Loreley vs Calyon Complaint

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,

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CRÉDIT 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").

FILED: NEW YORK COUNTY CLERK 10/22/2010 INDEX NO. 650673/2010

NYSCEF DOC. NO. 5 RECEIVED NYSCEF: 10/22/2010

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

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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

Companies to purchase CDO notes totaling $70.5 million. By this action, the Loreley

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.







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 ACTION1

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.

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24) The Loreley Companies invested in CDOs, and are long-term buy-and-hold

investors. IKB served as investment advisor to the Loreley Companies and, in that capacity,

identified and recommended investments in CDOs to the Loreley Companies.

25) As Plaintiffs’ investment advisor, IKB performed diligence prior to making any

investment recommendations to the Loreley Companies. If, following its diligence, IKB

recommended a particular CDO investment for potential purchase by one or more of the Loreley

Companies, the proposed CDO investment was presented to an investment committee, known

generally as the RFCC investment committee. If approved by the RFCC investment committee,

the proposed CDO investment was then presented to the Loreley Companies for their decision on

whether or not to purchase it. Unless and until recommended by IKB, no investment in a CDO

was ever purchased by the Loreley Companies.

26) In June 2006, September 2006, and June 2007, the Loreley Companies bought

from Calyon notes issued in connection with the three CDOs that are the subject of this action,

Orion 2006-1, Pyxis 2006-1, and Millstone IV, in the aggregate amount of $70.5 million as

follows:

CDO Purchaser Class of Notes Rating

Amount ($Millions)

Orion 2006-1

LFJ 7 A AAA 10.5

Pyxis 2006-1

LFJ 25 A-2

AAA

10

Millstone IV

LFJ 31 LFJ 32

A-3 B

AAA AA

35.5 14.5

TOTAL 70.5

II. CDO Structure

27) Generally stated, a CDO is a transaction in which a special purpose vehicle

(known as an "Issuer") purchases, or takes the risk of, a portfolio of assets (typically known as a

"reference pool," "underlying assets," "collateral pool" or "collateral"), such as bonds or loans,

and issues various classes, or "tranches," of debt and equity securities to investors. The cash

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flows from the collateral are used to repay the Issuer's obligations to investors, including the

holders of notes issued in connection with the CDO, according to a defined priority (known as a

"waterfall"), generally starting with the most senior tranches and down through the waterfall to

the most junior tranches.

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.

29) The prospects of the securities issued in connection with a CDO being repaid in

full depends upon, among other things, the structure of the transaction, the credit quality, and

subsequent performance of the collateral.

30) The senior tranches of a CDO typically receive principal and interest first, and

have the lowest risk of loss. Conversely, 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. 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.

31) In its most basic form, a CDO is structured as follows:

Special Purpose Vehicle CDO underlying assets

AAA Cash flows

AA

A

BBB

Losses Equity

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32) Ratings agencies typically assign credit ratings to the various tranches of a CDO,

except for the equity tranche. Ratings agencies also assign ratings to the underlying assets that

are either held by the Issuer or referenced by the Issuer's underlying assets.2

33) The most senior tranches of CDOs are typically rated "AAA," the highest rating

available. 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. The

lower the credit quality of the underlying assets, the greater the required subordination – usually

because lower quality underlying assets have a higher default risk and lower recovery rates.

34) Conversely, senior tranches of CDOs with "high grade" portfolios – e.g., those

consisting of AAA, AA, and A-rated underlying assets – usually require less subordination than

similarly rated tranches of "mezzanine" CDOs, which contain assets taken from the lower-rated

(but investment grade) "mezzanine" portion of their underlying transactions' capital structure.

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, and (b)

the amount of subordination is set properly, with a sufficient safety margin to absorb expected

losses so that the risk of default affecting the senior tranches is minimized.

36) For managed CDO transactions, there is a collateral manager. IKB, Plaintiffs’

investment advisor, sought out managed CDO transactions for Plaintiffs with collateral managers

possessing independence and skill, 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,

thereby reducing risk and enhancing performance for the benefit of investors such as Plaintiffs.

37) Managing a CDO portfolio typically involves selecting the initial collateral pool,

monitoring the credit status of the individual underlying assets, reinvesting payment proceeds

from maturing underlying assets, and making allowed substitutions in the collateral for the

2 For the purposes of this complaint, and unless stated otherwise, any reference to a particular rating refers to the Standard & Poor’s ratings categories.

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benefit of investors. A collateral manager, therefore, can greatly affect the performance of a

CDO and either raise or lower its risk profile. Thus, the expertise and qualifications of a

collateral manager are of material importance to potential investors – as they were to Plaintiffs’

investment decisions.

38) Collateral managers are paid a fee for their services, typically a percentage (or

basis points) of the notional value of the transaction (i.e., the total deal issuance), the cost of

which is ultimately paid for by the investors in the CDO.

39) As explained by Adam Giddy, 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. This manager is also responsible for the ongoing trading activities during a reinvestment period to realize gains and minimize losses, and maintain the portfolio within the constraints of the transaction structure. 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, the manager's expertise with the assets and ability to manage within established constraints is paramount to the success of the CDO. Market consensus is that the manager is the most important factor in a performance of a CDO.

"The CDO Product," by Ian Giddy, Professor of Finance at the Stern School of Business at New York University (emphasis added).

40) Moreover, as stated by Nestor Dominguez, the former co-head of Citigroup's

global CDO business, in testimony before the Financial Crisis Inquiry Commission: "The

collateral manager's role was to conduct diligence concerning the underlying assets, purchase the

collateral pool, and manage and trade the collateral pool for the benefit of the debt and equity

issued by the CDO." Testimony of Nestor Dominguez before the Financial Crisis Inquiry

Commission, April 7, 2010.

41) During the 2005-2007 period, arrangers of CDOs (like Calyon) increasingly

marketed and sold "synthetic" CDO structures, in which the underlying collateral pool did not

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consist solely of cash assets, but rather included credit default swaps ("CDS") that were intended

to replicate the performance of cash assets that the CDS referenced.

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, loss, write-down or rating deterioration).

43) Many arrangers of CDOs favored synthetic or hybrid CDOs (i.e., CDOs with

synthetic components) because they did not require the purchase of a substantial amount of cash

assets, a process that could take several months. By using CDS, billion-dollar CDOs often could

be assembled in weeks, resulting in more and significant underwriting and placement fees.

44) During the CDO boom, synthetic and hybrid deals made for quick assembly of

CDOs. But they also became the driving force for certain CDO arrangers, including Calyon, to

create CDOs to the order and specifications of investors who desired to short (i.e., 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.

III. The Requirements for the Loreley Companies’ Investments in CDOs

46) As a part of IKB’s processes for recommending investments to the Loreley

Companies, IKB focused on managed transactions involving independent collateral managers

who would identify and select high quality collateral for the benefit of CDO investors, such as

Plaintiffs, thereby enhancing the likely performance of the transaction and lowering its risk

profile.

47) Indeed, IKB's diligence for the Loreley Companies included in-person interviews

and reviews of collateral managers’ stated investment preferences. IKB also developed internal

rating systems for collateral managers, and would not, as a general matter, recommend an

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investment to the Loreley Companies in a CDO if they did not approve of the collateral manager

for that CDO.

48) The Loreley Companies’ investment decisions also relied on, inter alia, the

ratings assigned to proposed CDO investments, as well as the ratings assigned to the CDOs'

underlying collateral, as indicators of the risks associated with the assets that IKB recommended

to the Loreley Companies. IKB communicated to Calyon that the Loreley Companies had a low

appetite for credit risk and no appetite for principal loss.

49) Upon information and belief, Calyon knew of the Loreley Companies' investment

criteria because, inter alia, Calyon representatives attended meetings IKB held with collateral

managers for the purpose of conducting diligence for its investment recommendations to the

Loreley Companies.

50) For instance, on or about May 17, 2006, Calyon representative Benjamin Lee

attended a meeting in New York with IKB representative Dr. Klaus Bauknecht and

representatives of NIBC Credit Management, Inc. ("NIBC"), including Arjun Kakar, concerning

the Orion 2006-1 CDO. It was represented to IKB as investment advisor to Plaintiffs that NIBC

was the collateral manager for the Orion 2006-1 deal.

51) At the meeting held on or about May 17, 2006, Dr. Bauknecht reviewed, among

other things, Plaintiffs' objectives, requirements, and investment procedures, including Plaintiffs'

requirements for collateral quality. Dr. Bauknecht stressed the importance of having high-

quality collateral in the transaction.

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.

53) At that conference, a meeting was held among representatives of Calyon

(including Loic Fery and Ralf Otzen) and IKB (including Dr. Klaus Bauknecht) in Calyon's

rented offices. Calyon representatives asked during that meeting what it would take for IKB to

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recommend investments in Calyon-arranged CDO deals to the Loreley Companies. IKB

indicated to Calyon what types of investments IKB would consider to recommend for

investment.

54) To minimize risk, the Loreley Companies investments focused on highly-rated

tranches, primarily AAA and AA, of CDOs managed by experienced collateral managers who

would exercise independent judgment in purchasing and managing the collateral for the benefit

of investors. Calyon clearly knew this.

55) Indeed, in considering whether to recommend that the Loreley Companies invest

in Calyon-arranged CDOs, IKB reviewed with Calyon, among other things, the collateral

managers' collateral selection processes.

56) Plaintiffs’ investment decisions also relied upon marketing materials provided by

Calyon. Calyon, like other CDO arrangers, generally marketed CDOs to investors and their

advisors using materials that included, among other things, pitch books, preliminary offering

memoranda or circulars, final offering memoranda or circulars, and other presentations. 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.

57) IKB repeatedly informed Calyon of the Loreley Companies' investment

requirements and collateral manager protocols. For example, in and around the spring of 2006,

Uta Kubis of IKB had multiple phone conversations with Ralf Otzen of Calyon in which Ms.

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. Otzen's inquiries regarding the types of investments in which IKB was interested in

recommending to the Loreley Companies – Ms. Kubis explained, inter alia, (a) that the Loreley

Companies were interested in managed CDO deals, (b) that IKB's assessment of the collateral

manager was critical to each investment decision, (c) that IKB had a collateral manager rating

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and assessment system, and (d) that, for deals involving the higher-rated managers, the Loreley

Companies could invest lower in the investment structure.

58) Furthermore, upon information and belief, Calyon knew, through its employee,

Paul Byers, about the investment requirements of the Loreley Companies. Mr. Byers learned

about those details in and around 2005, 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.

59) No later than June 15, 2006, (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. During

that conference, Mr. Byers attended a meeting at an outdoor café in Barcelona with Calyon's

Alexander Rekeda, NIBC's Alex Stetkyvich, and IKB's Uta Kubis and Dr. Klaus Bauknecht. Mr.

Byers was at that time leaving UBS and had committed to working for Calyon.

IV. Calyon's Constellation CDO Fraud

A. The Calyon Fraudulent Scheme

60) Upon information and belief, starting in 2005, Calyon set ambitious goals to

expand its securitization and structured credit businesses. For example, in the course of 2005,

Calyon participated both in major asset-backed securitization issues in the U.S. and transactions

involving asset-backed commercial paper conduits (like the Rhineland Programme). Calyon's

structured credit activity grew significantly in the second half of 2005, including Calyon's

involvement in CDOs, particularly synthetic and hybrid CDOs. In its December 15, 2005

"Strategic Development Plan" for 2006 to 2008, 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.

61) Notwithstanding the rapid development of Calyon's CDO business, in May 2006

it still lagged behind several of its competitors. Upon information and belief, Calyon – in an

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effort to keep up with its rivals – set a goal to close four or five CDO deals a month but, to the

chagrin of management, was only able to close approximately one CDO per month.

62) However, Magnetar helped fuel Calyon's desire for growth by sponsoring five

Calyon-arranged CDOs. Calyon and Magnetar worked together to create the first of the

Constellation CDOs – Orion 2006-1, which closed on May 26, 2006. Magnetar then sponsored four

additional Constellation CDOs, which together with Orion 2006-1, totaled approximately $6 billion:

Deal Name Closing Collateral Manager Deal Size Arranger

Orion 2006-1, Ltd. 5/26/2006 NIBC 1,300,000,000 Calyon

Pyxis 2006-1 10/3/2006 Putnam 1,479,380,000 Calyon

Cetus 2006-3 11/28/2006 GSC Partners 420,000,000 Calyon

Orion 2006-2 CDO Ltd.

12/7/2006 NIBC 1,559,000,000 Calyon

Volans Funding 2007-1 3/14/2007 Vero Capital 1,100,000,000 Calyon

63) Located in Evanston, Illinois, Magnetar was founded by Alec Litowitz, the former

global head of equities at Citadel Investment Group. Magnetar grew rapidly, becoming a major

player in structured credit – especially CDOs – within just two years. In fact, according to

reports, from its launch in 2005 through 2007, Magnetar grew 600%, from approximately $1.5

billion under management to approximately $9 billion.

64) Upon information and belief, and as public reports have begun to reveal, 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.

65) As reported in a January 14, 2008, Wall Street Journal article entitled "A Fund

Behind Astronomical Losses," Magnetar "contributed to billions in losses on Wall Street, even as

the fund itself profited from the subprime-mortgage crisis." Magnetar derived those profits from

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the so-called Constellation CDOs, which were created by Magnetar in collusion with arrangers,

including Calyon, and bear the names of astral entities.

66) According to that article, Magnetar "facilitated the creation of a few of the worst-

performing collateralized debt obligations." Further, on information and belief, 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,” and (b) “designed structures to exploit

that[.]'" On information and belief, Magnetar designed those structures through investment

funds it controlled, which invested in the equity tranches of CDO deals secured by RMBS (or

through CDOs with CDS that referenced RMBS).

67) As 2010 public reports have now revealed, to effectuate its short strategy,

Magnetar approached deal-hungry investment banks like Calyon with a seductive offer.

Magnetar would purchase the equity tranche of the CDO it sought to create, provided the

investment bank – e.g., Calyon – made available short positions on the CDO's collateral. A

corollary requirement was control by Magnetar over deal structure, formation, and the collateral

included in the CDO (i.e., the same collateral and the same deal Magnetar was shorting).

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.

68) A 2010 book authored by Yves Smith, a financial services consultant and author

who worked previously at Goldman Sachs & Co., McKinsey & Co. and Sumitomo Bank,

describes, using industry sources, the investment scheme of Magnetar and its complicit arranging

banks. Specifically, Yves Smith states (a) the Magnetar net-short strategy only worked if the

CDOs it sponsored failed, and (b) to make that strategy succeed, Magnetar ensured inclusion of

the riskiest "crap" assets in the CDOs it created: Magnetar owns the [CDO's] equity layer, which throws out a lot of cash for perhaps a year or two and then starts to decay quickly. They bet against the better slices, short the very same deals they created[.]

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It only works if the deal is so bad that the equity, plus the higher layers, are all toast. Magnetar would not make its target returns on the equity tranche alone. The deals had to fail for them to succeed. It was common for funds like Magnetar to let a trading desk know what parameters it wanted, and the traders would in turn line up suitable investments with the CDO manager. Magnetar influenced the transaction by mandating a certain equity return, which meant the CDO would have to hold the 'spreadiest' (i.e., riskiest) crap.

Yves Smith, ECONNED, at 258-59 (Palgrave MacMillan 2010).

69) Upon information and belief: (a) Magnetar was net short the Constellation CDOs,

i.e., the size of Magnetar's short positions exceeded the size of its long positions, and (b) the

ratios of Magnetar's short positions to its long positions have varied from deal-to-deal, but could

be as much as 6-to-1 net short or even higher. In other words, Magnetar was betting on the

failure of the very deals it was creating.

70) CDO arrangers, including Calyon, knew about and facilitated Magnetar's net short

strategy. As recounted in ECONNED, "Dealer [Calyon] winks back at Hedgie [Magnetar] and

pretends he believes Hedgie is serious about ‘hedging’ his CDO investment, even though both of

them understand that Hedgie's interest lies in having the CDO crater."

71) Moreover, an April 9, 2010, report published by ProPublica (a non-profit

investigative news service), authored and investigated with extensive source citation by Jesse

Eisinger (a former Wall Street Journal reporter who, among other things, 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," including Calyon's role in creating it.

72) As recounted by ProPublica, "[u]sually, investment banks had to go out and find

buyers of the equity. With Magnetar, the buyer came right to the bank's doorstep. Wall Street

was overjoyed." 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.

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* * * Only a small group of Wall Street insiders was privy to what has become known as the Magnetar Trade. Nearly all those approached by Pro Publica declined to talk on the record, fearing their careers would be hurt if they spoke publicly. But interviews with participants, e-mails, thousands of pages of documents and details about the securities that until now have not been publicly disclosed shed light on an arcane, secretive corner of Wall Street.

73) According to ProPublica, Magnetar partnered with Deutsche Bank to buy the

equity of its maiden deal, Orion 2006-1. In doing so, ProPublica continues, Magnetar "didn't

reach for a Wall Street powerhouse to put the deal together. Instead, the investors worked with

Alex Rekeda" – a young and relatively inexperienced professional "who was then working [in

New York] for Calyon, the investment banking arm of French bank Crédit Agricole."

74) The ProPublica report further reveals that "Magnetar and Deutsche were deeply

involved in creating Orion [2006-1]. 'We want to make sure we control the deal,' a banker who

worked on it recalls them emphasizing." Id. (emphasis added). A critical aspect of that control

was dictating a deal's collateral pool composition.

75) ProPublica also reported that CDO managers and arrangers such as Calyon knew

Magnetar "used the equity to fund the shorts."

76) As further reported by ProPublica, Deutsche Bank's leader on the Orion 2006-1

CDO, Michael Henriques, later quit – and joined Magnetar.

77) Magnetar also hired Jim Prusko in connection with its CDO shorting franchise.

Prusko had previously worked for investment manager Putnam Investments, a/k/a Putnam

Advisory Company, LLC, ("Putnam") in Boston.

78) In an email ProPublica uncovered dated September 8, 2006, Prusko stated to

Andrew Shook, President and CIO of prospective CDO manager Ischus Capital Management,

LLC ("Ischus"): "Our goal is to partner with managers and do a series of deals, 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." Id. (emphasis added).

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79) Upon information and belief, Magnetar – unbeknownst to the Loreley Companies

or their investment advisor, but well known to arrangers such as Calyon – bought the cooperation

of CDO collateral managers by promising deal volume.

80) One of the managers Magnetar partnered with was Prusko's former employer,

Putnam, which (nominally) acted as the collateral manager of Pyxis 2006-1. Another was NIBC,

which (nominally) was the collateral manager of Orion 2006-1. In reality, however, Magnetar

controlled these deals.

81) Magnetar's partnerships with Putnam and NIBC, coupled with its net short

strategy, were not disclosed or known to – nor could they have been known to – the Loreley

Companies until revealed in 2010. Rather, Calyon affirmatively and materially misrepresented

and concealed the manner in which portfolios for the Orion 2006-1 and Pyxis 2006-1 CDOs

were selected.

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.

83) On information and belief, 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. As stated in

ECONNED, "Hedgie [i.e., Magnetar], having put up the equity, gets veto power over the bonds in

the CDS." Moreover, the very reason for the Constellation CDO's "hybrid" (i.e., partially

synthetic) structure was to provide a vehicle for Magnetar's net short positions.

84) It was known within Calyon, but unknown and undisclosed to investors such as

the Loreley Companies, 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; that is, to allow for Magnetar's heavy bets that the deals would fail.

(b) The collateral managers for Magnetar-sponsored transactions, such as Orion 2006-1 and Pyxis 2006-1, would not, upon information and belief, select underlying assets for the CDOs unless Magnetar approved such assets, so that Magnetar could control the selection of collateral it was going to short.

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(c) For Magnetar-sponsored CDO transactions, such as Orion 2006-1 and Pyxis 2006-1, on information and belief, there was no true, independent collateral manager selecting or managing the collateral for the benefit and in the best interests of the CDOs' "long" investors.

The Loreley Companies did not know, nor could they have known, of these facts, which were

materially misrepresented and concealed by Calyon. The true facts have begun to surface only in

2010.

85) In an email dated September 29, 2006, from Prusko to Ischus, also uncovered by

ProPublica, 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." In a later email,

dated October 3, 2006, Ischus refused, stating "we will not assemble a portfolio we are not proud

of and feel strongly about in the name of a spread target."

86) Ischus did not serve as manager for that or any other Magnetar-sponsored CDO.

87) Similarly telling is a January 10, 2007, email from the now-infamous Goldman

Sachs & Co. ("Goldman") employee Fabrice Tourre ("Tourre") to ACA Management ("ACA").

This document was made public (and marked as Exhibit #108) during the hearings conducted by

the U.S. Senate Permanent Subcommittee on Investigations on or about April 27, 2010. There,

while outlining the management fee structure for ACA – which the SEC alleges was fraudulently

suborned by Goldman at the behest of another short investor, Paulson & Company – Tourre

states "[t]hat's what we've been seeing for most Magnetar-sponsored transactions." (Emphasis

added).

88) As ProPublica further reported:

Since it was the sponsor, Magnetar had privileges. 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. Like all investors, equity buyers had to weigh risk and reward, the goal being to maximize returns while minimizing the chances that your investment will blow up.

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.

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Doing that would make it more likely that Magnetar's bets against the CDO would pay off.

(Emphasis added).

89) Neither the Orion 2006-1 nor the Pyxis 2006-1 CDOs was managed by an

independent collateral manager as Calyon represented. Rather, upon information and belief,

Calyon arranged those transactions at the behest of, and for the benefit of Magnetar – knowing

that Magnetar was controlling the deals, dictating the collateral pool composition and, at the

same time, betting on the deals' failure.

90) Calyon concealed and materially misrepresented the true nature of the Orion

2006-1 and Pyxis 2006-1 CDOs to IKB and the Loreley Companies. Had the Loreley

Companies known the truth, they would never have purchased Orion 2006-1 or Pyxis 2006-1.

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. The equity tranche of a CDO

is generally the hardest for an arranger to sell because it is unrated and the most subordinated

tranche. For an 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, to

get the deals done, Calyon had to lie to the CDO "long" investors and their investment advisors,

such as the Loreley Companies and IKB.

92) Calyon arranged Orion 2006-1 and Pyxis 2006-1 to induce long investors,

including Plaintiffs, into funding the pay-off on Magnetar's short positions achieved through the

purchase of CDS protection. Had Magnetar sought a direct counter-party for its short trades,

without the creation of a CDO by a complicit arranger like Calyon, there would have been no

takers in an open market trade given the significant size of the short positions they set out to

acquire.

93) Indeed, as recounted in ECONNED, a "big short position … would show up quickly

and blow spreads out incredibly wide." Calyon thus created these CDOs under the guise of bona

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fide long investments that, unbeknownst to the Loreley Companies, were vehicles sponsored and

controlled by the party betting heavily on the transactions' failure.

94) For its part, Calyon generated substantial fees on Orion 2006-1 and Pyxis 2006-1

in its roles as, inter alia, arranger, initial purchaser, and placement agent for each CDO. Plus,

Calyon was rewarded with a total of five Constellation CDOs by Magnetar.

95) Calyon – in the case of Orion 2006-1 and Pyxis 2006-1 – was the lynchpin to the

fraudulent scheme. Without Calyon, there would be no CDO, and thus there could be no

Magnetar short.

96) As recounted in ECONNED, the Hedgie (i.e., Magnetar) purchases "short"

protection from the Dealer (e.g., Calyon) through CDS on the bonds referenced in the synthetic

portion of the CDO portfolio. "The Dealer has now committed to sell CDS protection against …

assorted BBB trash [i.e., the Dealer is itself "long"]. At the moment this is exclusively the

Dealer's risk, so Dealer needs to get rid of this risk as quickly as possible. That means coming

up with investors in the CDO."

97) The "Dealer" (i.e., Calyon) thus arranges and markets a CDO to long investors,

such as the Loreley Companies, who contribute hundreds of millions of dollars to the CDO

Issuer in exchange for notes. At closing, 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. 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. The cash infused by the long

investors is then used to pay the short investor when the deal it created fails. That is precisely

what happened in the Orion 2006-1 and Pyxis 2006-1 CDOs.

98) This net short trade could only have been accomplished by Magnetar in

complicity with Calyon. At the same time, Calyon misrepresented that the portfolios were

selected based on the experience and judgment of an independent, qualified manager acting in

the interests of the CDO long investors.

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99) Upon information and belief, Magnetar did not simply hedge a class of assets

through a "long/short" strategy. Rather, as explained in an email by an industry insider who

worked on these transactions, Magnetar created a class of CDOs for the sole purpose of shorting

them:

At their peak, Magnetar was *THE* driver of RMBS [residential mortgage backed security] CDO issuance. The size of their "Constellation" program was the most amazing thing I've seen in my entire career. …

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. And, they realized that while most other hedge funds were content shorting the BBB tranches from subprime RMBS, shorting the BBB tranches from RMBS CDOs was a much more slam dunk of a trade. The commentary is right … without someone willing to fund the equity of a CDO there was no way to get one done. So, 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.

The gravy was that the equity was typically good for one or two VERY HEFTY cashflow distributions, i.e., these structures went terrifically bad, but it usually took a little while from a timing perspective for that to happen. So, their carry cost of the shorts was offset by the one or two equity payments.

ECONNED, at 259 (alterations in original).

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;

$368.4 million for Pyxis 2006-1 and $265 million for Orion 2006-1. But that subordination was

an illusion, and Calyon's representations – including the subordination representations made in

the offering memoranda for each deal – were false. The expected defaults and losses generated

by the assets Magnetar selected were sufficient to eliminate, or substantially impair, the

subordination that was represented to exist.

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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. Specifically, on

December 4, 2008, Pyxis 2006-1 experienced an event of default and on June 10, 2010, Orion

2006-1 experienced an event of default.

102) Likewise, both deals were downgraded by ratings agencies to "junk" status within

the reinvestment period. On November 21, 2007, the ratings agency Fitch downgraded to a

rating of BB- the Orion 2006-1 Class A notes that LFJ 7 purchased, and in September 2008,

Fitch further downgraded those notes to a CC rating. On March 26, 2008 the ratings agency

Moody's downgraded the Class A-2 notes that LFJ 25 had purchased to a rating of B1, and on

May 18, 2008 further downgraded them to a Ca rating.

B. Calyon's Fraudulent Sale of Orion 2006-1 and Pyxis 2006-1 to the Loreley Companies

103) Calyon was aware that IKB acted as the investment advisor to the Loreley

Companies and set out to sell CDOs to the Loreley Companies. No later than June 2005, Calyon

was aggressively marketing CDO deals to IKB as investment advisor to the Loreley Companies.

104) As part of its effort to sell CDOs to the Loreley Companies, Calyon promoted

itself as a leader in structured finance CDOs, listing its track record with billions of dollars in

structured credit transactions that either had already closed or were in the pipeline. 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.

105) Calyon represented that, given its expertise and its relationships in the sector, it

was ideally situated to sell to the Loreley Companies investments in CDOs that met their

objectives.

106) However, Calyon insisted on acting as an intermediary between IKB and each of

the collateral managers, and strictly controlled the flow of information between the two. Even

when IKB attempted to communicate with collateral managers directly – for example when IKB

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asked for information on asset cash flows and defaults from NIBC, the collateral manager for

Orion 2006-1 – NIBC referred IKB to Calyon.

1. Orion 2006-1

107) 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.

108) In February 2006, Calyon provided IKB with a 56-page marketing presentation

for Orion 2006-1. The cover page of this presentation represented that Orion 2006-1 was

"Managed by NIBC Credit Management, Inc."

109) In March 2006, Calyon provided IKB with another 56-page presentation for Orion

2006-1. The cover page of this presentation represented that Orion 2006-1 was "Managed by

NIBC Credit Management, Inc."

110) Calyon repeatedly represented – via, for example, 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, inter alia, selecting appropriate, high quality

assets. Indeed, 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, and because, on information and belief, it knew

that IKB was familiar with and thought highly of NIBC.

111) For example, in its March 2006 marketing presentation, Calyon devoted an entire

25-page section to the collateral manager, NIBC. Calyon represented that NIBC "[a]s both an

investor and issuer of CDOs … has a thorough understanding of CDO structures," and that its

"extensive experience, knowledge and resources … contributed to the development of

proprietary ABS and CDO technology to analyze portfolio performance under a wide range of

economic scenarios."

112) Calyon further stressed in its marketing presentation that NIBC "[i]dentifies assets

within the framework set by [NIBC's] Investment Committee," and "employs proprietary

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modeling to perform credit and risk analysis, both quantitatively and qualitatively, focusing on a

bottom up approach." According to the presentation, four separate NIBC teams analyzed,

selected and managed investments – an Investment Committee, an Investment Team, a CDO

Compliance Team, and a Surveillance Team – a painstaking and "multi-layered" process

"designed to have multiple 'sets of eyes' for each investment."

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, 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."

114) Consistent with these representations, 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, acquisition and disposition of the Collateral Debt

Securities" based on its "research, credit analysis and judgment."

115) Calyon's representations were material and knowingly or recklessly false when

made because, inter alia, Magnetar – in complicity with Calyon, but invisibly to the Loreley

Companies and IKB – controlled Orion 2006-1, partnered with NIBC, and dictated the selection

of the Orion 2006-1 assets in furtherance of its net short strategy. Rather than selecting "strong"

assets as Calyon specifically represented, weak, low quality assets were included in the

transaction. 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, Magnetar. Furthermore,

Calyon concealed material information from the Loreley Companies and IKB regarding

Magnetar's role in constructing and controlling the deal, and Calyon's agreement to arrange the

deal at Magnetar's behest in order to facilitate Magnetar's net short strategy.

116) In reasonable and justifiable reliance on Calyon's misrepresentations and

omissions, IKB recommended that LFJ 7 invest in the Orion 2006-1 CDO. LFJ 7 accepted IKB's

recommendation and approved investment in Orion 2006-1 Class A notes.

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117) LFJ 7 purchased from Calyon CIB Orion 2006-1 Class A notes. Calyon knew

LFJ 7 was relying on Calyon's materially false statements and material omissions.

118) When purchased by LFJ 7, the Class A notes were rated AAA by S&P and Fitch,

and Aaa by Moody's. LFJ 7 presently owns Orion 2006-1 Class A notes with a face amount of

$10.5 million.

2. Pyxis 2006-1

119) In or around July 2006, 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.

120) During that month, Calyon provided IKB with two marketing presentations for

Pyxis 2006-1, each approximately 50 pages long. The cover page for both of these presentations

represented that Pyxis 2006-1 was "Managed by The Putnam Advisory Company, LLC."

121) Each of these presentations included approximately 20 pages that described, in

detail, the rigorous asset-selection process that Putnam, the collateral manager, would engage in

to assemble the Pyxis 2006-1 collateral pool.

122) For example, one of the July 2006 presentations touted the detailed diligence that

Putnam conducts in deciding on a deal's collateral pool. Calyon represented that Putnam

analyzes "each transaction … to better understand its collateral composition" and conducts a

"[s]tructural analysis [that] includes understanding rating levels." The presentation stated that

Putnam "develops multiple scenarios to test the structure's durability," which "involves running

multiple stress scenarios by varying inputs such as default frequency vectors, loss severities,

prepayments speeds and interest rates." According to the presentation, "[t]he results of

[Putnam's] analysis, combined with the prudent application of judgment, allow Putnam to decide

if to invest, what tranche to invest in, how much to invest and at what price in order to achieve

acceptable risk-adjusted returns for its clients." Indeed, it was represented that Putnam offered

"best in class CDO management capability."

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123) Calyon further represented in the July 2006 presentation that "Putnam should

actively drive the product structure."

124) In a July 7, 2006 pitch book for Pyxis 2006-1, Calyon represented that "Putnam

seeks to design and undertake transactions that have a high probability of success." In that same

document, Calyon represented of Putnam's "rigorous portfolio construction" and "fundamental

security selection."

125) Consistent with these representations, 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," and that "[d]ay-to-day portfolio

management" will "be the joint responsibility of [Putnam's] CDO & Portfolio Credit Team." The

offering memorandum touted Putnam's vast experience in managing structured assets.

126) Calyon's representations were material and knowingly or recklessly false when

made because, inter alia, Magnetar – in complicity with Calyon, but invisibly to IKB and the

Loreley Companies – controlled Pyxis 2006-1, partnered with Putnam, and controlled the

selection of the Pyxis 2006-1 collateral.

127) Rather than selecting assets with the "prudent application of judgment … to

achieve acceptable risk adjusted return" as Calyon represented, weak and poor quality assets

were intentionally selected. This scheme was perpetrated to trick Plaintiffs into purchasing the

"long" side of a CDO transaction, Pyxis 2006-1, that was secretly controlled by the net "short"

side, Magnetar. Furthermore, Calyon concealed material information from the Loreley

Companies and IKB regarding Magnetar's role in constructing and controlling the deal, and

Calyon's agreement to arrange the deal at Magnetar's behest in order to facilitate Magnetar's net

short strategy.

128) In reasonable and justifiable reliance on Calyon's materially false representations

and omissions, IKB recommended that LFJ 25 invest in the Pyxis 2006-1 CDO. LFJ 25 accepted

IKB's recommendation and approved investment in Pyxis 2006-1 Class A, B, and C notes.

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129) LFJ 25 bought from Calyon CIB Pyxis 2006-1 Class A-2 notes. Calyon knew

that LFJ 25 was relying on Calyon's materially false statements and omissions.

130) When purchased by LFJ 25, those notes were rated AAA by S&P and Fitch, and

Aaa by Moody's. LFJ 25 presently owns Pyxis 2006-1 Class A-2 notes with a face amount of

$10 million.

3. Transaction Features of the Orion 2006-1 and Pyxis 2006-1 CDOs

131) As detailed above, Magnetar funded its net short positions with the cash-flow it

received from its equity holdings in the CDOs it created. This fact was known to Calyon but

unknown and undisclosed to the Loreley Companies.

132) Orion 2006-1 and Pyxis 2006-1, like other Constellation CDOs, were structured

for the benefit of the equity tranche. Without knowing the equity investor was controlling the

deals, influencing the selection of weak and poor quality collateral, and was net short the deals,

these features appeared facially benign. And Calyon misrepresented them as benign to IKB and

the Loreley Companies. In reality, the structural features were designed to provide Magnetar

with a cheap source of funds to pay for its net short positions.

133) For example, for Orion 2006-1 (which was supposedly managed by NIBC) and

Pyxis 2006-1 (which was supposedly managed by Putnam), 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 4.5 years after closing for Orion 2006-1 and five years after

closing for Pyxis 2006-1). This delay was designed to allow the equity tranche holders

(Magnetar) to receive cash flow even in times of market distress.

134) Calyon, however, misrepresented the true purpose of these deal features. For

example, on or about April 12, 2006, Ralf Otzen of Calyon forwarded to Uta Kubis of IKB a

note from Benjamin Lee of Calyon, in which Mr. Lee represented that the reason the IC Test was

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absent from the Orion 2006-1 CDO structure was because Orion 2006-1 was a hybrid CDO

containing "pay as you go" CDS. Contrary to this express representation, 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.

135) Similarly, on September 19, 2006, Ralf Otzen forwarded to Uta Kubis a note from

Benjamin Lee in which Mr. 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." Contrary to this express representation, 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.

136) The Pyxis 2006-1 CDO also included an issuance of Class X notes, which became

a staple characteristic of the Constellation CDOs. 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. Upon information and belief, in at least some of

these transactions, Magnetar owned the Class X notes and/or used them in a way that resulted in

the equity being partially unfunded. By being the holder of the Class X notes and equity-holder,

Magnetar ensured returns on its investment by receiving cash flow distributions.

137) The actual purpose for all of these features was to allow Magnetar to fund – in an

inexpensive way – its bet against the deal as a whole. Calyon concealed from and

misrepresented to IKB and, in turn, the Loreley Companies, the purpose for these features.

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. Upon information and belief, Calyon was

required to insert these terms as part of the quid pro quo for Magnetar's equity sponsorship of the

CDOs. But Calyon also had to misrepresent the terms to investors because if Calyon disclosed

their true purpose, Calyon would have revealed the Magnetar strategy and alerted those investors

to the fraudulent design of the CDO transactions.

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V. Calyon's Roles as Arranger

139) As a CDO arranger, Calyon performed multiple roles, both in its CDO business

generally and specifically to market and sell CDOs to IKB and the Loreley Companies. Those

activities included:

(a) structuring and modeling each CDO; (b) interfacing with the ratings agencies to achieve targeted

ratings for the CDO's tranches; (c) acting as a warehouse lender prior to and during the CDO

ramp-up period, in connection with which it provided financing for the assets to be sold to the CDO;

(d) acting as a credit default swap counterparty in connection with synthetic or hybrid CDOs;

(e) marketing and selling the CDO's notes to investors to complete the transaction; and

(f) communicating with each CDO's collateral manager, as necessary.

140) In addition, Calyon, like other arrangers, often provided other written or oral

representations regarding the structure of the CDO, the collateral manager, and the nature and

quality of the collateral, as Calyon did with IKB and the Loreley Companies. The CDO's

structural characteristics and collateral eligibility criteria were typically established by the

arranger.

141) In exchange for discharging its responsibilities, Calyon, like other arrangers,

received millions of dollars in investment banking and placement fees at closing based on a

percentage of the notional value of the CDO.

142) Given this fee structure, Calyon had an incentive to place as many large CDOs

into the market as the market would consume. And Calyon did so, structuring and closing deals

as fast as it could (albeit not as many as it would have liked).

143) By 2006, Calyon had substantial expertise and depth in securitization and

structured credit and was deeply involved in arranging CDOs backed by U.S. sub-prime

mortgage assets. Indeed, in February of 2006, Calyon made an aggressive move to expand its

CDO business by acquiring the CDO management firm Omicron Investment Management.

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144) Calyon's structured finance business was developing so rapidly that, by

September 2006, it claimed to be a leading specialist in CDO structuring, with a trading platform

covering the entire structured credit product spectrum. In November 2006, Calyon was ranked

seventh worldwide in ABS/MBS securitizations (according to Thompson Media and a November

2006 Crédit Agricole investor presentation).

145) During this time, Calyon promoted its experience and expertise in documents

entitled Structured Credit Presentation, listing billions of dollars of structured credit transactions

that had already closed, or which were in the pipeline, including, upon information and belief,

the following:

• Lincoln Avenue ABS CDO, $1.25 billion

• Millstone III HG ABS CDO, $2.2 billion

• TSAR 16 HG ABS CDO, $1.5 billion

• Orion 2006-1 ABS CDO, $1.3 billion

• Sheffield CDO of CDO, $300 million

• G-Square HG ABS CDO, $1.5 billion

• ZOO ABS CDO II, €250 million

• Grand Avenue ABS CDO, $1.2 billion

• Davis Square HG ABS CDO, $2 billion

• Monroe Harbour HG ABS CDO, $1.5 billion

• Gloucester Street HG ABS CDO, $1 billion

• LCM CLO, $307 million

• Confluent Fund, €2.5 billion

• Brigantine HG ABS, $2 billion

• CLOME CLO, €300 million

• GSC Partners CDO, $1.5 billion

• Orion 2006-2 ABS CDO, $1.5 billion

• FFTW HG ABS CDO, $1.8 billion

• Vero ABS CDO, $1.5 billion

• Omicron CDO of CDO, $1.2 billion

• Primus CDO Squared, $2 billion

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• Selecta CDO, €12.5 billion

• Bishopsgate CDO, $2 billion

• Midgard CDO Squared, $5.6 billion

• Embla CDO, $10 billion

• Cypress Tree CDO, $10 billion

146) Upon information and belief, by July 2007, Calyon had completed at least a

further $5.0 billion of CDO transactions, including the following:

• Pyxis 2006-1 (3 Oct 06), $1.5 billion

• Cetus 2006-3 (28 Nov 06), $1.2 billion

• Millstone IV (22 Jun 07), $2.2 billion

• Volans 2007-1 (14 Mar 07), $1.1 billion

147) Upon information and belief, Calyon also claimed to have long-term relationships

with top collateral managers, including the following:

• TCW

• Primus

• Dynamic Credit Partners

• Fischer, Francis, 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

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• Delaware Investments

• NIBC Credit Management

• WSq Investment Management

• P&G Alternative Investments

148) Upon information and belief, by late 2006 or early 2007, Calyon, having arranged

$75 billion in CDO deals, had "warehoused" (i.e., financed the purchase of, and retained on its

balance sheet for possible resale) many billions of dollars of CDO and RMBS securities with

substantial exposure to the U.S. residential mortgage market.

VI. Calyon's Millstone IV Fraud

A. The Departure of Calyon's CDO Team

149) In December 2006, "virtually all of the essential personnel" of Calyon's "Cash

CDO line of business … abruptly resigned en masse to become employed by Mizuho," as

Calyon described it in a complaint it later filed against Mizuho.

150) Calyon thus lost to Mizuho, a competitor in New York, the core of its CDO

business team. The departing employees included Alexander Rekeda, the head of Calyon's cash

CDO business, and Paolo Torti, the sole ABS/CDO trader performing the warehousing function

for Calyon. In its subsequent suit against Mizuho, Calyon described the departure of its staff as a

"mass exodus." This event appears to have accelerated Calyon's reconsideration of its exposure

to the U.S. residential mortgage market.

151) Upon information and belief, by early 2007, Calyon found itself holding the risk

on billions of dollars of CDOs and ABS securities that it wanted to unload. As of January 2007,

this risk included, according to a collateral composite prepared by Calyon, approximately $1.2

billion of securities being "ramped" (i.e., bought into a warehouse lending facility supplied by

Calyon) for inclusion in what became the Millstone IV cash CDO.

152) Calyon carried the risk of loss on these securities unless it could off-load them by,

for example, placing them in a CDO. Facing this risk, and with the loss of the core of its CDO

team, Calyon, on information and belief, made an undisclosed internal decision no later than

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February 2007, to exit the U.S. residential mortgage securities market, including arranging and

underwriting CDOs.

153) As Calyon later revealed in its published semi-annual financial reports for 2007,

only after the Millstone IV CDO closed, "[n]o new CDO derivatives transactions [were] initiated

since the US mortgage crisis began in February 2007." See Calyon Update of Shelf-Registration

Statement Document 2006, Financial Review at 30 (June 2007) published in or about August,

2007. Calyon thereafter repeated that pronouncement – i.e., that no new CDO transactions were

initiated after February 2007 – in other publicly disseminated documents, including an August

2007 investor presentation, a December 20, 2007 press release, and a June 2008 shareholders

newsletter.

154) On information and belief, to effectuate that internal decision, Calyon embarked

on a strategy to eliminate at least $1.2 billion of its exposure to the U.S. mortgage-related market

by completing the ramping and closing of the Millstone IV CDO.

155) Calyon concealed the fact that the Millstone IV CDO was, in reality, an "exit

deal." An exit deal is the capital market's equivalent of a going-out-of-business sale; that is, a

means of disposing of inventory upon an exit from the market.

156) Historically, when an investment bank such as Calyon concludes that it is exiting

a business line in which it had been an active participant, its counterparties, clients, and investors

consider such a decision to be a material event which requires disclosure. 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. 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.

157) In recognition of the materiality of this information, investment banks and issuers

publicly announce their plans to exit particular lines of business. For instance, in September

2007, E-Trade announced its intention to exit the wholesale mortgage business. Likewise,

General Electric announced in July 2007 its intention to exit the subprime mortgage business.

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Calyon made no such announcement, declaring its intent to exit the CDO of ABS business only

after it had already completed that exit.

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, if not years, before closing, (b) Calyon's entire cash CDO group

unceremoniously left the firm in December 2006, precipitating Calyon's de-risking strategy in

February 2007, and (c) by February 2007 Calyon had clearly determined the U.S. housing

market was in crisis.

159) Millstone IV, in fact, was the last ever CDO of ABS that Calyon closed.

Similarly, Millstone IV is the last deal listed on the website of Church Tavern Advisors, LLC,

which was the collateral manager for the Millstone IV CDO, with a description stating "n/a"

under the heading "Recent Transactions."

160) Calyon did not waste its final opportunity to offload its U.S. housing market

exposure into Millstone IV, its exit CDO. As stated, by January 2007 Calyon was, on

information and belief, holding the risk of approximately $1.2 billion of what became the

Millstone IV collateral portfolio.

161) From February to June 2007, Calyon ramped another $851 million of assets for

Millstone IV. Of that, upon information and belief, Calyon transferred $410 million of its own

risk into the portfolio. That $410 million of assets was originally issued in 2006 or earlier,

making it unlikely that such a large volume of older deals was purchased for Millstone IV from

the secondary market in 2007.

162) Calyon indicated in its financial reports in August 2007 that "[a]s part of its cash

CDO activity, Calyon has a portfolio of ABS that are in the structuring phase, as well as CDO

tranches not yet sold."

163) Upon information and belief, 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. This was at a time when, on information and belief, Calyon internally

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believed that the U.S. mortgage market – the very asset class it was ramping for Millstone IV –

was in crisis.

164) Moreover, 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.

165) Calyon represented to Plaintiffs (including via the final offering circular dated

June 21, 2007) that the Millstone IV Class A-3 notes purchased by LFJ 31, which were originally

rated AAA, were supported by $68 million in subordinated tranches. This meant that until the

CDO suffered losses of $68 million, the Class A-3 notes would not be economically impacted.

166) Calyon represented to Plaintiffs (including via the final offering circular dated

June 21, 2007) that the Millstone IV Class B notes purchased by LFJ 32, which were originally

rated AA, were supported by $44.5 million in subordinated tranches. This meant that, until the

CDO suffered losses of $44.5 million, the Class B 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.

168) Approximately 19% of the Millstone IV collateral pool, or $369 million,

consisted of notes of other CDOs (commonly called the "CDO bucket"). This collateral was far

more difficult for an investor to analyze because the collateral underlying the CDO bucket was

unidentified. However, Calyon knew exactly what was in the Millstone IV CDO bucket.

169) Approximately 25% of that CDO bucket, or $95 million, consisted of notes from

Magnetar-sponsored Constellation CDOs, including the following:

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TRANCHE FACE AMOUNT TRANSACTION

VRGO 2006-1A A1J 20,000,000.00 Vertical Virgo Ltd.

VELA 2006-1A A 20,000,000.00 MKP Vela CBO Ltd.

LCERT 2006-1A A1 6,000,000.00 Lacerta ABS CDO Ltd.

DRACO 2007-1A A1J 15,000,000.00 Draco Ltd.

AURIG 2006-1A B 9,500,000.00 Auriga CDO Ltd.

AURIG 2006-1A C 8,000,000.00 Auriga CDO Ltd.

DRACO 2007-1A A1J 4,400,000.00 Draco Ltd.

ACABS 2006-AQA A1J $13,250,000 ACA Aquarius 2006-1

170) As the co-inventor of the Magnetar scheme, Calyon knew or recklessly

disregarded the fact that each of these Constellation CDOs had been built to fail. This meant

that, at inception, Calyon expected or should have expected that at least $95 million in losses

would be suffered in the deal.

171) Thus, Calyon knew or recklessly disregarded the fact that the subordination it

represented to IKB and the Loreley Companies did not exist. 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.

Indeed, the expected default on those assets was sufficient to eliminate the structural

subordination and cause actual losses to the Loreley Companies.

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.

173) In or around March 2007, 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.

174) On or about March 16, 2007, Calyon provided IKB with a 44-page marketing

presentation for Millstone IV. The cover page for this presentation described Millstone IV as a

"Super High Grade ABS CDO," a statement Calyon knew to be materially false.

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175) Calyon also provided IKB with similar 40-plus page presentations on or about

April 4, 2007, April 11, 2007, and May 10, 2007. The cover pages for each presentation also

falsely described Millstone IV as a "Super High Grade ABS CDO."

176) Likewise, on or about March 14, 2007, March 19, 2007, March 30, 2007, April 4,

2007, and May 10, 2007, Calyon provided IKB with five separate term sheets for 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.

177) Calyon was fully aware of the Loreley Companies' investment objectives.

Consistent with those objectives, Calyon marketed the Millstone IV CDO to Plaintiffs as a

"Super High Grade" CDO with underlying assets predominantly rated AA and above.

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.

179) Each of Calyon's statements that Millstone IV was a "Super High Grade ABS

CDO" was materially false when made.

180) Millstone IV was actually an exit deal designed to shift the risk of assets away

from Calyon, when Calyon had secretly decided to exit the CDO business.

181) In addition, by virtue of the inclusion of the Magnetar-sponsored Constellation

CDOs and other weak and poor quality assets, the Millstone IV CDO lacked the subordination

for the Class A-3 and Class B tranches that Calyon represented to the Loreley Companies.

182) In reasonable reliance on these materially false representations and omissions,

IKB recommended that LFJ 31 and LFJ 32 invest in the Millstone IV CDO. LFJ 31 and LFJ 32

accepted IKB's recommendation and approved the proposed investment in Millstone IV notes.

183) LFJ 31 bought Millstone IV Class A-3 notes from Calyon CIB. Calyon knew

LFJ 31 was relying on Calyon's materially false statements and omissions.

184) At that time, those notes were rated AAA by S&P and Aaa by Moody's. LFJ 31

presently owns Millstone IV Class A-3 notes with a face amount of $35.5 million.

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185) LFJ 32 bought Millstone IV Class B notes from Calyon CIB. Calyon knew LFJ

32 was relying on Calyon's materially false statements and omissions.

186) At that time those notes were rated AA by S&P and Aa2 by Moody's. LFJ 32

presently owns Millstone IV Class B notes with a face amount of $14.5 million.

187) By November 2007, the Millstone IV CDO experienced an event of default.

188) On December 18, 2007, Moody's downgraded to a Caa1 (a "junk" rating) the

Millstone IV class A-3 notes that LFJ 31 purchased.

189) On December 18, 2007 Moody's also downgraded to a Ca (also a junk rating) the

Millstone IV class B notes that LFJ 32.

VII. The Injuries Caused by Calyon's Misconduct

190) As a result of the defaults that eventually did occur, the Loreley Companies have

suffered injury as to each of the Orion 2006-1, Pyxis 2006-1 and Millstone IV notes that they

purchased.

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.

CAUSES OF ACTION

FIRST CAUSE OF ACTION (Rescission Based Upon Fraudulent Inducement: Orion 2006-1 and Pyxis 2006-1)

192) Plaintiffs repeat and reallege the preceding allegations as though fully set forth

herein.

193) Calyon’s representations and omissions as described above with respect to the

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, incomplete, misleading, and false when made.

These representations and omissions were made intentionally or with reckless disregard for the

truth.

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quality of the assets comprising the collateral pool for the Orion 2006-1 and Pyxis 2006-1 CDOs

were material, incomplete, misleading, and false when made. These representations and

omissions were made intentionally or with reckless disregard for the truth.


value, 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, incomplete, misleading, and false

when made. These representations and omissions were made intentionally or with reckless

disregard for the truth.


structural features of the Orion 2006-1 and Pyxis 2006-1 CDOs were material, incomplete,

misleading, and false when made. These representations and omissions were made intentionally

or with reckless disregard for the truth.


nature of the Orion 2006-1 and Pyxis 2006-1 CDOs, including that the above-described notes

were consistent with the investment requirements of LFJ 7 and LFJ 25, were material,

incomplete, misleading, and false when made. 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,

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.

199) Based upon its superior knowledge and expertise, its incomplete and misleading

disclosures, 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, Calyon had an affirmative duty to provide full,

complete, and accurate disclosures of these material facts. Calyon intentionally failed to provide,

or recklessly disregarded its obligation to provide, full, complete, and accurate disclosures of

these material facts.

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200) LFJ 7 and LFJ 25 reasonably and justifiably relied to their detriment on Calyon’s

misrepresentations and omissions, including Calyon’s affirmative duty to provide full, complete,

and accurate disclosures to LFJ 7 and LFJ 25.

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, which they would not have

done had they known the truth.

202) The notes that LFJ 7 and LFJ 25 bargained for were different from what LFJ 7

and LFJ 25 received from Calyon. LFJ 7 and LFJ 25 lack an adequate remedy at law.

203) As a result, 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. Rescission would restore each party to its original position through Calyon tendering

the original purchase price plus interest, less any benefit to LFJ 7 and LFJ 25, and LFJ 7 and LFJ

25 tendering their notes to Calyon.

SECOND CAUSE OF ACTION (Rescission Based Upon Fraudulent Inducement: Millstone IV)


herein.


quality of the assets comprising the collateral pool for the Millstone IV CDO were material,




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, incomplete, misleading, and false



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207) Calyon’s representations and omissions as described above with respect to its

plans to exit the business of arranging CDOs of ABS, the fact that Millstone IV was an “exit

deal” for Calyon, 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, incomplete,




nature of the Millstone IV CDO, including that the above-described notes were consistent with

the investment requirements of LFJ 31 and LFJ 32, were material, incomplete, misleading, and

false when made. These representations and omissions were made intentionally or with reckless









or recklessly disregarded its obligation to provide, full, complete, and accurate disclosures of

these material facts.




212) Calyon’s misrepresentations and omissions induced LFJ 31 and 32 to purchase

the above-described Millstone IV notes from Calyon, which they would not have done had they

known the truth.

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214) As a result, 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. Rescission

would restore each party to its original position through Calyon tendering the original purchase

price plus interest, less any benefit to LFJ 31 and LFJ 32, and LFJ 31 and LFJ 32 tendering their

notes to Calyon.

THIRD CAUSE OF ACTION (Rescission Based Upon Misrepresentation: Orion 2006-1 and Pyxis 2006-1)


herein.

216) Calyon's representations and omissions as described above with respect to the






were material, incomplete, misleading, and false when made.


value, credit quality, and risk of loss for the notes purchased by LFJ 7 and LFJ 25 in connection


when made.



misleading, and false when made.



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incomplete, misleading, and false when made.

221) Calyon's misrepresentations and omissions as described above were made to IKB,


expectation that LFJ 7 and LFJ 25 would act thereon.



that were uniquely within Calyon's knowledge, Calyon had an affirmative duty to provide full,

complete, and accurate disclosures of these material facts.

223) LFJ 7 and LFJ 25 reasonably and justifiably relied to their detriment on Calyon's

misrepresentations and omissions as described above, including Calyon's affirmative duty to

provide full, complete, and accurate disclosures to LFJ 7 and LFJ 25.

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, which they would not

have done had they known the truth.



226) As a result, LFJ 7 and LFJ 25 are entitled, without having to prove scienter,

injury, or damages, 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. Rescission would

restore each party to its original position through Calyon tendering the original purchase price

plus interest, less any benefit to LFJ 7 and LFJ 25, and LFJ 7 and LFJ 25 tendering their notes to

Calyon.

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FOURTH CAUSE OF ACTION (Rescission Based on Misrepresentation: Millstone IV)

227) Plaintiffs repeat and reallege the preceding allegations as though fully set forth herein.



incomplete, misleading, and false when made.




when made.

230) Calyon's representations and omissions as described above with respect to its

plans to exit the business of arranging CDOs of ABS, the fact that Millstone IV was an "exit

deal" for Calyon, 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, incomplete,

misleading, and false when made.




false when made.

232) Calyon's misrepresentations and omissions as described above were made to IKB,


expectation that LFJ 31 and LFJ 32 would act thereon.



that were uniquely within Calyon's knowledge, Calyon had an affirmative duty to provide full,

complete, and accurate disclosures of these material facts.

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234) LFJ 31 and LFJ 32 reasonably and justifiably relied to their detriment on Calyon's

misrepresentations and omissions, including Calyon's affirmative duty to provide full, complete,


235) Calyon's misrepresentations and omissions induced LFJ 31 and LFJ 32 to

purchase the above-described Millstone IV notes from Calyon, which they would not have done

had they known the truth.



237) As a result, LFJ 31 and LFJ 32 are entitled, without having to prove scienter,

injury, or damages, to rescind each of the purchase and sale contracts by which the above-

described purchases of Millstone IV were affected. Rescission would restore each party to its

original position through Calyon tendering the original purchase price plus interest, less any

benefit to LFJ 31 and LFJ 32, and LFJ 31 and LFJ 32 tendering their notes to Calyon.

FIFTH CAUSE OF ACTION (Damages Based Upon Fraud: Orion 2006-1 and Pyxis 2006-1)


herein.





These representations and omissions were made intentionally or with reckless disregard for the

truth.



were material, incomplete, misleading, and false when made. These representations and

omissions were made intentionally or with reckless disregard for the truth.

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value, credit quality and risk of loss for the notes purchased by LFJ 7 and LFJ 25 in connection




















or recklessly disregarded its obligation to provide, full, complete, and accurate disclosures to LFJ

7, LFJ 25, and their investment advisor of these material facts.




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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, which they would not have

done had they known the truth.

248) As a direct and proximate result of those misrepresentations and omissions, LFJ 7

and LFJ 25 have suffered damages.

249) In addition or in the alternative to their claims for rescission, LFJ 7 and 25 are

entitled to an award of damages in an amount to be proven at trial.

SIXTH CAUSE OF ACTION (Damages Based Upon Fraud: Millstone IV)


herein.










253) Calyon’s representations and omissions as described above with respect to its

plans to exit the business of arranging CDOs of ABS, the fact that Millstone IV was an “exit

deal” for Calyon, 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, incomplete,



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false when made. These representations and omissions were made intentionally or with reckless









or recklessly disregarded its obligation to provide, full, complete, and accurate disclosures to LFJ

31, LFJ 32, and their investment advisor of these material facts.




258) Calyon’s misrepresentations and omissions induced LFJ 31 and 32 to purchase

the above-described Millstone IV notes from Calyon, which they would not have done had they

known the truth.

259) As a direct and proximate result of those misrepresentations and omissions, LFJ

31 and LFJ 32 have suffered damages.

260) In addition or in the alternative to their claims for rescission, LFJ 7 and 25 are

entitled to an award of damages in an amount to be proven at trial.

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SEVENTH CAUSE OF ACTION (Unjust Enrichment: Orion 2006-1 and Pyxis 2006-1)


herein.

262) As detailed above, on the basis of Calyon’s misrepresentations and omissions

regarding the Orion 2006-1 and Pyxis 2006-1 CDOs, LFJ 7 and LFJ 25 transferred the purchase

prices for the above-described notes issued in connection with the Orion 2006-1 and Pyxis 2006-

1 CDOs, and paid a portion of Calyon’s fees as arranger of those CDOs.

263) Calyon has been unjustly enriched at the expense of LFJ 7 and LFJ 25 by, inter

alia, 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.

264) Calyon unjustly retained its wrongfully obtained profits at the expense of LFJ 7

and LFJ 25.

EIGHTH CAUSE OF ACTION (Unjust Enrichment: Millstone IV)


herein.

266) As detailed above, on the basis of Calyon’s misrepresentations and omissions

regarding the Millstone IV CDO, LFJ 31 and LFJ 32 transferred the purchase prices for the

above-described notes issued in connection with the Millstone IV CDO, and paid a portion of

Calyon’s fees as arranger of that CDO.

267) Calyon has been unjustly enriched at the expense of LFJ 31 and LFJ 32 by, inter

alia, its use of the Millstone IV CDO as a means to dispose of its weak and poor quality assets

from its balance sheet, having decided to exit the business of arranging CDOs of ABS.

268) Calyon unjustly retained its wrongfully obtained profits at the expense of LFJ 31

and LFJ 32.

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Loreley vs Calyon Complaint

Documents

Transcript of Loreley vs Calyon Complaint