## Facts

- Putnam served as collateral manager for Pyxis ABS CDO 2006-1, a CDO backed by a mix of cash and synthetic RMBS exposure, marketed in 2006.
- Offering materials described Putnam as an independent, experienced manager that would select Pyxis collateral.
- FGIC, a monoline insurer, issued a guaranty tied to a $900 million “SuperSenior” swap transaction involving Pyxis and Calyon, exposing FGIC to payment obligations upon Pyxis default.
- FGIC alleged Putnam misrepresented its independence and role in collateral selection by ceding effective control to Magnetar, a hedge fund that allegedly held a net-short position and had incentives to favor weaker collateral.
- In April 2008, the insured tranche was downgraded from AAA to C; Pyxis later defaulted, and FGIC alleged potential liability up to $900 million.
- FGIC sued Putnam under New York law for fraud, negligent misrepresentation, and negligence; Putnam moved to dismiss under Rule 12(b)(6).

## Issues

1. Whether the complaint plausibly alleged loss causation for fraud—i.e., that the alleged misrepresentations were a substantial factor in causing FGIC’s losses rather than the market-wide RMBS/CDO collapse.
2. Whether the complaint alleged a special or privity-like relationship creating a duty sufficient to support negligent misrepresentation and negligence claims seeking purely economic damages.

## Decision

- The court granted Putnam’s Rule 12(b)(6) motion.
- The fraud claim was dismissed for failure to plead loss causation with sufficient specificity to connect the alleged misstatements to the losses, as opposed to the broader market downturn.
- The negligent misrepresentation and negligence claims were dismissed for failure to allege a special or privity-like relationship imposing a duty on Putnam to provide accurate information to FGIC.
- The amended complaint was dismissed in full, with leave to amend within twenty days.

## Legal Principles

- To plead fraud under New York law, a plaintiff must plausibly allege both transaction causation (reliance inducement) and loss causation (proximate cause linking the misrepresentation to the loss).
- Loss causation is not satisfied by alleging exposure to a risky product followed by loss during a market collapse; the pleading must connect the alleged misconduct to the default or the magnitude/timing of loss in a non-conclusory way.
- Negligent misrepresentation requires a special or privity-like relationship creating a duty to impart correct information, plus incorrect information and justifiable reliance.
- Negligence claims for purely economic loss generally require a relationship so close as to approach privity; arm’s-length dealings among sophisticated market participants, without more, do not establish the requisite duty.

## Conclusion

The court dismissed FGIC’s claims at the pleading stage because the complaint did not plausibly attribute FGIC’s losses to the alleged misrepresentations rather than the market downturn and did not allege a relationship with Putnam sufficiently close to impose a duty supporting negligence-based theories.


Financial Guaranty Ins. Co. v. Putnam Advisory Co., 2013 WL 5230818 (S.D.N.Y. 2013)