Criterium Capital Funds B.V. v. Tremont (Bermuda) Ltd. (In re Kingate Mgmt. Ltd. Litig.), Docket No. 11–1397–cv.

• Citation: 784 F.3d 128
• Decision Date: 23 April 2015
• Docket Number: Docket No. 11–1397–cv.
• Parties: In re KINGATE MANAGEMENT LIMITED LITIGATION Criterium Capital Funds B.V., BBF Trust, Wall Street Securities, S.A., Banca Arner S.A., Alvaro Castillo, on behalf of themselves and all others similarly situated, Eithan Ephrati, Andbanc, Silvana Worldwide Corporation, BG Valores, S.A., Jaques Lamac, Nitkey Holdings Corporation, Plaintiff–Appellants, Lucien Geldzahler, Plaintiff–Consolidated Defendant–Appellant, v. Tremont (Bermuda) Limited, Graham H. Cook, John E. Epps, Sandra Manzke, FIM Advisers LLP, Charles Sebah, Keith R. Bish, Christopher Wetherhill, Michael G. Tannenbaum, Tremont Group Holdings, Incorporated, PricewaterhouseCoopers LLP, Defendant–Appellees, Kingate Management Limited, FIM (USA) Incorporated, Citi Hedge Fund Services Ltd., Defendant–Consolidated Defendant–Appellees, PricewaterhouseCoopers Bermuda, Carlo Grosso, FIM Limited, Federico M. Ceretti, Consolidated Defendant–Appellees, Bernard L. Madoff, Phillip A. Evans, Margaret Every, Shazieh Salahuddin, Johann Wong, Preston M. Davis, Bank of Bermuda Limited, Defendants, PricewaterhouseCoopers, Andorra Banc Agricol Reig S.A., on behalf of itself and on behalf of all others similarly situated, Consolidated Defendants.
• Court: United States Courts of Appeals. United States Court of Appeals (2nd Circuit)

784 F.3d 128

In re KINGATE MANAGEMENT LIMITED LITIGATION

Criterium Capital Funds B.V., BBF Trust, Wall Street Securities, S.A., Banca Arner S.A., Alvaro Castillo, on behalf of themselves and all others similarly situated, Eithan Ephrati, Andbanc, Silvana Worldwide Corporation, BG Valores, S.A., Jaques Lamac, Nitkey Holdings Corporation, Plaintiff–Appellants

Lucien Geldzahler, Plaintiff–Consolidated Defendant–Appellant

v.Tremont (Bermuda) Limited, Graham H. Cook, John E. Epps, Sandra Manzke, FIM Advisers LLP, Charles Sebah, Keith R. Bish, Christopher Wetherhill, Michael G. Tannenbaum, Tremont Group Holdings, Incorporated, PricewaterhouseCoopers LLP, Defendant–Appellees

Kingate Management Limited, FIM (USA) Incorporated, Citi Hedge Fund Services Ltd., Defendant–Consolidated Defendant–Appellees

PricewaterhouseCoopers Bermuda, Carlo Grosso, FIM Limited, Federico M. Ceretti, Consolidated Defendant–Appellees

Bernard L. Madoff, Phillip A. Evans, Margaret Every, Shazieh Salahuddin, Johann Wong, Preston M. Davis, Bank of Bermuda Limited, Defendants

PricewaterhouseCoopers, Andorra Banc Agricol Reig S.A., on behalf of itself and on behalf of all others similarly situated, Consolidated Defendants.

Docket No. 11–1397–cv.

United States Court of Appeals, Second Circuit.

Argued April 9, 2013.

Decided April 23, 2015.

David A. Barrett (S. Douglas Bunch, Steven J. Toll, Lisa M. Mezzetti, Daniel S. Sommers, Joshua S. Devore, Cohen Milstein Sellers & Toll PLLC, New York, N.Y.; David Boies, Boies, Schiller & Flexner LLP, Armonk, N.Y.; Stuart H. Singer, Carl E. Goldfarb, James Grippando, Boies, Schiller & Flexner LLP, Ft. Lauderdale, FL, on the brief), Boies, Schiller & Flexner LLP, New York, N.Y., for Plaintiff–Appellants.

Seth M. Schwartz, Skadden, Arps, Slate, Meagher & Flom LLP, New York, N.Y., for Defendant–Appellees Tremont (Bermuda) Limited and Tremont Group Holdings, Inc.

Howard J. Rubin (Bruce M. Ginsberg, on the brief), Davis & Gilbert LLP, New York, N.Y., for Defendant–Appellees Graham H. Cook, John E. Epps, and Charles D. Sebah.

Carmine D. Boccuzzi (David Y. Livshiz, on the brief) Cleary Gottlieb Steen & Hamilton LLP, New York, N.Y., for Defendant–Appellee Citi Hedge Fund Services, Ltd.

Sanford M. Litvack (Dennis H. Tracey, III, Lisa J. Fried, on the brief), Hogan Lovells U.S. LLP, New York, N.Y., for Defendant–Appellee PricewaterhouseCoopers Bermuda.

Jodi A. Kleinick (Barry G. Sher, Mor Wetzler, on the brief), Paul Hastings LLP, New York, N.Y., for Defendant–Appellees FIM Advisers LLP, FIM Limited, FIM (USA), Inc., Carlo Grosso, and Federico H. Ceretti.

John Han, Jonathan D. Cogan, Carrie A. Tendler, Kobre & Kim LLP, New York, N.Y., for Defendant–Appellee Sandra Manzke.

Peter R. Chaffetz, Charles J. Scibetta, Erin E. Valentine, Chaffetz Lindsey LLP, New York, N.Y., for Defendant–Appellees Kingate Management Limited and Christopher Wetherhill.

Laura Grossfield Birger, Cooley LLP, New York, N.Y., for Defendant–Appellee Michael Tannenbaum.

Michael S. Flynn, Michael P. Carroll, James H.R. Windels, Davis Polk & Wardwell LLP, New York, N.Y., for Defendant–Appellee PricewaterhouseCoopers LLP.

Before: KATZMANN, Chief Judge, LEVAL and HALL, Circuit Judges.

Opinion

LEVAL, Circuit Judge:

In this appeal, we confront a number of textual ambiguities as to the scope of the Securities Litigation Uniform Standards Act of 1998 (“SLUSA”), Pub.L. No. 105–353, § 101, 112 Stat. 3227 (1998), which bars the maintenance of certain state-law-based class actions alleging falsity¹ in connection with transactions in categories of securities that the Act identifies as “covered securities.” Plaintiffs appeal from the judgment of the United States District Court for the Southern District of New York (Batts, J. ), which dismissed their state-law class action claims as precluded by SLUSA, and denied leave to re-plead as futile.

The ambiguities of SLUSA that we confront in considering this appeal include, first, the relationship of the transaction in covered securities to the alleged false conduct, second, the relationship of the alleged false conduct to the state law theory of liability, and third, the relationship of the defendant to the alleged false conduct, necessary in each case to bring a state-law class action suit within the scope of SLUSA's prohibitions.

With respect to the first ambiguity regarding the relationship between the securities transaction and the false conduct, two court decisions made since this appeal was argued govern our consideration. First is the Supreme Court's ruling in Chadbourne & Parke LLP v. Troice, ––– U.S. ––––, 134 S.Ct. 1058, 188 L.Ed.2d 88 (2014) ; second, a panel of this court recently interpreted the Chadbourne decision in In re Herald, 753 F.3d 110 (2d Cir.2014) ( “Herald II ”). Under Herald II, we conclude that the alleged fraud in the instant case is “in connection with the purchase or sale of a covered security” and thus qualifies to bring the case within SLUSA's prohibition (assuming SLUSA's other necessary elements are met). 15 U.S.C. § 78bb(f)(1).

The second and third issues are complicated in this case by the numerous distinct state law theories of liability asserted in the Complaint. Our analysis of the statute leads us to the conclusions that: i) state law claims that do not depend on false conduct are not within the scope of SLUSA, even if the complaint includes peripheral, inessential mentions of false conduct; and ii) claims accusing the defendant of complicity in the false conduct that gives rise to liability are subject to SLUSA's prohibition, while claims of false conduct in which the defendant is not alleged to have had any complicity are not.

I. BACKGROUND

The operative Amended Consolidated Class Action Complaint (the “Complaint”),² filed May 18, 2010, following Plaintiffs' voluntary dismissal of their federal claims,³ asserts only claims under state law. It alleges the following facts.

Plaintiffs are individuals and entities, each of which purchased shares in Kingate Global Fund, Ltd. (“Kingate Global”) and/or Kingate Euro Fund, Ltd. (“Kingate Euro”) (collectively, the “Funds”) and continued to hold their shares until the exposure in December 2008 of the Ponzi scheme operated by Bernard L. Madoff and Bernard L. Madoff Investment Securities LLC (“BMIS”), a broker-dealer founded and run by Madoff. The Madoff Ponzi scheme resulted in the loss of the great majority of the Funds' assets. The Complaint asserts a class action on behalf of all shareholders in the Funds (with the exception of Defendants and certain affiliates of Defendants) as of the time Madoff's fraud was exposed.

The Funds are open-ended investment companies organized and operating in the British Virgin Islands. Defendants are persons and entities that served in roles affiliated with the Funds, including officers, directors, and managers of the Funds (the “Managers”), auditors (the “Auditors”), a consultant (the “Consultant”), and the Funds' administrator (“Administrator”). The names and roles of the defendants in connection with the Funds are set forth in the margin.⁴

Plaintiffs invested in the Funds by purchasing shares. It appears to be common ground in this appeal that the shares of the Funds are not “covered securities,” as defined by SLUSA, so that if the applicability of SLUSA depends on the plaintiffs' purchase of those shares, SLUSA cannot apply. The plaintiffs' expectations, however, based on the declared intentions of the Funds, was that the Funds would invest in common stock of Standard & Poors (“S & P”) 100 companies, listed on United States exchanges. The latter securities are “covered securities” under the terms of SLUSA.

The Funds operated as “feeder funds” for BMIS, meaning that the Funds delegated custody of the investments and all investment decisions and duties to Madoff and BMIS. Between March 1994 and December 10, 2008, Kingate Global gave BMIS $963.45 million to invest for its account. Between May 1, 2000, and December 10, 2008, Kingate Euro gave BMIS $767.44 million of its funds to invest for its account. During those periods, BMIS provided the Funds with periodic account statements. The statements purported to show purchases and sales for the Funds' accounts of “covered securities”—common stock of major companies included in the S & P 100 Index, and of options on the S & P 100 Index. According to the account statements, those investments produced a continuous course of very substantial profits and growth, so that by November 30, 2008, the Funds' investments with BMIS had grown to a combined value of over $3 billion.

As was revealed in December 2008, however, the investments made by BMIS on behalf of the Funds turned out to be entirely fictitious. BMIS had made no purchases or sales of securities, and there were no profits or growth in its customers' accounts. Madoff had used the assets invested through BMIS either for his personal benefit or for distribution to account holders who demanded withdrawal of their investments. The Funds' investments through BMIS, which represented substantially all of the Funds' assets, were lost to Madoff's fraud.

Prior to the exposure of Madoff's scheme, the Funds, and the defendants speaking on their behalf, represented to their investors that the Funds' assets were being invested by an unnamed investment advisor, who was realizing substantial growth for the accounts of the Funds, using a trading strategy that involved purchasing S & P 100 stocks while concurrently selling call options and buying put options on the S & P 100 Index.

According to the allegations of the Complaint, in statements to investors, the Managers undertook obligations to evaluate and monitor the investment advisor, and the Auditors undertook obligations to audit the Funds' financial statements in accordance with established accounting principles. Each falsely represented to the Funds' investors from time to time (according to the allegations of the Complaint) that they had performed those obligations, when in fact they had not. The...