Croscill Inc. v. Gabriel Capital, L.P. (In re J. Ezra Merkin & Bdo Seidman Sec. Litig.)
| Decision Date | 23 September 2011 |
| Docket Number | 09 Civ. 6483(DAB).,Nos. 08 Civ. 10922(DAB),09 Civ. 6031(DAB),s. 08 Civ. 10922(DAB) |
| Citation | 817 F.Supp.2d 346 |
| Parties | In re J. Ezra MERKIN and BDO Seidman Securities Litigation.Croscill Inc., et al., Plaintiffs, v. Gabriel Capital, L.P., et al., DefendantsMorris Fuchs Holdings, LLC, Plaintiff, v. Gabriel Capital, L.P., et al., Defendants. |
| Court | U.S. District Court — Southern District of New York |
OPINION TEXT STARTS HERE
Arthur N. Abbey, Nancy Kaboolian, Richard Barry Margolies, Stephen Thran Rodd, Karin Elizabeth Fisch, Abbey Spanier Rodd Abrams & Paradis, LLP, Gregory Mark Nespole, Malcolm Todd Brown, Demet Basar, Wolf Haldenstein Adler Freeman & Herz LLP, New York, NY, for Plaintiffs.
Andrew J. Levander, Gary John Mennitt, Neil A. Steiner, Gary John Mennitt, Dechert, LLP, Ira George Greenberg, Robert Novack, Charles W. Stotter, Florence Amanda Crisp, Edwards Wildman Palmer LLP, Karen Yasmine Bitar, Adam David Cole, Greenberg Traurig, LLP, New York, NY, M. Katherine Stroker, M. Katherine Stroker, Dechert LLP, Philadelphia, PA, Peter A. Wald, Latham & Watkins, L.L.P., San Francisco, CA, for Defendants.
This action arises from the well-known fraud perpetrated by Bernard L. Madoff (“Madoff”) through his investment firm Bernard L. Madoff Investment Securities LLC (“BMIS”). Plaintiffs New York Law School (“NYLS”), Scott Berrie (“Berrie”), Jacob E. Finkelstein CGM IRA Rollover Custodian (“Finkelstein”), and Nephrology Associates PC Pension Plan (“Nephrology”) (collectively, “NYLS Plaintiffs”), as well as Croscill, Inc., Florence Kahn Weinberg Intervivos Trust, Douglas J. Kahn 2008 Family Trust, and David Kahn 2008 Family Trust (collectively, “Croscill Plaintiffs”), and Morris Fuchs Holdings, LLC (“Fuchs Plaintiff”) (the NYLS, Croscill and Fuchs Plaintiffs, collectively, “Plaintiffs”) 1, bring this action on behalf of investors in three hedge funds: Ascot Partners, L.P. (the “Ascot Fund”), Gabriel Partners, L.P. (the “Gabriel Fund”), and Ariel Fund, Ltd. (the “Ariel Fund”) (collectively, “the Funds”).
Defendant J. Ezra Merkin (“Merkin”) was the general partner of the Ascot Fund and the Gabriel Fund. Merkin was also the sole shareholder and director of Defendant Gabriel Capital Corporation (“GCC”), which in turn was the investment advisor to the Ariel Fund. Defendant BDO USA, LLP, f/k/a BDO Seidman, LLP (“BDO USA”) served as the auditor of the Ascot Fund and the Gabriel Fund, while Defendants BDO Cayman Islands, formerly trading as BDO Tortuga (“BDO Cayman”), and BDO Limited, formerly trading as BDO Binder (“BDO Limited”) 2, served as the auditors for the Ariel Fund. The Funds invested heavily with BMIS, The reported value of the Funds' assets—and thus the value of Plaintiffs' investments in the Funds—dropped significantly in 2008 when Madoff's massive Ponzi scheme was discovered.
In their Third Consolidated Amended Class Action Complaint 3 (“TAC”), Plaintiffs allege that Defendants Merkin and GCC failed to disclose the Funds' investments with Madoff, or that they should have performed better due diligence in connection with such investments. Plaintiffs assert seven claims against Defendants Merkin and GCC, for violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”), as well as common law claims for breach of fiduciary duty, gross negligence, unjust enrichment, fraud, and negligent misrepresentation. The Croscill and Fuchs Complaints also assert claims for fraudulent concealment and breach of contract.
Plaintiffs allege that Defendants BDO USA, BDO Cayman, and BDO Limited (the “Auditor Defendants”) failed to perform their work in a manner consistent with “Generally Acceptable Auditing Standards” (“GAAS”) and “Generally Accepted Accounting Principles” (“GAAP”), and that these Auditor Defendants should have conducted further work to ferret out Madoff's fraud. Plaintiffs assert six claims against the Auditor Defendants for violations of section 10(b) of the Exchange Act, as well as common law claims for breach of fiduciary duty, aiding and abetting breach of fiduciary duty, unjust enrichment, common law fraud, and negligent misrepresentation.
Defendants Merkin and GCC now move to dismiss Plaintiffs' TAG, as well as the separate Complaints of Croscill and Fuchs, pursuant to Fed.R.Civ.P. 9(b) and 12(b)(6). Defendant BDO USA moves to dismiss pursuant to Fed.R.Civ.P. 12(b)(1) and 12(b)(6). Finally, Defendants BDO Cayman and BDO Limited move to dismiss pursuant to Fed.R.Civ.P. 12(b)(1), 12(b)(2) and 12(b)(6).4
For the reasons below, Defendants' Motions to Dismiss are GRANTED and the Complaints are DISMISSED.5
The following facts, drawn from the TAG, are assumed to be true for purposes of the Motions to Dismiss.6
The Ascot Fund is a Delaware limited partnership. (TAC ¶ 32.) Investors in the Ascot Fund are limited partners of Ascot Partnership. (TAC ¶ 50.) Substantially all of the assets of Ascot Fund were invested in Madoff. (TAC ¶ 49.) Lead Plaintiff NYLS invested $3 million by purchasing a limited partnership interest in the Ascot Fund in 2006 and it continues to own that investment, which is now virtually worthless. (TAC ¶ 20.)
The Gabriel Fund is also a Delaware limited partnership. (TAC ¶ 33.) Investors in the Gabriel Fund are limited partners of the Gabriel Partnership. (TAC ¶ 79.) Lead Plaintiff Berrie invested $500,000.00 by purchasing a limited partnership interest in the Gabriel Fund and continues to hold that investment. (TAC ¶ 21.) The Croscill Plaintiffs investment in the Gabriel Fund was once over $4 million. (Croscill Compl. ¶ 15.) Plaintiff Fuchs invested $10,135 million in Gabriel in January 2006. (Fuchs Compl. ¶ 15.) Plaintiffs allege that the Gabriel Fund has lost approximately 30% of its value as a result of the wrongful conduct of Defendants. (Croscill Compl. ¶ 15; Fuchs Compl. ¶ 23.)
The Ariel Fund is an off-shore hedge fund that is a Cayman Islands corporation. (TAC ¶ 34.) Ariel was formed to undertake business as a corporate open-ended investment fund and is considered to be the “offshore twin” of Gabriel, i.e., investments in Ariel were made to track, or be in lockstep with, those of Gabriel. (TAC ¶¶ 34, 78.) Shareholders in the Ariel Fund must be non-U.S. persons or U.S. persons subject to ERISA, or otherwise exempt from paying Federal Income Tax. (TAC ¶ 34.) Investors in the Ariel Fund are purchasers of redeemable participating preference shares. (TAG ¶ 82.) Co–Lead Plaintiff Finkelstein, a U.S. resident, invested $500,000 in the Ariel Fund, and Plaintiff Nephrology, a U.S. resident, invested over $1 million in the Ariel Fund by purchasing redeemable participating preference shares. (TAG ¶¶ 22–23.)
Defendant Merkin is the founder, General Partner and Manager of both the Ascot Fund and the Gabriel Fund. (TAG ¶ 24.) Defendant GCC is a Delaware corporation which, along with Defendant Merkin, is headquartered in New York City. (TAG ¶¶ 24–25.) Defendant Merkin is the sole shareholder and sole director of GCC, which is the investment advisor to the Ariel Fund. (TAG ¶ 24.)
The basic facts surrounding Madoff's Ponzi scheme are by now well-known. In 1959, Madoff founded BMIS, a securities broker-dealer firm. At some point, Madoff and BMIS began to represent that they used a “split-strike conversion” strategy to manage assets for its investors. BMIS provided its investors with periodic statements that showed purported trades, and resulting profits, on customer accounts. However, those trades and resulting profits were fictitious. In classic Ponzi scheme fashion, when profits needed to be paid to individual investors who made a withdrawal from their account, the profits actually came from additional investments made by other investors, such as feeder funds.
In the late 1980's, Defendant Merkin began running his own investment funds. (TAG ¶ 47.) Sometime in the early 1990's, Merkin met Madoff and they started doing business together. (TAG ¶ 48.) Sometime thereafter, Defendant Merkin started raising large sums of money from investors, including Lead Plaintiffs and other investors, and investing some of these funds in Madoff and BMIS. (TAG ¶ 48.)
On December 10, 2008, Madoff admitted running the largest Ponzi scheme in history. (TAC ¶ 37.) On December 11, 2008, Madoff and BMIS were criminally charged for their fraud. (TAC ¶¶ 38–39.) On June 29, 2009, after pleading guilty, Madoff was sentenced to 150 years in prison. (TAG ¶ 44.) At the time that the Madoff fraud was revealed, Defendants Merkin and GCC had entrusted to Madoff virtually all of the investment capital of the Ascot Fund, and at least 25% of the investment capital of the Gabriel Fund and the Ariel Fund. (TAC ¶ 38.)
The TAG alleges that Defendants Merkin and GCC, as managers of the Funds, made various misrepresentations. ( See generally TAC ¶¶ 55, 70–77, 88–90, 96–100, 110.) Summarized, these misrepresentations included: how the funds were to be managed; where and how investments would be made; and what Defendant Merkin's role was to be in management of the Funds. (TAC ¶¶ 44–77, 84–95, 110–20.) Plaintiffs allege that these misrepresentations occurred through the dissemination of prospectuses and offering memoranda, as well as part of quarterly reports, presentations and individual statements made by Defendant Merkin to investors.
Defendant Merkin offered participation in the Ascot Fund to qualified investors through a series of confidential offering memoranda issued in 1992, 1996, 2002, and 2006. (TAC ¶ 53.) Similarly, Defendant Merkin offered participation in the Gabriel Fund and Ariel Fund to qualified investors through prospectuses and confidential offering memoranda. (TAC ¶ 88.)
Plaintiffs allege these offering memoranda and prospectuses were filled with misrepresentations by Merkin and GCC, For instance, the TAC alleges that certain...
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