$30 million securities case trial bound after summary judgment rejection

An international dispute over $30 million in failed investments is trial bound after an Orange County superior court judge ruled triable issues exist regarding California's role in the ill-fated hedge fund transactions.

Judge William D. Claster's order denying summary judgment in the securities case against Jefferies International Ltd. rejected jurisdictional arguments by the investment management firm, which said the case lacked California ties because the plaintiff hedge funds are based in the Cayman Islands while Jefferies is based in England with co-defendant Jefferies LLC in New York.

However, the hedge funds had agreements with Rimrock Capital, which is based in Irvine, that Claster found relevant because they're governed by California law.

Rimrock isn't involved in the lawsuit, but its principal-client relationship with the plaintiffs meant its employees discussed the investments at the center of the lawsuit. Those discussions could be considered communications with plaintiffs, according to the lawsuit, which would connect the investments to California.

"Again, Rimrock Capital's status as agent for the funds creates a disputed fact question about whether the sale of the notes took place in California," Claster wrote.

The hedge funds sued in 2017 after spending $27.5 million in euros on securities offered by the Italian waste management company Waste Italia S.p.A then seeing the company collapse and the notes become worthless. They blame Jefferies LLC and Jefferies International Ltd., separate but related entities that marketed the notes to U.S. investors while misstating key attributes about Waste Italia. That includes its massive environmental liabilities and the value of its interest in the company SMC S.p.A., according to a trial brief from their lawyer Ryan S. Landes, a partner at Quinn Emanuel Urquhart & Sullivan, LLP. They don't argue Jefferies actually knew the statements were false, "Rather, they challenge only the sufficiency of Jefferies LLC's diligence," according to Claster's order. Waste Italia made two interest payments on the notes to investors before it collapsed.

Trial is scheduled to begin Dec. 2 in Santa Ana, and Landes said he's "ready to go." He's working with Peter E. Calamari, a partner in Quinn's New York office.

Jefferies is represented by Frank B. Kennamer, a partner with Morgan, Lewis & Bockius LLP who called the lawsuit "disingenuous" in a trial brief that says the hedge funds "were fully aware of the risks," which were in line with the notes' "outsized yield."

"They knew that Waste Italia had a consistent history of losing money, that it planned to take on even more risk through several acquisitions, that it planned to finance that added risk through leverage, and that the notes it was offering were highly risky debt instruments," according to the trial brief from Kennamer, who is working with Morgan Lewis partners Joseph E. Floren and Lucy Wang.

The hedge funds are suing under California's Blue Sky laws, which apply to misstatements in securities sales but don't require proof that the misstatements directly caused financial losses. A statutory formula governs damages, which an expert hired by Quinn Emanuel has calculated at $33.5 million under current European-U.S. exchange rates, including interest.

Landes' complaint brought two causes of action under state Corporations Code § 25401, which applies to sellers, and § 25501, which applies to agents who assist sellers.

While Claster rejected the Morgan Lewis team's summary judgment motion, he granted motions for summary adjudication that strike a single defendant from each claim. That's because no one disputes Jefferies LLC -- not Jefferies International Ltd. -- sold the notes, so it's the only defendant liable as a seller under 25401. In the same regard, only Jefferies International can be liable for aiding the seller.

Claster initially declined the claim adjudication motions in his tentative ruling, but he changed his mind after hearing oral arguments. The judge also rejected Rimrock's motion for summary judgment and motion for summary adjudication on two affirmative defenses from Jefferies LLC, pointing to a lack of controlling California authority defining reasonable care as well as existing Securities Exchange Commission guidance and a defense expert opinion the judge said establishes disputed questions of fact regarding the LLC's due diligence.

His ruling was finalized late Nov. 1. Rimrock High Income Plus (Master) Fund, Ltd. v. Jefferies LLC et al., 2017-00959428 (O.C. Super. Ct., filed Dec. 1, 2017)