German Bank Can Sue Hedge Fund Over CDO, Court Rules

Aug 9 2012 | 1:41pm ET

Aladdin Capital Management will have to defend its handling of a collapsed collateralized debt obligation, after all.

A federal appeals court in New York overturned a lower-court judge’s ruling throwing out the case against the hedge fund. The decision is a victory for Germany’s Bayerische Landesbank, which last year sued Aladdin, accusing it of misleading the bank about the mortgage-backed CDO and of recklessness in its management.

Bayerische Landesbank alleged that Aladdin had sold the CDO as investment-grade. But at least 11 underlying entities—among them Lehman Brothers, Washington Mutual and two Icelandic events—suffered credit events, and the bank’s entire US$60 million investment was lost.

But a lower court judge dismissed the case a year ago. Bayerische Landesbank appealed, and the Second Circuit Court of Appeals found that it had “plausibly alleged that Aladdin’s gross negligence exposed Bayerische to greater risk that it would lose its entire investment than would have otherwise been the case.”

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