Financial Guaranty Insurance Co. v. The Putnam Advisory Company

In 2006 the Putnam Advisory Company, LLC (Putnam) (defendant) and Calyon started marketing a collateralized debt obligation called Pyxis ABS CDO 2006-1 (Pyxis). In the marketing material, Putnam claimed that all the collateral for Pyxis would be chosen by Putnam. Relying on the representations made by Putnam, Financial Guaranty Insurance Co. (Financial) (plaintiff) agreed to insure a $900 million transaction between Calyon and Pyxis. Under the insurance agreement, Financial agreed that if Pyxis defaulted, Financial would make all payments owed by Calyon under the transaction. In 2008, after a market-wide downturn, Pyxis defaulted, and Financial became liable for almost $900 million. Financial filed fraud and negligent-misrepresentation claims in federal district court against Putnam, arguing that Putnam had violated New York law by making material misrepresentations that resulted in Financial’s liability. Financial claimed that Putnam lied about personally choosing the collateral for Pyxis, instead allowing Magnetar Capital LLC (Magnetar), a hedge-fund manager that was short-selling Pyxis, to choose the collateral. Financial believed that because of Magnetar’s short position, Magnetar was incentivized to select weak collateral in hopes that Pyxis would fail. Putnam filed a motion to dismiss, arguing that Financial had failed to satisfy the loss-causation element of fraud because it had not shown that its loss would have been avoided without the alleged misrepresentation. Putnam also argued that Financial had failed to show that Financial and Putnam had a relationship that justified Financial’s negligent-misrepresentation claim.