Morgan Stanley Asia (Singapore) Pte (formerly known as Morgan Stanley Dean Witter Asia (Singapore) Pte) and others v Hong Leong Finance Ltd

• Jurisdiction: Singapore
• Judge: Belinda Ang Saw Ean J
• Judgment Date: 19 April 2013
• Neutral Citation: [2013] SGHC 83
• Court: High Court (Singapore)
• Docket Number: Originating Summons No 798 of 2012
• Published date: 29 April 2013
• Year: 2013
• Hearing Date: 19 November 2012,11 March 2013,14 February 2013
• Plaintiff Counsel: Alvin Yeo SC, Chua Sui Tong, Lim Shiqi and Edmund Koh (WongPartnership LLP)
• Defendant Counsel: Lee Eng Beng SC, Disa Sim and Ng Kexian (Rajah & Tann LLP)
• Subject Matter: Conflict of Laws,Restraint of foreign proceedings,Vexatious and oppressive conduct
• Citation: [2013] SGHC 83

Belinda Ang Saw Ean J: Introduction

The background facts to this application vide Originating Summons No 798 of 2012 (“OS 798/2012”) arose from the failure of a series of credit-linked notes issued in Hong Kong and sold in Singapore known as “Pinnacle Notes” during the global financial crisis in 2008.

Background The parties

Morgan Stanley Asia (Singapore) Pte (formerly known as Morgan Stanley Dean Witter Asia (Singapore) Pte) (“P1”) was the arranger of the Pinnacle Notes. As the arranger, P1 was involved in putting together the prospectus and pricing statements (collectively, the “Offering Materials”) of the Pinnacle Notes.

Pinnacle Performance Limited (“P2”), a Cayman Islands registered company, was the issuer of the Pinnacle Notes.

Morgan Stanley & Co International Plc (formerly known as Morgan Stanley & Co International Limited) (“P3”) was identified in the Offering Materials as, inter alia, the “Determination Agent”, “Dealer”, “Market Agent” and “Forward Counterparty” with respect to the Pinnacle Notes.

Morgan Stanley Capital Services LLC (formerly known as Morgan Stanley Capital Services Inc) (“P4”), a Delaware company with executive offices in New York, was identified in the Offering Materials as the “Swap Counterparty” with respect to the “Swap Agreement” underlying the Pinnacle Notes.

Morgan Stanley & Co LLC (formerly known as Morgan Stanley & Co Incorporated) (“P5”) was a Delaware company with executive offices in New York. It was not named in the Offering Materials. P5 provides brokerage and investment advisory services. The plaintiffs are indirect wholly-owned subsidiaries of Morgan Stanley, a publicly listed Delaware-headquartered corporation with its principal executive offices in New York.

The defendant, Hong Leong Finance Limited (“HLF”), was the distributor of the Pinnacle Notes pursuant to a Master Distributor Appointment Agreement dated 6 October 2006 entered into between HLF and P1, P2 and P3 (“the MDAA”). As distributor, HLF distributed six series of the Pinnacle Notes (ie, Series 2, 3, 6, 7, 9 and 10) between October 2006 and December 2007.

Events leading up to OS 798/2012

During the global financial crisis in 2008, investors who bought the Pinnacle Notes lost all if not a substantial portion of their original investment. By and large, the loss of the original investment was triggered by the failure or near bankruptcy of any one of the five “Reference Entities” in the “Reference Portfolio” contained in the base prospectus, namely Lehman Brothers Holdings Inc, Federal Home Loan Mortgage Corporation (also known as Freddie Mac), Federal National Mortgage Association (also known as Fannie Mae), and Icelandic banks Kaupthing banki hf and Landsbanki Islands hf.

In the chaotic aftermath of the failure of the Pinnacle Notes, the Monetary Authority of Singapore (“MAS”) stepped in and set up a complaint handling process for financial institutions in Singapore. Eventually, through this process, HLF compensated Singapore-based customers (who bought Pinnacle Notes Series 9 and 10) for more than US$32m in losses. HLF was also penalised for having mis-sold these high-risk financial products, in particular Series 9 and 10 of the Pinnacle Notes, to its customers owing to lack of internal controls.

In April 2010, HLF filed Originating Summons No 403/2010 (“OS 403/2010”) against P1 seeking pre-action discovery of documents. After pre-action discovery was ordered and documents disclosed in a list of documents in October 2011, HLF did not commence proceedings in Singapore. Instead, HLF sued the plaintiffs in New York vide Case No 12 Civ 6010 which was filed in the United States District Court for the Southern District of New York (“the New York Court”) on 6 August 2012 (“the NY Proceedings”).

HLF chose to sue in New York because of an ongoing US Class Action in New York (see [16] below). The main complaint in the NY Proceedings was in relation to fraud: HLF accused P5 of deceptively selling Pinnacle Notes that had been designed to fail for P5’s own benefit. In particular, P5 had designed the underlying synthetic collateralised debt obligations (CDOs) to fail, and P5 was positioned to profit when the Pinnacle Notes failed because of swap transactions entered into by its affiliate P4.

HLF alleges in the NY Proceedings that the Pinnacle Notes were linked to synthetic CDOs that were in turn tied to inherently risky companies. The Pinnacle Notes featured two layers of financial instruments bundled together with prominence allegedly given to one so as to obscure the nature and importance of the other. The “Reference Entities” mentioned above (at [8]), which HLF alleges were inherently risky companies, were tied to the underlying layer of financial instruments (ie, the synthetic CDOs). This was allegedly obscured by the first layer of financial instruments which had as its “Reference Entities”, and whose performance depended on, major corporations and sovereign funds with high credit ratings. When those risky “Reference Entities” of the underlying layer of financial instruments (mentioned above at [8]) failed, the original investment from the investors of the Pinnacle Notes moved to P4 pursuant to swap arrangements. By reason of this deception, the plaintiffs allegedly fraudulently misrepresented to HLF that the Pinnacle Notes constituted a safe conservative investment when they were not.

HLF alleges that this fraudulent misrepresentation led it to enter into the MDAA to sell the Pinnacle Notes to its Singapore-based customers. Besides the compensation of US$32m, HLF has sought punitive damages in the NY Proceedings.¹

In addition to the above, HLF also further claims in the NY Proceedings that, under New York law, the doctrine of “equitable subrogation” entitles it to assert legal claims that are sought by the Singapore investors in parallel proceedings in New York (see [16] below). There is no equivalent doctrine of equitable subrogation under Singapore law.

OS 798/2012 was filed on 22 August 2012 to, inter alia, restrain HLF from suing or continuing to prosecute proceedings whether in the US or elsewhere (save in Singapore) in relation to any claims concerning or arising out of the credit-link notes issued by P2, specifically Series 2, 3, 6, 7, 9 and 10 of the Pinnacle Notes. At the time of the hearing of OS 798/2012, there were no proceedings filed in Singapore.

The US Class Action

On 25 October 2010 (more than one and a half years prior to the commencement of the NY Proceedings), a group of 18 Singapore investors who bought Pinnacle Notes from distributors such as HLF (“the Singapore investors”) commenced a class action (Case No. 10 Civ 8086) in the New York Court alleging, inter alia, fraud against the plaintiffs (“the US Class Action”). The allegations were similar to those set out in [11] and [12] above (in fact, HLF based its claims on those of the Singapore investors in the US Class Action). In essence, the Singapore investors allege that the fraud of the plaintiffs led them to buy the Pinnacle Notes and caused them to suffer loss.

The New York Court had accepted that the US Class Action should be litigated in New York and New York was found to be the situs of the alleged fraud in the US Class Action. It is also significant that in the US Class Action, the plaintiffs had applied to the New York Court to dismiss the claims of the Singapore investors.

On 31 October 2011, Judge Leonard B Sand (“Judge Sand”) (who heard the motion to dismiss in Dandong, et al v Pinnacle Performance Limited, et al (10 Civ. 8086 (LBS) allowed the motion in part. Notably, the Singapore investors’ claims founded on fraud, fraudulent inducement, and breach of implied covenant of good faith and fair dealings were allowed to continue in New York. The plaintiffs tried to appeal against Judge Sand’s decision, but the Court of Appeal for the Second Circuit declined to consider the appeal.

The plaintiffs disagreed with Judge Sand’s findings. However, I am of the view that Judge Sand determined that New York had jurisdiction over the US Class Action by applying principles that were broadly similar to those that the Singapore courts would have applied.

Judge Sand disagreed with the plaintiffs that there were jurisdictional clauses in play that excluded litigation in New York. On the issue of forum non conveniens, Judge Sand also disagreed with the plaintiffs that the core allegations in the US Class Action concerned activities that occurred in Singapore. Judge Sand was aware that the Singapore investors’ claims must not be mere assertions and conclusions without basic supporting facts, and he was satisfied on the material available that the Singapore investors’ case against the plaintiffs met the requisite threshold. At p 4 of his Order dated 31 October 2011 (“the October Order”), he held: ²

On a motion to dismiss, a court reviewing a complaint will consider all material factual allegations as true and draw all reasonable inferences in favor of [the Singapore investors]. Lee v. Bankers Trust Co., 166 F.3d 540, 543 (2d Cir.1999). “To survive dismissal, the plaintiff must provide the grounds upon which his claims rests through ‘factual allegations sufficient to raise a right to relief above the speculative level.’” ATSI Commc’ns Inc. V. The Shar Fund, Ltd., 493 F.3d 87, 93 (2d Cir. 2007) (citing Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007)). “Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice.” Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949 (2009). Rather, [the Singapore investors’] complaint must include “enough facts to state a claim of relief that is plausible on its face.” Id. at 1940 (citing Twombly, 550 U.S. at 570). Plausibility, in turn, requires that the allegations in the complaint “raise a reasonable expectation that discovery will reveal evidence” in support of the claim. Twombly, 550...