Anwar v. Fairfield Greenwich Ltd.

• Decision Date: 29 July 2010
• Docket Number: No. 09 Civ. 0118(VM),09 Civ. 0118(VM)
• Citation: 728 F.Supp.2d 354
• Parties: Pasha S. ANWAR, et al., Plaintiffs, v. FAIRFIELD GREENWICH LIMITED, et al., Defendants.
• Court: U.S. District Court — Southern District of New York

728 F.Supp.2d 354

Pasha S. ANWAR, et al., Plaintiffs,

v.FAIRFIELD GREENWICH LIMITED, et al., Defendants.

No. 09 Civ. 0118(VM).

United States District Court, S.D. New York.

July 29, 2010.

David A. Barrett, Boies, Schiller & Flexner, LLP, Christopher Lovell, Victor E. Stewart, Jody Krisiloff, Lovell Stewart Halebian Jacobson LLP, James Abram Harrod, III, Carl Lester Stine, Chet Barry Waldman, Robert Craig Finkel, Wolf Popper LLP, Robert Alan Wallner, Jean Lee, Kent Andrew Bronson, Kristi Stahnke McGregor, Milberg LLP, William M. O'Connor, Crowell & Moring LLP, Brian Dale Graifman, David Alan Gehn, Gusrae, Kaplan, Bruno & Nusbaum, PLLC, Daniel W. Krasner, Demet Basar, Wolf Haldenstein Adler Freeman & Herz LLP, Joseph Emanuel Neuhaus, Sullivan and Cromwell, LLP, David Robert Kromm, Hillary Sobel, Jeffrey Charles Zwerling, Robert S. Schachter, Stephanie Elizabeth Kirwan, Stephen Leland Brodsky, Richard A. Speirs, New York, NY, Sashi Bach Boruchow, Stuart Harold Singer, Boies, Schiller & Flexner LLP, Fort Lauderdale, FL, Matthew W. Cheney, Crowell & Moring LLP, Daniel S. Sommers, Joshua Seth Devore, Steven Jeffrey Toll, Cohen Milstein Sellers & Toll PLLC, Washington, DC, Paul Edouard Dans, Rivero Mestre & Castro, Jeffrey F. D. Bogert, Bogert & Rembold, P.L., Laurence Edward Curran, III, Curran & Associates, Coral Gables, FL, David Alan Rothstein, Jeffrey Brett Kaplan, Lorenz Michel Pruss, Dimond Kaplan & Rothstein PA, Coconut Grove, FL, Robert E. Linkin, Dimond Kaplan & Rothstein, PA, Richard E. Brodsky, The Brodsky Law Firm, Miami, FL, for Plaintiffs.

ABN Amro Life S.A., pro se.

Mark Geoffrey Cunha, Michael Joseph Chepiga, Paige Elizabeth Fleming, Paul Jacob Sirkis, Peter Eric Kazanoff, Sara Ann Ricciardi, Simpson Thacher & Bartlett LLP, Glenn Kurtz, White & Case LLP, Andrew J. Levander, David Scott Hoffner, Dechert, LLP, Adam K. Grant, Daniel R. Benson, Daniel J. Fetterman, Marc E. Kasowitz, Kasowitz, Benson, Torres & Friedman, LLP, Helen Virginia Cantwell, Mark P. Goodman, Debevoise & Plimpton, LLP, Eliot Lauer, Michael Joseph Moscato, Timothy Neil McCabe, Curtis, Mallet-Prevost, Colt & Mosle, LLP, Andrew M. Genser, Kirkland & Ellis LLP, Gabrielle Sean Marshall, Sarah Loomis Cave, William R. Maguire, Hughes Hubbard & Reed LLP, Stephen Lee Weinstein, Eiseman, Levine, Lehrhaupt & Kakoyiannis, P.C., Edward M. Spiro, Robert James Anello, Claudio Godinez Roumainochoa, Morvillo, Abramowitz, Grand, Iason, Anello & Bohrer, P.C., Jonathan David Cogan, Michael Sangyun Kim, Kobre & Kim LLP, Sharon L. Nelles, Allison Caffarone, Bradley Paul Smith, Diane Lee McGimsey, Patrick Barrett Berarducci, Sullivan & Cromwell, LLP, New York, NY, Jennie Boehm Krasner, Dechert, LLP, Princeton, NJ, Amanda McGovern, Dyanne Eyce Feinberg, Elizabeth A. Izquierdo, Lewis Nathan Brown, Terence Michael Mullen, Gilbride Heller & Brown P.A., Hilarie Bass, Ricardo A. Gonzalez, Greenberg Traurig, LLP, Miami, FL, Amy E. Crawford, Brenton Rogers, Emily Nicklin, Timothy A. Duffy, Kirkland & Ellis LLP, Chicago, IL, for Defendants.

David J. Molton, Martin S. Siegel, Brown Rudnick LLP, Catherine A. Torrell, Cohen Milstein Sellers & Toll P.L.L.C., Gregory Mark Nespole, Wolf Haldenstein Adler Freeman & Herz LLP, New York, NY.

DECISION AND ORDER

VICTOR MARRERO, District Judge.

This lawsuit is a putative class action on behalf of individuals and entities (collectively,"Plaintiffs") who invested large sums of money in four hedge funds founded and operated by the Fairfield Greenwich Group ("Fairfield Greenwich"). The overwhelming majority of Plaintiffs' money was in turn invested in Bernard Madoff's Ponzi scheme. Plaintiffs are now suing a number of Fairfield Greenwich companies, directors, and others who audited or administered the hedge funds. The complaint alleges violations of federal securities law and common law tort, breach of contract and quasi-contract causes of action. Fairfield Greenwich and numerous co-defendants (collectively, "Defendants") move to dismiss the complaint in its entirety, asserting defenses grounded in federal and state law.

Because of the breadth of issues raised in Defendants' various submissions, the Court considers their motions in two separate rulings. This Decision and Order, to be referred to as "Anwar I," disposes of arguments made by Defendants that all of Plaintiffs' common law claims, save for fraud, are preempted by New York State's Martin Act (the "Martin Act"), N.Y. Gen. Bus. Law, Art. 23-A, §§ 352-359. The remainder of Defendants' arguments are addressed in a companion Decision and Order issued separately.

Defendants' preemption argument-that the Martin Act, the state law granting the New York State Attorney General ("Attorney General") power to prosecute fraud in the securities market, forecloses any private common law causes of action except for fraud-has been accepted by the majority of courts that have considered the issue in the Southern District of New York, as well as by numerous New York state courts. See Nanopierce Tech., Inc. v. Southridge Capital Mgmt. LLC, No. 02 Civ. 0767, 2003 WL 22052894, at *2 (S.D.N.Y. Sept. 2, 2003) (collecting cases). This Court sees the issue differently.

I. DISCUSSION

A. A FOX TERRIER COMES TO COURT

In a recurring theme that inspired many of his books and essays on natural history, the prominent biologist Stephen Jay Gould often documented how, not uncommonly, an error enters into scientific theories and writings, and later becomes perpetuated when the fallacy is uncritically adopted and copied by subsequent scholars, at times expressed with identical phrases, arguments and illustrations. See, e.g., Stephen Jay Gould, Bully for Brontosaurus 163-64 (1991) (finding the description of Eohippus, the so-called dawn horse, as resembling "the size of a fox terrier" in two-thirds of modern American biology textbooks, and tracing the archaic simile verbatim to a 1904 article by an eminent American scholar). In consequence, flawed or false concepts gain currency in scientific literature, and then become axiomatic through generations of literal repetition in succeeding texts, sometimes long after the rationale for the original proposition has been lost, and even after the theory has been roundly discredited or disproved. The law has its own version of this practice reflected in some judicial opinions.¹ A body of federal and state court decisions interpreting andapplying one aspect of the Martin Act presents a case in point.

The unwitting perpetuation of error, in this Court's reading of the law, comes in judicial decisions ruling that the Martin Act preempts common law causes of action that exist independent of the Martin Act but whose proof relies on the same facts that would support a Martin Act prosecution by the Attorney General. Speaking generally, the Martin Act "authorizes the Attorney General [of New York] to investigate and enjoin fraudulent practices in the marketing of stocks, bonds and other securities within or from New York State." Kerusa Co. LLC v. W10Z/515 Real Estate Ltd., 12 N.Y.3d 236, 879 N.Y.S.2d 17, 906 N.E.2d 1049, 1052 (2009). In 1987, the New York State Court of Appeals held that the Martin Act did not authorize private causes of action. See CPC Intern. Inc. v. McKesson Corp., 70 N.Y.2d 268, 519 N.Y.S.2d 804, 514 N.E.2d 116, 119 (1987) (" McKesson") (declaring that "this court holds that an implied private action is not consistent with the legislative scheme underlying the Martin Act"). But, as further elaborated below, McKesson did not explicitly address whether the Martin Act preempted common law claims based on the same facts that would also empower the Attorney General to prosecute under the Martin Act. From the statute's legislative grant of power, as glossed by judicial construction, many courts derived a rule that "the [Martin] Act precludes a private right of action for common law claims the subject matter of which is covered by the Martin Act." Pro Bono Invs., Inc. v. Gerry, No. 03 Civ. 4347, 2005 WL 2429787, at *16 (S.D.N.Y. Sep. 30, 2005). Because it requires proof of deceitful intent, an element not thought to be required by the Martin Act, the only common law cause of action deemed not so "covered" is fraud. See Nanopierce Tech., 2003 WL 22052894, at *4.

Most cases finding Martin Act preemption have arisen in the Southern District of New York. See Stephenson v. Citco Group Ltd., 700 F.Supp.2d 599, 612-17 (S.D.N.Y.2010); Sedona Corp. v. Ladenburg Thalmann & Co., Inc., No. 03 Civ. 3120, 2005 WL 1902780, at *21-*23 (S.D.N.Y. Aug. 9, 2005); Nanopierce Tech., 2003 WL 22052894, at *3; Bibeault v. Advanced Health Corp., No. 97 Civ. 6026, 1999 WL 301691, at *10-*11 (S.D.N.Y. May 12, 1999); Independent Order of Foresters v. Donaldson, Lufkin & Jenrette Inc., 919 F.Supp. 149, 153-54 (S.D.N.Y.1996) (" Foresters"). As demonstrated below, the doctrine originated in Foresters and was later adopted almost verbatim in a string of cases. But even here the authority for this proposition is not uniform, as at least three judges of this Court have not given the Martin Act such a broad preemptive ruling. See Cromer Fin. Ltd. v. Berger, No. 00 Civ 2498, 2001 WL 1112548, at *3-*5 (S.D.N.Y. Sept. 19, 2001) (Cote, J.); Xpedior Creditor Trust v. Credit Suisse First Boston (USA) Inc., 341 F.Supp.2d 258, 272 (S.D.N.Y.2004) (Scheindlin, J.) ( citing Cromer); In re WorldCom, Inc. Sec. Litig., 382 F.Supp.2d 549, 560 n. 18 (S.D.N.Y.2005) (Cote, J.); Louros v. Kreicas, 367 F.Supp.2d 572, 595-96 (S.D.N.Y.2005) (Kaplan, J.) (finding that Martin Act preemption "foreclose[s]" only causes of action alleging "dishonesty or deception").

In addition to this divergent line of federal authority, the Attorney General, in two cases pending before the First Department, has taken a position against total preemption, see Brief for the Attorney General of the State of New York as Amicus Curiae, CMMF, LLC. v. J.P. Morgan Inv. Mgmt., Inc., No. 601924/09 (App. Div. 1st Dep't Apr. 7, 2010) ("Attorney General...