Military Housing Financial Fraud Suit Advances, Moves to New York

SAN JOSE, Calif. (CN) – Finding she lacks jurisdiction over financial firms and advisers accused of bilking military housing projects out of hundreds of millions of dollars, a federal judge decided Thursday to transfer the case to New York instead of dismissing it for lack of jurisdiction.

“Denying transfer would require piecemeal litigation of the action in multiple fora,” U.S. District Judge Beth Labson Freeman wrote. “In contrast, the majority – and potentially all – of the defendants would be subject to suit in the [Southern District of New York].”

In August 2017, Monterey Bay Military Housing LLC and 17 other military housing projects sued Ambac Assurance Corporation, its managing director Chetan Marfatia, Jefferies Mortgage Finance and two related companies, along with Danny Ray, managing director of Jefferies and its predecessor GMAC.

The housing projects claim Ray used his position as financial adviser to get them to select project-financing bonds with higher interest rates, allowing Ray and his codefendants to reap undisclosed profits and charge exorbitant fees.

Ray and Marfatia allegedly instructed Standard and Poor’s (S&P) credit rating agency not to set unofficial “shadow” ratings for their bonds higher than “A,” effectively “rigging the rating system” and allowing them to charge higher fees and rates. The two financial advisers also convinced the projects to purchase unnecessary insurance for the bonds from defendant Ambac at inflated prices, according to the suit.

This all occurred despite Ray’s representation that he would use his “best efforts” to negotiate the most competitive market rates and efficient structure for bonds to finance housing projects, according to the plaintiffs.

Freeman rejected the defendants’ argument that they could not be sued for conduct that allegedly occurred from 2002 to 2012 because the statute of limitations expired. She found it too early in the litigation to decide whether or not the full nature of the alleged misconduct was concealed from the plaintiffs until 2016.

The plaintiffs say they did not discover the misconduct until learning in 2016 of Ray’s attempt to destroy more than 9,000 documents through discovery in a lawsuit brought by Ambac against some of the housing projects.

Freeman found she lacks jurisdiction over all but one defendant – Ambac – under the three-prong test for deciding if a court has jurisdiction over an entity. That test was established by the Ninth Circuit in the 2004 ruling, Schwarzenegger v. Fred Martin Motor Co.

 Instead of partially dismissing the suit due to lack of jurisdiction, Freeman found that in the interest of justice it would be better to reconsider Ambac’s prior motion to transfer the case to the Southern District of New York.

“Because New York is now the only potential forum where the action could be litigated against all, or a majority, of defendants, the court now concludes that the convenience of the parties favors transfer,” Freeman wrote.

Despite Freeman’s decision to advance the lawsuit, an attorney for defendant Ray said Friday he will continue pushing for the case to be dismissed once it is assigned to a new judge in the Southern District of New York.

“We look forward to demonstrating again why these baseless accusations against Mr. Ray have no merit on the law or on the facts, and should be dismissed in the interests of justice,” Ray’s attorney, Reed Brodsky, of Gibson, Dunn & Crutcher in New York, said by email.

Attorneys for the housing projects, Ambac, Jefferies and Marfatia did not immediately respond to requests for comment Friday.

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