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Paul, Weiss Achieves Victories for JP Morgan in New York State and Federal Courts

On March 24, 2010, Paul, Weiss achieved a victory before Justice Barbara Kapnick in the Commercial Division in New York State Supreme Court for its client J.P. Morgan Investment Management (JPMIM).

JPMIM, the discretionary investment manager of approximately $1.65 billion in assets for its client Ballantyne Re plc (Ballantyne), invested approximately 85% of the portfolio in mortgage-backed securities (MBS) and home equity loan asset-backed securities (ABS-HEL) during 2006 and held such investments through 2008.

The plaintiff in the action, Ambac Assurance UK Limited (Ambac), is the financial guarantor of certain notes issued by Ballantyne. Accordingly, after the value of the portfolio substantially decreased, Ambac was required to fund payments to noteholders and sued JPMIM, in its own right and on behalf of Ballantyne, for breach of contract, breach of fiduciary duty and gross negligence. Ambac primarily claimed that JPMIM was aware that MBS and ABS-HEL were unsuitable for Orkney's investment objectives and failed to disclose these risks, while affiliates of JPMIM were themselves selling such securities from their own portfolios and instructing their clients to do the same.

In its motion to dismiss all claims, Paul, Weiss argued that the breach of contract claim should be dismissed because JPMIM's investments for the account complied fully with all terms of the agreement, including the negotiated sector percentages in the investment guidelines, and that JPMIM did not act with gross negligence in managing the account (the contract limited liability solely to acts of gross negligence). As to the fiduciary duty and gross negligence claims, Paul, Weiss argued that such claims must be dismissed as preempted by New York's Martin Act that bars all non-fraud common law tort claims in the securities context.

The court dismissed with prejudice the complaint in its entirety on precisely these grounds, notably finding that failure to meet an investment objective cannot form the basis of a breach of contract claim and that the Martin Act preempts such claims.

On March 30, 2010, Paul, Weiss achieved a similar victory before Judge Crotty in the Southern District for its client JP Morgan Chase Bank. JP Morgan acted as the discretionary investment manager of approximately $130 million in assets for its client NM Homes, Inc. (NMH). JP Morgan invested NMH's portfolio in ABS-HELs, collateralized mortgage obligations (CMOs) and floating rate notes (FRNs).

Similar to Ambac, NMH primarily claimed that JP Morgan was aware that such securities were "subprime linked" and unsuitable for its conservative investment objective and that JP Morgan failed to disclose these risks, while it was simultaneously selling such securities from its own portfolios and instructing select clients to do the same. NMH asserted five counts of fraud and four counts of common law non-fraud tort claims (breach of fiduciary duty, negligence, gross negligence and negligent misrepresentation).

Paul, Weiss argued that the fraud claims should be dismissed for failure to adequately allege scienter; the Court agreed and granted leave to replead. As to the common law non-fraud tort claims, Paul, Weiss argued that such claims were preempted by the Martin Act; these claims were dismissed by the Court with prejudice.

The Paul, Weiss team was comprised of partner Richard Rosen (who argued both motions), associates Farrah Berse, Elizabeth Eaton and Jennifer Vakiener, former associates Seiji Newman and Joshua Kaye, staff attorney Lois Jeffers and paralegal Katherine Jenkins.

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