843 F.3d 561 (2nd Cir. 2016), 15-3124, Trustees of Upstate New York Engineers Pension Fund v. Ivy Asset Management

Docket Nº:15-3124
Citation:843 F.3d 561
Opinion Judge:DENNIS JACOBS, Circuit Judge:
Party Name:TRUSTEES OF THE UPSTATE NEW YORK ENGINEERS PENSION FUND, Plaintiff-Appellant, v. IVY ASSET MANAGEMENT, LAWRENCE SIMON, HOWARD WOHL, and BANK OF NEW YORK MELLON CORPORATION, Defendants-Appellees
Attorney:LOUIS P. MALONE III, O'Donoghue & O'Donoghue LLP, Washington, D.C. (Jennifer R. Simon; and James L. Linsey, Linsey Law Firm, PLLC, New York, NY, on the brief), for Plaintiff-Appellant. LEWIS J. LIMAN (Jeffrey A. Rosenthal, on the brief), Cleary Gottlieb Steen & Hamilton LLP, New York, NY, for Def...
Judge Panel:Before: KEARSE, JACOBS, and POOLER, Circuit Judges.
Case Date:December 08, 2016
Court:United States Courts of Appeals, Court of Appeals for the Second Circuit
SUMMARY

Plaintiffs, trustees of an Employee Retirement Income Security Act (ERISA), 29 U.S.C. 1001 et seq., pension fund, filed suit against its investment manager and principals alleging that defendants knew by 1998 that investing with Bernard L. Madoff Investment Securities LLC (BLMIS) was imprudent; that these defendants breached their fiduciary duty by failing to warn the fund of this fact; that if... (see full summary)

 
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Page 561

843 F.3d 561 (2nd Cir. 2016)

TRUSTEES OF THE UPSTATE NEW YORK ENGINEERS PENSION FUND, Plaintiff-Appellant,

v.

IVY ASSET MANAGEMENT, LAWRENCE SIMON, HOWARD WOHL, and BANK OF NEW YORK MELLON CORPORATION, Defendants-Appellees

15-3124

United States Court of Appeals, Second Circuit

December 8, 2016

Argued October 19, 2016

The Board of Trustees of the Upstate New York Engineers Pension Fund sues the fund's investment manager, alleging breach of fiduciary duty in failing to advise the fund in 1998 that it had become imprudent to continue as a customer of Bernard L. Madoff Investment Securities LLC. The Trustees also sue Bank of New York Mellon Corporation, alleging that it knowingly participated in the fiduciary breach. The United States District Court for the Southern District of New York (Gardephe, J.) dismissed the Trustees' complaint for failure to state a claim and for failure to allege an actual injury sufficient to establish Article III standing.

Affirmed.

LOUIS P. MALONE III, O'Donoghue & O'Donoghue LLP, Washington, D.C. (Jennifer R. Simon; and James L. Linsey, Linsey Law Firm, PLLC, New York, NY, on the brief), for Plaintiff-Appellant.

LEWIS J. LIMAN (Jeffrey A. Rosenthal, on the brief), Cleary Gottlieb Steen & Hamilton LLP, New York, NY, for Defendants-Appellees.

Before: KEARSE, JACOBS, and POOLER, Circuit Judges.

OPINION

DENNIS JACOBS, Circuit Judge:

An ERISA pension fund, by its trustees, sues its investment manager (and principals), alleging: that these defendants knew by 1998 that investing with Bernard L. Madoff Investment Securities LLC (" BLMIS" ) was imprudent; that these defendants breached their fiduciary duty by failing to warn the fund of this fact; that if warned, the fund would have withdrawn the full sum appearing on its 1998 BLMIS account statements; and that prudent alternative investment of that sum would have earned more than the fund's actual net withdrawals from its BLMIS account between 1999 and 2008. The trustees seek to obtain the difference by way of damages, among other remedies. The trustees also sue Bank of New York Mellon Corporation, which acquired the investment manager in 2000, alleging that it knowingly participated as a non-fiduciary in the fiduciary breach. They appeal from a judgment of the United States District Court for the Southern District of New York (Gardephe, J.), dismissing their complaint for failure to state a claim pursuant to Federal Rule of Civil Procedure 12(b)(6) and for failure to allege an actual injury sufficient to establish Article III standing pursuant to Federal Rule of Civil Procedure 12(b)(1).

I

Unless otherwise noted, all facts are taken from the first amended complaint (the " complaint" ).

In 1990, Ivy Asset Management (" Ivy" ) agreed with the Trustees of the Upstate New York Engineers Pension Fund (the " Plan" ) to serve as an investment manager and provide advice in the investment of Plan assets. Ivy, which was formed and run by defendants Lawrence Simon and Howard Wohl, continued in this role until 2009. The Plan paid Ivy an annual " basic fee" as well as a " performance fee" equal to a percentage of investment profits above a target threshold. App'x 101, 142. Guided by Ivy, the Trustees invested a portion of Plan assets with BLMIS (Bernie Madoff's investment advisory business) starting in 1990 and continuing until December 2008, when the Madoff Ponzi scheme was exposed.

As this court well knows, BLMIS conducted no actual securities or options trading on behalf of its customers. Instead, BLMIS deposited customer investments into a single commingled checking account and, for years, fabricated customer statements to show fictitious securities trading activity and returns ranging between 10 and 17 percent annually. When customers sought to withdraw money from their accounts, including withdrawals of the fictitious profits that BLMIS had attributed to them, BLMIS sent them cash from the commingled checking account.

Picard v. Ida Fishman Revocable Tr. (In re Bernard L. Madoff Inv. Sec. LLC), 773 F.3d 411, 415 (2d Cir. 2014).

Under the Employee Retirement Income Security Act (" ERISA" ), 29 U.S.C. § 1001 et seq., Ivy, Simon, and Wohl owed fiduciary duties to the Plan. We start from the allegation that they breached these duties beginning in December 1998 by concealing their well-founded belief that investing with BLMIS was imprudent. It is not alleged that Ivy, Simon, or Wohl knew that Madoff was operating a Ponzi scheme, only that they knew that his investment strategy was incoherent and his representations regarding his supposed trades were inconsistent with publicly available information. In 1998, Ivy expressed general concerns about Madoff's operations and sought to limit the Plan's investment with BLMIS, but it did not advise the Trustees to get out.

Ivy, Simon, and Wohl allegedly concealed their doubts about Madoff " so as to maintain [Ivy's] assets under management and receive the fees generated by these assets." App'x 71. Performance fees linked to the Plan's BLMIS investment totaled $1.8 million after December 1998.

The chart below summarizes the Plan's BLMIS investments and withdrawals from the initial date.1 As the chart reflects, the Plan's withdrawals exceeded investments beginning in 2002. By December 2005, after which date the Plan made no further investments or withdrawals, the Plan had withdrawn nearly $33 million more than it had invested.

Date Event Net Investment/Profit
1990 - May 1997 Invested $13,085,201 $13,085,201 net investment
June 1997 Withdrew $359,943 $12,725,258 net investment
March 1998 Withdrew $7,000,000 $5,725,258 net investment
January 1999 Invested $2,300,000 $8,025,258 net investment
April 1999 Invested $4,000,000 $12,025,258 net investment
March 2000 Withdrew $7,000,000 $5,025,258 net investment
September 2000 Withdrew $5,000,000 $25,258 net investment
March 2002 Withdrew $6,000,000 $5,974,742 net profit
December 2002 Withdrew $3,000,000 $8,974,742 net profit
...

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