1 STATE OF NEW YORK SUPREME COURT : COUNTY OF ERIE M&T BANK CORPORATION, Plaintiff v. Index No. GEMSTONE CDO VII, LTD.; GEMSTONE CDO VII CORP.; DEUTSCHE BANK SECURITIES, INC.; DEUTSCHE BANK TRUST COMPANY AMERICAS; DEUTSCHE BANK AG; HBK INVESTMENTS, LP; HBK PARTNERS II LP; and HBK MANAGEMENT LLC, Defendants. COMPLAINT M&T BANK CORPORATION, by its attorneys, Hodgson Russ LLP and Kornstein Veisz Wexler & Pollard, LLP, alleges for its complaint: Parties 1. M&T Bank Corporation ( M&T ) is a New York corporation with its principal office at One M&T Plaza, Buffalo, New York Defendant Gemstone CDO VII, Ltd. ( Gemstone Ltd. ) is a Cayman Islands limited partnership with its principal office at c/o Deutsche Bank (Cayman), Ltd., P.O. Box 1984, Grand Cayman KY Gemstone Ltd. is the issuer of the notes sold to M&T which are the subject of this action (the Gemstone VII notes ). 3. Defendant Gemstone CDO VII Corp. ( Gemstone Corp. ) is a Delaware corporation with its principal office at c/o Donald Puglisi, 850 Liberty Avenue, Suite 204,
2 - 2 - Newark, Delaware Gemstone Corp. is the co-issuer of the Gemstone VII notes. 4. Deutsche Bank Trust Company Americas ( Deutsche Bank Trust ) is a New York banking corporation with its principal office at 60 Wall Street, New York, New York. Deutsche Bank Trust acted as trustee of the trust formed to hold and administer the collateral underlying the Gemstone VII notes (the Gemstone Trust ). 5. Defendant Deutsche Bank Securities, Inc. ( DBSI ) is a Delaware corporation with its principal office at 60 Wall Street, New York, New York. DBSI is a registered broker-dealer, and it was the direct seller to M&T of the Gemstone VII notes. DBSI is the owner of a Class A-1b note. The Class A-1b notes are referred to in the Gemstone VII offering circular and in the indenture for the Gemstone Trust as the Controlling Class. The Controlling Class noteholders have rights superior to M&T, including higher priority to interest and principal and rights to determine whether the Gemstone Trust collateral is liquidated under certain circumstances. 6. Deutsche Bank AG is a German corporation with an office at 60 Wall Street, New York, New York. Deutsche Bank AG acted as counterparty on the credit default swaps which constituted $600 million of the collateral for the Gemstone VII notes. 7. HBK Investments, LP ( HBK ) is a Delaware limited partnership with its principal office at 300 Crescent Court, Dallas, Texas 75201, and with an office at 350 Park Avenue, New York, New York. HBK is the collateral manager for the Gemstone VII trust. HBK is also the owner of the $18.7 million Class E note and (together with DBSI) $400 million in Class A-1b notes issued by the Gemstone Ltd. and Gemstone Corp.
3 HBK Partners II LP ( HBK Partners ) is a Delaware limited partnership with its principal office at 300 Crescent Court, Dallas, Texas HBK Partners is a general partner of HBK. 9. HBK Management LLC ( HBK Management ) is a Delaware limited liability company with its principal office at 300 Crescent Court, Dallas, Texas HBK Management is a general partner of HBK Partners. Summary of this Action 10. This action seeks recovery of more than $82 million of losses suffered by M&T as a result of a fraud and other wrongful conduct by DBSI, HBK, and their affiliates. Between early 2004 and 2007, DBSI and HBK marketed several series of notes known generically as collateralized debt obligations ( CDOs ), primarily under the name Gemstone, representing that these notes were safe, secure, and nearly risk-free. On February 21, 2007, DBSI sold to M&T two Gemstone VII notes, each due December 12, 2045: (1) a Class A-2 note in the amount of $42 million, which was rated AAA by Standard & Poor s ( S&P ) and which paid interest at the annual rate of 1-month LIBOR plus.47% (initially 5.82%); and (2) a Class B note in the amount of $40 million, which was rated AA by S&P and paid interest at the annual rate of 1-month LIBOR plus.68% (initially 6.03%). On February 21, 2007, 30-day U.S. Treasury bills, which were essentially risk-free, paid 5.253% annual interest; 30-day commercial paper from a high-grade corporation such as General Electric paid 5.23% annual interest and 1- month LIBOR, which is generally assumed to represent AA-rated bank debt, paid 5.32% annual interest. The Gemstone VII notes purchased by M&T were marketed by defendants as providing a higher interest rate than Treasury bills or high-grade corporate bonds, with a risk level lower
4 - 4 - than high-grade bonds and approaching the risk-free level of Treasury bills. 11. While the representation that the Gemstone VII notes were safe, secure, and nearly risk-free may or may not have been true for earlier Gemstone CDOs, it was entirely false for the Gemstone VII notes sold to M&T in February By February 2007, DBSI and HBK had dramatically reduced the underwriting standards and due diligence performed in selecting and assembling the collateral underlying the notes they marketed. This reduction in underwriting and due diligence standards was not disclosed to M&T. As a result of their reduced underwriting and due diligence standards, defendants were able to structure the Gemstone VII CDO with impaired and non-conforming collateral, directly contrary to their representations that the Gemstone VII notes were a safe, secure, and nearly risk-free investment. 12. Defendants marketed the Gemstone CDO offerings, including Gemstone VII, by emphasizing the ratings awarded to the Gemstone notes by S&P and Moody s the two leading debt rating companies. M&T s Class A-2 note was rated AAA by S&P and Aaa by Moody s. These are the highest ratings for safety and ability to repay. M&T s Class B note was rated AA by S&P and Aa2 by Moody s. These are the second highest ratings for safety and ability to repay. Defendants knew that these ratings were misleading and inflated, because defendants had withheld from the rating agencies material information about the quality and default problems defendants were experiencing with subprime collateral under their control in late 2006 and early Upon information and belief, defendants also withheld from the rating agencies information about the extent and scope of fraud and other problems with their subprime loan-backed portfolios and that subprime originators were refusing to stand behind their contractual warranties relating to such loans. Upon information and belief, if this information
5 - 5 - had been disclosed to the rating agencies, the notes purchased by M&T would have received lower ratings, and M&T would not have purchased them. 13. Among the other material misrepresentations made by defendants in marketing the Gemstone VII notes to M&T were: a. The Gemstone VII notes were sold as safe, secure, and nearly riskfree investments, similar to (but safer than) high-grade corporate bonds. In fact, defendants were aware, and failed to disclose, that the collateral underlying the Gemstone VII notes was impaired and rapidly deteriorating at the time the notes were offered for sale. b. Defendants represented that they applied stringent underwriting standards in assembling and selecting the subprime mortgage collateral underlying the Gemstone VII notes and that they performed extensive, detailed, and state-of-the-art loan level and market due diligence in assembling and selecting that collateral, utilizing proprietary analytical systems and tools. Defendants marketed these features as assuring the safety and strong performance of the Gemstone VII notes. In fact, defendants knew that their underwriting standards and due diligence efforts had declined substantially from the earlier Gemstone offerings and that, as a result, the collateral underlying the Gemstone VII notes was impaired and deteriorating. c. Defendants represented that HBK possessed unique and
6 - 6 - extraordinary skills as a collateral manager, which ensured the high quality of the Gemstone VII notes and the strong performance of its collateral. d. Defendants represented that the ratings assigned to the Gemstone notes by independent ratings agencies (S&P s and Moody s) were objective and reliable indicators that the Gemstone notes had the highest degree of safety. The Class A-2 note purchased by M&T was rated AAA by S&P and Aaa by Moody s. The Class B note purchased by M&T was rated AA by S&P and Aa2 by Moody s. In soliciting M&T, defendants emphasized that these ratings indicated that the notes M&T purchased were high-quality, lowrisk investments and that the capacity of the issuer to meet all commitments under the notes was extremely strong and/or very strong. In fact, defendants actually negotiated the structure of the Gemstone VII offering with the rating agencies with a specific view toward obtaining particular ratings for classes of notes for marketing purposes. Defendants knew that the ratings they obtained for the Gemstone VII notes were fraudulent and false, overstated the safety and security and understated the risk of the notes, and did not accurately reflect the impaired and deteriorating quality of the collateral underlying the Gemstone VII notes. e. Defendants represented that the structure of the Gemstone VII
7 - 7 - CDO provided a high degree of safety, due to the overcollateralization and tranching of the CDO. Overcollateralization means that there was more collateral than necessary to pay the senior and mezzanine-level notes. Tranching refers to the fact that the Gemstone VII notes were organized by level of seniority (or tranche ). Because the claims to interest and principal of the less senior notes were subordinated to the claims of the more senior notes, any losses would be borne entirely by the less senior notes until their investment was exhausted. This structure was marketed as conferring a highdegree of safety on the more senior notes (such as the notes purchased by M&T). 14. In fact, all of these representations were false. The structure of the Gemstone VII CDO did not ensure its safety; that structure did not and could not protect it from massive losses. The ratings given the Gemstone VII notes by S&P and Moody s were not indicative of safety; defendants had misrepresented the collateral underlying the notes to the ratings agencies and the Gemstone VII notes did not objectively earn the ratings that defendants touted in their marketing. Defendants representations that HBK had conducted extensive due diligence to eliminate problem loans was simply false; HBK was aware that there was a substantial percentage of non-conforming mortgages underlying the Gemstone VII collateral. Finally, the representations that HBK s alleged management skills conferred safety on the Gemstone VII notes was false; HBK and DBSI knowingly and intentionally included low-quality and unstable collateral in the Gemstone VII offering for the purpose of closing the offering and
8 - 8 - earning fees. Background of the Subprime Mortgage Market and CDOs FACTS RELEVANT TO M&T S CLAIMS 15. Prior to 2003, the subprime sector of the mortgage market was relatively small, consisting of only 8% of originated mortgages. In 2003, that figure rose to 18%. In 2005 and 2006, subprime mortgages consisted of 20% of all originated mortgages. By 2007, there was $1.3 trillion in outstanding subprime mortgage debt, $600 billion of which was originated in Prior to 2002, subprime mortgage-backed securitizations involved the issuance of bonds backed by subprime mortgages or the sale of interests in trusts that held subprime mortgages. In 2002, it became more common for the financial services industry to package subprime mortgages into CDOs. CDOs are entities that issue debt securities (often notes) collateralized by other debt instruments (typically bonds, loans, or other financial obligations) which generate a stream of cash flows in the form of interest payments, as well as a return of principal. The cash flow from the collateral is used to repay the notes issued by the CDO. The purchase of securities issued by the CDO is essentially a purchase of a right to participate in the cash flows from the collateral portfolio owned by the CDO. 17. CDOs are distinguished from simpler mortgage-backed securities, such as bonds, by a number of features. First, CDOs typically own a large number of separate mortgage backed bonds; the Gemstone VII CDO, for example, owns approximately 105 mortgage or loanbacked bonds. CDO promoters marketed this as an advantage, claiming that the number of different bonds comprising the collateral provides diversification, that there is little default
9 - 9 - correlation among the bonds, and that this contributes to safety. Second, CDOs are structured into different levels (or tranches ) of risk. Investors who buy debt in the bottom tranche receive higher interest, but their interest is the first to be impaired on default. The rights of the lowerlevel tranches to receive interest payments are subordinate to the rights of the higher-level tranches to receive their interest payments. Investors who purchase notes from the higher tranches are paid less interest, but in return receive a higher degree of safety. In essence, the principal and interest that should be available to pay the lower tranches if the collateral performs as projected acts as back-up collateral for the higher tranches. This is referred to as overcollateralization, and it acts as credit enhancement supporting the higher tranches. This structure allowed CDO issuers to sell notes that were AAA rated to investors seeking a high degree of safety and to sell notes that were rated below investment grade to investors seeking high returns. 18. While subprime mortgage originations rose dramatically from 2001 through 2005 (from $120 billion to over $625 billion), the demand for subprime mortgages as collateral for securitizations grew even more quickly. The investment banking industry had created flexible debt products that it marketed to fill the needs of institutional investors with a wide range of investment goals, from those seeking relatively high returns with moderate risk to those seeking a high degree of safety with more moderate returns. The AAA and AA rated tranches (which accounted for far more than half of the value in a typical subprime CDO offering) were marketed as alternatives to high-grade corporate bonds and other fixed-income securities, offering equal or greater safety and modestly higher returns. 19. The demand for subprime mortgage-backed bonds (both for direct sale and
10 to serve as collateral in CDOs) was so strong that by 2004 it was common for more than half of the collateral underlying a CDO to be made up of derivatives known as credit default swaps, the performance of which mirrored an identified group of subprime mortgage-backed bonds (known as Reference Obligations ). A credit default swap is a securities derivative under which one party sells credit insurance to another (known as the credit default swap counterparty ). In return for a premium or stream of premium payments, the seller of the credit default swap agrees to pay the counterparty any shortfall in interest or principal payments that occurs as a result of any default in payments under the Reference Obligation. While the purchase of a credit default swap could be part of a plan to hedge the risk of default on a bond owned by the counterparty, the counterparty need not own the Reference Obligation and could be purchasing the credit protection purely as a speculative investment strategy. 20. The premiums received in return for selling credit default swaps become additional collateral that are reinvested by the CDO to generate increased cash flow to pay interest and principal pursuant to the CDO s terms for each tranche. The effect of selling credit default swaps is to create virtual investments in the subprime mortgage-backed bonds identified as Reference Obligations. There was a secondary motivation for utilizing credit default swaps in CDOs. It made it easier to assemble the required collateral for closing the CDO offering. For example, if 50% of the CDO collateral was credit default swaps, then the value of actual cash bonds to be purchased was reduced by half. 21. In retrospect, the widespread use of credit default swaps in place of actual cash bonds (which were in short supply) was indicative of an industry that was growing recklessly and speculatively, without proper controls. Out of the approximately $1.1 billion
11 raised in the Gemstone VII offering, $600 million was committed as potential security for credit default swaps. M&T s Investment Decision 22. In early 2007, M&T s Treasury Department began investigating the possibility of investing in mortgage-backed CDOs. M&T contacted a number of broker-dealers and gathered information on several different CDO offerings. One of the broker-dealers was DBSI, which had a long-standing relationship with M&T. Sean Whelan, a salesman at DBSI, provided M&T with general information regarding the Gemstone VII CDO (all positive in nature). 23. The Gemstone VII CDO comprises two entities: Gemstone Ltd. (the Issuer ) and Gemstone Corp. (the Co-Issuer ). All shares of the Issuer are owned by a Deutsche Bank Cayman Islands affiliate. All shares of the Co-Issuer are owned by the Issuer. Thus, the Issuers of the Gemstone VII notes are Deutsche Bank affiliates. The Gemstone VII notes were sold by the Issuers to DBSI for re-sale to investors like M&T. Accordingly, Mr. Whelan was selling a deal that was essentially a proprietary product formed and owned by Deutsche Bank and its affiliates. 24. In early February 2007, M&T met with HBK Investments at its 350 Park Avenue offices to discuss the Gemstone VII CDO. At that meeting or shortly afterward, M&T was provided with a copy of the preliminary offering circular and a document entitled: Gemstone CDO VII Ltd. Debt Investor Presentation, dated February 8, These documents, which are collectively referred to as the Gemstone offering materials, contain numerous representations about the structure of the Gemstone VII CDO and the risk level
12 associated with each of its tranches. 25. M&T placed its order for $82 million in Gemstone VII notes on February 21, In deciding to invest in the Gemstone VII CDO, M&T relied on the Gemstone offering materials, the ratings of the Gemstone VII notes, and oral representations by DBSI and HBK Investments. M&T purchased a $42 million Class A-2 note (AAA rated) and a $40 million Class B note (AA rated). 26. According to S&P, a AAA rating is defined as follows: An obligation rated AAA has the highest rating assigned by Standard & Poor s. The obligor s capacity to meets its financial commitment on the obligation is extremely strong. S&P defines a AA rating as follows: An obligation rated AA differs from the highest-rated obligations only to a small degree. The obligor s capacity to meet its financial commitment on the obligation is very strong. 27. S&P represents that its long-term issue credit ratings are based on: (1) likelihood of payment capacity and willingness of the obligor to meets its financial commitment on an obligation in accordance with the terms of the obligation; (2) nature of and provisions of the obligation; and (3) protection afforded by, and relative position of, the obligation in the event of bankruptcy. S&P further represents that issue ratings are an assessment of default risk, but may incorporate an assessment of relative seniority or ultimate recovery in the event of a default. Finally, in explaining its ratings, S&P indicates that an issue credit rating is a current opinion of the creditworthiness of an obligor with respect to a specific
13 financial obligation, a specific class of financial obligations, or a specific financial program.... It takes into consideration the creditworthiness of guarantors, insurers, or other forms of credit enhancement on the obligation and takes into account the currency in which the obligation is denominated. The opinion evaluates the obligor s capacity and willingness to meet its financial commitments as they come due, and may assess terms, such as collateral security and subordination, which could effect ultimate payment in the event of a default. 28. The AAA and AA ratings were major considerations in M&T s determination to invest in the Gemstone VII notes, because they indicated that the notes were safe, stable, and nearly risk-free investments. DBSI and HBK represented, expressly and/or impliedly, that the ratings were accurate and based on access by the rating agencies to the Gemstone VII financial information, including information about the collateral portfolio, and that all material information was provided to the rating agencies. In marketing the Gemstone VII notes based substantially on their S&P and Moody s ratings, DBSI, HBK, and the Issuers were representing that those ratings were accurate and were based on complete information. 29. This is further supported by the fact that the rating agencies were directly involved in the process of structuring the Gemstone series of CDOs. An issuer seeking an S&P or Moody s rating provides a preliminary deal structure to the ratings agencies, advising which rating it seeks to procure for each tranche. In response, the ratings agencies will provide feedback, indicating that additional credit support is (or is not) necessary to obtain the desired rating. Representations in the Gemstone VII Offering Circular 30. The Gemstone VII offering circular (the GOC ) states that the net
14 proceeds from the issuance and sale of the Notes... will be used by the Issuer to purchase a diversified portfolio of interests in Underlying Assets having the characteristics described herein. GOC at 106. The offering circular describes the Underlying Assets as Asset-Backed Securities (e.g., bonds) and Synthetic Securities, consisting of credit default swaps. GOC at 109, 122. With respect to Synthetic Securities, the S&P or Moody s rating shall be the rating of the underlying Reference Obligation. GOC at The offering circular further states that there are certain Collateral Quality Tests that will be used to establish that the characteristics of the Issuer s portfolio on the Closing Date satisfy certain threshold levels. There are six Collateral Quality Tests, four of which rely upon S&P and Moody s ratings for the Underlying Assets. GOC at The offering circular also describes various overcollateralization tests, which measure the excess value of the collateral supporting each of the notes over the outstanding principal balance of the notes; the greater the excess, the safer the notes. M&T purchased Class A-2 Notes and Class B Notes. The Class A/B overcollaterization test requires that the Net Outstanding Underlying Asset Balance divided by the aggregate outstanding principal amount of the Class A and Class B notes be at least %. GOC at 72. As of March 31, 2008, the Class A/B overcollateralization ratio was 70.09% over 40% below the required overcollateralization value. 32. The calculation of the Net Outstanding Underlying Asset Balance is reliant upon S&P and Moody s ratings for the underlying asset-backed securities or Reference Obligations. GOC at For example, Underlying Assets with an S&P rating of B+, B, or B- are valued at 80 percent of their actual aggregate principal/notional balance. Underlying
15 Assets rated below B- are valued at 70 percent of their actual aggregate principal/notional balance. If the portion of Underlying Assets rated BB+, BB, or BB- exceeds 8.6 percent of the portfolio, then the aggregate principal/notional balance of such assets shall be deemed to be equal to 90 percent of the actual aggregate principal/notional balance. GOC at 67. The offering circular states that the S&P and Moody s ratings of the Class A-2 notes and Class B notes purchased by M&T would be AAA/Aaa and at least AA/Aa2, respectively. GOC at Thus, taken in its entirety, the offering circular makes clear that the Gemstone VII notes were marketed with an overriding emphasis on the S&P and Moody s ratings of the notes and the representations of safety and low risk conveyed by those ratings. Representations in the Gemstone CDO Debt Investor Presentation 34. The February 8, 2007 Gemstone CDO Debt Investor Presentation ( DIP ) contains a number of material representations. Some of these are set forth below. HBK is an experienced CDO manager with a strong alignment of economic interest with investors. DIP at 5 (emphasis added). HBK represented to M&T that it selected the collateral underlying the Gemstone VII CDO in three ways: (1) loans were screened, purchased from originators, and packaged into pools that were securitized in the form of bonds by investment banks working with HBK (such as Deutsche Bank); (2) HBK purchased new issue bonds after extensive loan-level due diligence; and (3) HBK purchased existing bonds on the secondary market. DIP at HBK s investment process integrates expertise in capital markets, structural analysis, collateral and loan-level analysis, due diligence, and in-house surveillance. HBK is seen as not as trader, but as a vigilant investor that maximizes value through intensive analysis and surveillance. Id. (emphasis added). Structured products [like the Gemstone VII CDO] exhibit relatively stable performance and low default history.... Structured products
16 [like the Gemstone VII CDO] have historically priced and continue to price wider than similarly rated due to liquidity and complexity premium that can be arbitraged through buy-and-hold cash flow CDO structure. DIP at 5. This is a statement that CDO products like Gemstone VII deliver higher returns at lower risk. Page 14 of the DIP contains a chart entitled Breakeven Analysis. It indicates that the cashflow waterfall of the Gemstone VII CDO produces enough excess interest to withstand cumulative losses of $517 million (47% of the original collateral balance) without any impact on interest or principal payments under the M&T notes. This represents that the notes were safe and secure investments. HBK s Structured Products Group is one of the leading purchasers and long-term investors in credit sensitive mortgages... HBK s investment model utilizes proprietary default, prepay, and severity loan level models to make investments in the residential market.... HBK has retained 100% of the equity from CDO transactions resulting in strong alignment of interest between HBK and investors. DIP at 23 (emphasis added). HBK focus[es] on [the] new issue market and purchases loans directly from originators. DIP at 29. HBK analyze[s] originators for underwriting consistency and [to] monitor changes to the competitive landscape. DIP at 29. HBK conduct[s] due diligence of underlying loan collateral to formulate investment assumptions, and it develops loan level models, with delinquency and default forecasts, loss severity forecasts, and prepayment forecasts. DIP at 30 (emphasis added). HBK conducts loan level due diligence and analysis (DIP at 32), and HBK aggressively pursues exit strategies when investments underperform, especially where fraud is a factor (DIP at 31) (emphasis added). HBK monitors collateral performance and measures it to original and subsequent default on loss assumptions. Id. This represents that HBK will protect noteholders against originator and mortgagor fraud. HBK performs detailed ongoing due diligence, monitoring, and surveillance, together with analysis of the collateral to identify potential losses and to mitigate losses, all using proprietary analytical systems. DIP at HBK s proprietary Default/Prepay and Severity MSA-level model allows for predictive power of future deal performance.... HBK is able to pick up on trends before they adversely impact the CDO. DIP at 41 (emphasis added).
17 HBK works with dealers and originators to customize pools by kicking out problem loans. DIP at 41 (emphasis added). Because all whole loan packages and every primary deal issued in the market is analyzed, in addition to our own loan level surveillance systems, HBK is able to pick up on trends before they adversely impact the CDO. DIP at 41 (emphasis added). Oral Representations by DBSI and HBK 35. In conversations with M&T beginning in January 2007, DBSI salesman Sean Whelan touted the high quality of the Gemstone VII CDO and its management team, indicating that it was far superior to any other available CDO. Mr. Whelan also represented that HBK was an extraordinarily experienced purchaser of credit instruments, that HBK provided extremely high quality and low-risk credit management, that HBK had its own money in the Gemstone VII deal and that this protected M&T, and that the Gemstone VII collateral was very clean, i.e., of high quality and safety. 36. Mr. Whelan also made the following representations to M&T: a. In a February 6, 2007 conversation, Mr. Whelan represented that HBK does constant maintenance and surveillance on the market and makes numerous technological investments in its collateral evaluation and monitoring processes; that investing in Gemstone VII was like a layup... it would ve been my number 1 pick, and we re happy to be doing a deal for him. b. In a February 7, 2007 phone call with M&T, Mr. Whelan explained the structure of Gemstone VII and said it will go extremely well.
18 c. In a February 13, 2007 phone call with M&T, Mr. Whelan stated that HBK... wouldn t buy stuff that didn t have good interest rate cap protection and the underlying structures in these bonds are built to withstand adverse conditions. d. In a February 14, 2007 phone call with M&T, Mr. Whelan assures M&T that HBK understands where the market is, and he describes the Gemstone VII deal as being in the upper end of good assets. e. In a February 15, 2007 phone call with M&T, Mr. Whelan described the Gemstone VII deal as having no interest rate risk and no derivative risk, and generally low risk. f. In a February 20, 2007 phone call with M&T, Mr. Whelan states that the Gemstone VII deal has $10 million of Class B notes left to sell, but the AAA mezz level is two times over[sold] and fully rock solid. 37. On February 21, 2007, M&T purchased $82 million of Gemstone VII notes, in reliance on Whelan s representations, the representations in the Gemstone offering materials, the AAA/AA ratings of the notes, and the other representations concerning the notes made by defendants. On March 15, 2007, the Gemstone VII offering closed and the trades pursuant to which M&T purchased its Gemstone VII notes settled.