misleading. These representations and omissions were made intentionally or with reckless disregard for the truth. 198) Calyon’s misrepresentations and omissions as described above were made to IKB.

incomplete. incomplete. SECOND CAUSE OF ACTION (Rescission Based Upon Fraudulent Inducement: Millstone IV) 204) herein. 202) The notes that LFJ 7 and LFJ 25 bargained for were different from what LFJ 7 and LFJ 25 received from Calyon. Rescission would restore each party to its original position through Calyon tendering the original purchase price plus interest. and LFJ 7 and LFJ 25 tendering their notes to Calyon. LFJ 7 and LFJ 25 lack an adequate remedy at law.200) LFJ 7 and LFJ 25 reasonably and justifiably relied to their detriment on Calyon’s misrepresentations and omissions. which they would not have done had they known the truth. 201) Calyon’s misrepresentations and omissions induced LFJ 7 and 25 to purchase the above-described Orion 2006-1 and Pyxis 2006-1 notes from Calyon. complete. These representations and omissions were made intentionally or with reckless disregard for the truth. LFJ 7 and LFJ 25 are entitled to rescind each of the purchase and sale contracts by which the above-described purchases of Orion 2006-1 and Pyxis 2006-1 notes were affected. 203) As a result. and false when made. misleading. less any benefit to LFJ 7 and LFJ 25. including Calyon’s affirmative duty to provide full. and false when made. 205) Calyon’s representations and omissions as described above with respect to the Plaintiffs repeat and reallege the preceding allegations as though fully set forth quality of the assets comprising the collateral pool for the Millstone IV CDO were material. -41- . 206) Calyon’s representations and omissions as described above with respect to the structural subordination associated with the notes purchased by LFJ 31 and LFJ 32 in connection with the Millstone IV CDO as described above were material. misleading. and accurate disclosures to LFJ 7 and LFJ 25. These representations and omissions were made intentionally or with reckless disregard for the truth.

208) Calyon’s representations and omissions as described above with respect to the nature of the Millstone IV CDO. and false when made. full. 212) Calyon’s misrepresentations and omissions induced LFJ 31 and 32 to purchase the above-described Millstone IV notes from Calyon. and accurate disclosures of these material facts. Calyon had an affirmative duty to provide full. misleading. misleading. including Calyon’s affirmative duty to provide full. complete.207) Calyon’s representations and omissions as described above with respect to its plans to exit the business of arranging CDOs of ABS. Calyon intentionally failed to provide. incomplete. and in light of the fact that LFJ 31 and LFJ 32 did not have access to material facts that were uniquely within Calyon’s knowledge. were material. 210) Based upon its superior knowledge and expertise. or recklessly disregarded its obligation to provide. its incomplete and misleading disclosures. 211) LFJ 31 and LFJ 32 reasonably and justifiably relied to their detriment on Calyon’s misrepresentations and omissions. and accurate disclosures of these material facts. and accurate disclosures to LFJ 31 and LFJ 32. and false when made. incomplete. complete. complete. These representations and omissions were made intentionally or with reckless disregard for the truth. which they would not have done had they known the truth. -42- . the fact that Millstone IV was an “exit deal” for Calyon. with the knowledge that IKB was acting as investment advisor to LFJ 31 and LFJ 32 and the intention and expectation that LFJ 31 and LFJ 32 would act thereon. and its determination to unload from its balance sheet into the Millstone IV collateral pool weak and poor quality assets as described above were material. These representations and omissions were made intentionally or with reckless disregard for the truth. including that the above-described notes were consistent with the investment requirements of LFJ 31 and LFJ 32. 209) Calyon’s misrepresentations and omissions as described above were made to IKB.

220) Calyon's representations and omissions as described above with respect to the nature of the Orion 2006-1 and Pyxis 2006-1 CDOs. incomplete. and false when made. credit quality. incomplete. and LFJ 31 and LFJ 32 tendering their notes to Calyon. and false when made. Rescission would restore each party to its original position through Calyon tendering the original purchase price plus interest. THIRD CAUSE OF ACTION (Rescission Based Upon Misrepresentation: Orion 2006-1 and Pyxis 2006-1) 215) herein. 214) As a result. and the involvement and role of Magnetar in connection with the Orion 2006-1 and Pyxis 2006-1 CDOs were material. incomplete. misleading. and false when made. LFJ 31 and LFJ 32 are entitled to rescind each of the purchase and sale contracts by which the above-described purchases of Millstone IV were affected. 218) Calyon’s representations and omissions as described above with respect to the value.213) The notes that LFJ 31 and LFJ 32 bargained for were different from what LFJ 31 and LFJ 32 received from Calyon. LFJ 31 and LFJ 32 lack an adequate remedy at law. incomplete. 216) Calyon's representations and omissions as described above with respect to the Plaintiffs repeat and reallege the preceding allegations as though fully set forth involvement and roles of NIBC and Putnam as collateral managers of the Orion 2006-1 and Pyxis 2006-1 CDOs. and risk of loss for the notes purchased by LFJ 7 and LFJ 25 in connection with the Orion 2006-1 and Pyxis 2006-1 CDOs were material. 217) Calyon's representations and omissions as described above with respect to the quality of the assets comprising the collateral pool for the Orion 2006-1 and Pyxis 2006-1 CDOs were material. less any benefit to LFJ 31 and LFJ 32. misleading. misleading. and false when made. including that the above-described notes -43- . 219) Calyon's representations and omissions as described above with respect to the structural features of the Orion 2006-1 and Pyxis 2006-1 CDOs were material. misleading.

injury. incomplete. were material. which they would not have done had they known the truth. complete. 225) The notes that LFJ 7 and LFJ 25 bargained for were different from what LFJ 7 and LFJ 25 received from Calyon. less any benefit to LFJ 7 and LFJ 25. including Calyon's affirmative duty to provide full. LFJ 7 and LFJ 25 lack an adequate remedy at law. Calyon had an affirmative duty to provide full.were consistent with the investment requirements of LFJ 7 and LFJ 25. misleading. 221) Calyon's misrepresentations and omissions as described above were made to IKB. and in light of the fact that LFJ 7 and LFJ 25 did not have access to material facts that were uniquely within Calyon's knowledge. without having to prove scienter. 224) Calyon's misrepresentations and omissions induced LFJ 7 and LFJ 25 to purchase the above-described Orion 2006-1 and Pyxis 2006-1 notes from Calyon. and accurate disclosures to LFJ 7 and LFJ 25. or damages. 222) Based upon its superior knowledge and expertise. 226) As a result. to rescind each of the purchase and sale contracts by which the abovedescribed purchases of Orion 2006-1 and Pyxis 2006-1 notes were affected. its incomplete and misleading disclosures. with the knowledge that IKB was acting as investment advisor to LFJ 7 and LFJ 25 and the expectation that LFJ 7 and LFJ 25 would act thereon. and accurate disclosures of these material facts. LFJ 7 and LFJ 25 are entitled. complete. and LFJ 7 and LFJ 25 tendering their notes to Calyon. 223) LFJ 7 and LFJ 25 reasonably and justifiably relied to their detriment on Calyon's misrepresentations and omissions as described above. Rescission would restore each party to its original position through Calyon tendering the original purchase price plus interest. and false when made. -44- .

were material. misleading. and in light of the fact that LFJ 31 and LFJ 32 did not have access to material facts that were uniquely within Calyon's knowledge. incomplete. misleading. and accurate disclosures of these material facts. incomplete. and false when made. 229) Calyon's representations and omissions as described above with respect to the structural subordination associated with the notes purchased by LFJ 31 and LFJ 32 in connection with the Millstone IV CDO as described above were material. complete. and false when made. with the knowledge that IKB was acting as investment advisor to LFJ 31 and LFJ 32 and the expectation that LFJ 31 and LFJ 32 would act thereon. 230) Calyon's representations and omissions as described above with respect to its plans to exit the business of arranging CDOs of ABS. and false when made. and false when made. including that the above-described notes were consistent with the investment requirements of LFJ 31 and LFJ 32. the fact that Millstone IV was an "exit deal" for Calyon. -45- . Calyon's representations and omissions as described above with respect to the quality of the assets comprising the collateral pool for the Millstone IV CDO were material. 232) Calyon's misrepresentations and omissions as described above were made to IKB. 233) Based upon its superior knowledge and expertise. misleading. misleading. incomplete. incomplete. its incomplete and misleading disclosures.FOURTH CAUSE OF ACTION (Rescission Based on Misrepresentation: Millstone IV) 227) 228) Plaintiffs repeat and reallege the preceding allegations as though fully set forth herein. Calyon had an affirmative duty to provide full. and its determination to unload from its balance sheet into the Millstone IV collateral pool weak and poor quality assets as described above were material. 231) Calyon's representations and omissions as described above with respect to the nature of the Millstone IV CDO.

to rescind each of the purchase and sale contracts by which the abovedescribed purchases of Millstone IV were affected. These representations and omissions were made intentionally or with reckless disregard for the truth. 239) Calyon’s representations and omissions as described above with respect to the Plaintiffs repeat and reallege the preceding allegations as though fully set forth involvement and roles of NIBC and Putnam as collateral managers of the Orion 2006-1 and Pyxis 2006-1 CDOs. and accurate disclosures to LFJ 31 and LFJ 32. and false when made. LFJ 31 and LFJ 32 are entitled. These representations and omissions were made intentionally or with reckless disregard for the truth. Rescission would restore each party to its original position through Calyon tendering the original purchase price plus interest. misleading. 237) As a result. and the involvement and role of Magnetar in connection with the Orion 2006-1 and Pyxis 2006-1 CDOs were material. FIFTH CAUSE OF ACTION (Damages Based Upon Fraud: Orion 2006-1 and Pyxis 2006-1) 238) herein. incomplete. incomplete. and false when made. complete. including Calyon's affirmative duty to provide full. without having to prove scienter. which they would not have done had they known the truth. 235) Calyon's misrepresentations and omissions induced LFJ 31 and LFJ 32 to purchase the above-described Millstone IV notes from Calyon. and LFJ 31 and LFJ 32 tendering their notes to Calyon. 240) Calyon’s representations and omissions as described above with respect to the quality of the assets comprising the collateral pool for the Orion 2006-1 and Pyxis 2006-1 CDOs were material. 236) The notes that LFJ 31 and LFJ 32 bargained for were different from what LFJ 31 and LFJ 32 received from Calyon. -46- . less any benefit to LFJ 31 and LFJ 32. injury. or damages. LFJ 31 and LFJ 32 lack an adequate remedy at law. misleading.234) LFJ 31 and LFJ 32 reasonably and justifiably relied to their detriment on Calyon's misrepresentations and omissions.

and accurate disclosures to LFJ 7 and LFJ 25. its incomplete and misleading disclosures. and accurate disclosures of these material facts. incomplete. including that the above-described notes were consistent with the investment requirements of LFJ 7 and LFJ 25. with the knowledge that IKB was acting as investment advisor to LFJ 7 and LFJ 25 and the intention and expectation that LFJ 7 and LFJ 25 would act thereon. complete. and their investment advisor of these material facts. credit quality and risk of loss for the notes purchased by LFJ 7 and LFJ 25 in connection with the Orion 2006-1 and Pyxis 2006-1 CDOs were material. These representations and omissions were made intentionally or with reckless disregard for the truth. complete. incomplete. 245) Based upon its superior knowledge and expertise. 243) Calyon’s representations and omissions as described above with respect to the nature of the Orion 2006-1 and Pyxis 2006-1 CDOs. misleading. misleading. 246) LFJ 7 and LFJ 25 reasonably and justifiably relied to their detriment on Calyon’s misrepresentations and omissions. LFJ 25. were material. complete. including Calyon’s affirmative duty to provide full. and accurate disclosures to LFJ 7. Calyon intentionally failed to provide. incomplete.241) Calyon’s representations and omissions as described above with respect to the value. These representations and omissions were made intentionally or with reckless disregard for the truth. and in light of the fact that LFJ 7 and LFJ 25 did not have access to material facts that were uniquely within Calyon’s knowledge. and false when made. full. misleading. -47- . 242) Calyon’s representations and omissions as described above with respect to the structural features of the Orion 2006-1 and Pyxis 2006-1 CDOs were material. and false when made. and false when made. Calyon had an affirmative duty to provide full. 244) Calyon’s misrepresentations and omissions as described above were made to IKB. or recklessly disregarded its obligation to provide. These representations and omissions were made intentionally or with reckless disregard for the truth.

incomplete. the fact that Millstone IV was an “exit deal” for Calyon. incomplete. and false when made. and false when made. These representations and omissions were made intentionally or with reckless disregard for the truth. 251) Calyon’s representations and omissions as described above with respect to the Plaintiffs repeat and reallege the preceding allegations as though fully set forth quality of the assets comprising the collateral pool for the Millstone IV CDO were material. These representations and omissions were made intentionally or with reckless disregard for the truth. incomplete. 252) Calyon’s representations and omissions as described above with respect to the structural subordination associated with the notes purchased by LFJ 31 and LFJ 32 in connection with the Millstone IV CDO as described above were material. These representations and omissions were made intentionally or with reckless disregard for the truth. which they would not have done had they known the truth. 253) Calyon’s representations and omissions as described above with respect to its plans to exit the business of arranging CDOs of ABS. -48- . misleading. and its determination to unload from its balance sheet into the Millstone IV collateral pool and weak and poor quality assets as described above were material. and false when made. LFJ 7 and LFJ 25 have suffered damages. LFJ 7 and 25 are entitled to an award of damages in an amount to be proven at trial. misleading. 248) As a direct and proximate result of those misrepresentations and omissions. 249) In addition or in the alternative to their claims for rescission.247) Calyon’s misrepresentations and omissions induced LFJ 7 and 25 to purchase the above-described Orion 2006-1 and Pyxis 2006-1 notes from Calyon. misleading. SIXTH CAUSE OF ACTION (Damages Based Upon Fraud: Millstone IV) 250) herein.

260) In addition or in the alternative to their claims for rescission. misleading. 258) Calyon’s misrepresentations and omissions induced LFJ 31 and 32 to purchase the above-described Millstone IV notes from Calyon. -49- . and accurate disclosures to LFJ 31 and LFJ 32. including Calyon’s affirmative duty to provide full. 257) LFJ 31 and LFJ 32 reasonably and justifiably relied to their detriment on Calyon’s misrepresentations and omissions. and accurate disclosures of these material facts. 256) Based upon its superior knowledge and expertise. 259) As a direct and proximate result of those misrepresentations and omissions. full. Calyon intentionally failed to provide. complete. LFJ 32. and in light of the fact that LFJ 31 and LFJ 32 did not have access to material facts that were uniquely within Calyon’s knowledge. and false when made. LFJ 7 and 25 are entitled to an award of damages in an amount to be proven at trial. LFJ 31 and LFJ 32 have suffered damages. including that the above-described notes were consistent with the investment requirements of LFJ 31 and LFJ 32. its incomplete and misleading disclosures. or recklessly disregarded its obligation to provide. and accurate disclosures to LFJ 31. complete.254) Calyon’s representations and omissions as described above with respect to the nature of the Millstone IV CDO. Calyon had an affirmative duty to provide full. 255) Calyon’s misrepresentations and omissions as described above were made to IKB. were material. with the knowledge that IKB was acting as investment advisor to LFJ 31 and LFJ 32 and the intention and expectation that LFJ 31 and LFJ 32 would act thereon. incomplete. complete. which they would not have done had they known the truth. and their investment advisor of these material facts. These representations and omissions were made intentionally or with reckless disregard for the truth.

Calyon unjustly retained its wrongfully obtained profits at the expense of LFJ 31 -50- . 268) and LFJ 32.SEVENTH CAUSE OF ACTION (Unjust Enrichment: Orion 2006-1 and Pyxis 2006-1) 261) herein. and paid a portion of Calyon’s fees as arranger of those CDOs. 266) As detailed above. 264) and LFJ 25. on the basis of Calyon’s misrepresentations and omissions Plaintiffs repeat and reallege the preceding allegations as though fully set forth regarding the Orion 2006-1 and Pyxis 2006-1 CDOs. 267) Calyon has been unjustly enriched at the expense of LFJ 31 and LFJ 32 by. its use of the Millstone IV CDO as a means to dispose of its weak and poor quality assets from its balance sheet. LFJ 31 and LFJ 32 transferred the purchase prices for the above-described notes issued in connection with the Millstone IV CDO. LFJ 7 and LFJ 25 transferred the purchase prices for the above-described notes issued in connection with the Orion 2006-1 and Pyxis 20061 CDOs. having decided to exit the business of arranging CDOs of ABS. inter alia. inter alia. 263) Calyon has been unjustly enriched at the expense of LFJ 7 and LFJ 25 by. earning fees through its fraudulent arrangement of CDO transactions and by acting as the original swap counterparty for the Orion 2006-1 and Pyxis 2006-1 deals. 262) As detailed above. EIGHTH CAUSE OF ACTION (Unjust Enrichment: Millstone IV) 265) herein. and paid a portion of Calyon’s fees as arranger of that CDO. on the basis of Calyon’s misrepresentations and omissions Plaintiffs repeat and reallege the preceding allegations as though fully set forth Calyon unjustly retained its wrongfully obtained profits at the expense of LFJ 7 regarding the Millstone IV CDO.

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