Fraternity Fund v. Beacon Hill Asset
| Decision Date | 06 July 2005 |
| Docket Number | No. 03 Civ. 2387(LAK).,03 Civ. 2387(LAK). |
| Citation | 376 F.Supp.2d 385 |
| Parties | FRATERNITY FUND LTD., et al., Plaintiffs, v. BEACON HILL ASSET MANAGEMENT LLC, et al., Defendants. |
| Court | U.S. District Court — Southern District of New York |
Scott M. Berman, Emilio A. Galvan, Brown Rudnick Berlack Israels LLP, for Plaintiffs.
Joel M. Miller, Charles R. Jacob III, Teresa A. Gonsalves, Miller & Wrubel P.C., for Defendants Beacon Hill Asset Management LLC and Safe Harbor Asset Management LLC.
Kevin H. Marino, John D. Tortorella, Marino & Associates, P.C., for Defendant John D. Barry.
Robert G. Stahl, Law Offices of Robert G. Stahl, LLC, for Defendant John W. Irwin.
Lawrence S. Lustberg, Thomas R. Valen, Gibbons, Del Deo, Dolan, Griffinger & Vecchione, P.C., for Defendant Thomas P. Daniels.
Michael Critchley, Michael Critchley, Jr., Michael Critchley & Associates, for Defendant Mark Miszkiewicz.
Seth M. Schwartz, Jonathan Frank, Edward Flis, Skadden Arps Slate Meagher & Flom LLP, for Defendant Asset Alliance Corporation.
This is a private securities action based on an alleged valuation fraud involving three hedge funds.
Over the course of October and November 2002, the funds' managers made a series of disclosures revealing that the net asset values of the funds had declined from the values reported as of August 31, 2002. Each subsequent disclosure revealed that the decline was greater than previously thought, with the final disclosure revealing that the NAVs had declined by 61.22 percent. The announcements prompted grand jury and SEC investigations and a number of civil actions, including this one. Now before the Court are motions to dismiss the amended complaint ("Complaint") by (1) Beacon Hill Asset Management, LLC ("Beacon Hill"), Safe Harbor Asset Management, LLC ("Safe Harbor Asset Management"), and their four principals, defendants John D. Barry, Thomas Daniels, John Irwin, and Mark Miszkiewicz (collectively, the "Beacon Hill Defendants") and (2) Asset Alliance Corp. ("Asset Alliance").1
The three hedge funds at the center of this action are Bristol Fund, Ltd. ("Bristol"), Safe Harbor, L.P. ("Safe Harbor"), and Milestone Plus Partners, L.P. ("Milestone") (collectively, the "Funds").2 They invested in mortgage-backed and related securities.3
Bristol and Safe Harbor were created and managed by the Beacon Hill Defendants.4 Milestone was managed by Milestone Global Advisors, L.P. ("Milestone Global") and, pursuant to an agreement in 1998 with Milestone Global, the Beacon Hill Defendants.5 In January 2002, Beacon Hill announced its adoption of a master feeder fund structure under which the Funds became "feeder funds" into Beacon Hill Master, Ltd. ("Beacon Hill Master").6 Beacon Hill Master managed their trading.7
The Complaint alleges three categories of misstatements and omissions by the Beacon Hill Defendants.
First, from March 2000 through September 2002, the defendants allegedly overstated the net asset values ("NAVs") of Bristol and Safe Harbor in audited financial statements and monthly performance reports ("MPRs").8 These documents allegedly stated 9 Allegedly, 10
Second, defendants allegedly represented in offering memoranda, audited financial statements, due diligence questionnaires, and meetings with investors that the NAVs of Bristol and Safe Harbor had been or would be calculated using independent prices.11 Rather than use independent prices, however, defendants used their own allegedly fraudulent valuations.12
Finally, defendants allegedly misrepresented in offering memoranda and audited financial statements that NAVs were calculated in good faith.13
The Beacon Hill Defendants allegedly concealed the Funds' losses until they made three disclosures in October and November 2002 that revealed the extent of losses.
First, 14
Second, 15
Finally, "[o]n November 27, 2002, Beacon Hill disclosed that the NAV of the Funds had actually declined by 61.22% from the NAV reported as of August 31, 2002."16 The Complaint alleges that, "[i]n actuality, the NAVs of the Funds had been declining for years."17
The Complaint alleges the following about the defendants.
Beacon Hill is a Delaware limited liability company formed in 1997 by its four principals — Barry, Daniels, Irwin, and Miszkiewicz (collectively the "Individual Defendants") — to serve as an investment manager of hedge funds that invested in mortgage-backed and related securities.18 As of 1998, Asset Alliance, through two wholly owned subsidiaries, allegedly owned 50 percent of Beacon Hill and the Individual Defendants the other 50 percent.19
The Individual Defendants were principals and directors of Beacon Hill.20 Barry was president and director of marketing and "responsible for the daily management of the firm."21 Daniels was chief investment officer and "direct[ed] the overall risk management of the firm."22 Miszkiewicz was chief financial officer and Irwin a senior portfolio manager.23
Safe Harbor Asset Management is a New Jersey limited liability company and the general partner of Safe Harbor.24 Beacon Hill owned 99 percent and Barry one percent of it.25
Milestone Global is a Delaware limited liability partnership and the general partner of Milestone.26 Asset Alliance owned 99 percent.27 In or around 1998, Milestone Global and Beacon Hill entered into an agreement pursuant to which Beacon Hill provided Milestone with investment management services.28
Asset Alliance is a Delaware corporation that acquired a 50 percent interest in Beacon Hill in 1998.29 Its practice allegedly was to purchase 50 percent interests in investment managers such as Beacon Hill.30 It then provided its affiliates with advice in "marketing and distribution services, strategic planning and administration, as well as back-office support and systems."31
None of the Funds is a party to this action.
Plaintiffs are 36 shareholders and/or limited partners of the Funds.32 They invested, in aggregate, $106 million between September 1997 and September 2002.33 All but two of the plaintiffs invested in Bristol and/or Safe Harbor, but not Milestone. Plaintiffs Balentine Global Hedge Fund, L.P. and Balentine Hedge Fund Select, L.P. ("Balentine Plaintiffs") invested only in Milestone.34
The Complaint asserts six claims against the Beacon Hill Defendants. Four claims are brought by all plaintiffs except for the Balentine Plaintiffs. These claims allege violations of Section 10(b) of the Securities and Exchange Act of 1934 (the "Exchange Act")35 and state common law.36 The remaining two claims are brought by the Balentine Plaintiffs on state law theories.37
The Complaint makes five claims against Asset Alliance. Three are brought by all of the plaintiffs and allege control person liability under Section 20(a) of the Exchange Act38 and violations of state common law.39 Two are brought by plaintiff Sanpaolo IMI Alternative Investments SGR SpA ("Sanpaolo") on state common law theories and relate to Sanpaolo's investments in Bristol.40
Finally, the plaintiffs who invested in Safe Harbor ("Safe Harbor Plaintiffs") assert a state law claim against Safe Harbor Asset Management.41
The disclosures by Beacon Hill in the fall of 2002 prompted an action by the SEC.42 Without admitting or denying liability, the Beacon Hill Defendants consented to entry of a final judgment and injunction pursuant to which they were obliged to pay $2.2 million in disgorgement and $2 million in civil penalties.43
Plaintiffs commenced this action on April 8, 2003. The Court subsequently granted motions by the Beacon Hill Defendants and Asset Alliance to dismiss the corrected and supplemental complaint for failure to satisfy the requirements of Rule 9(b) and the PSLRA.44 The Complaint was filed on June 24, 2004.
In deciding a Rule 12(b)(6) motion, the Court accepts as true all well-pleaded factual allegations in the complaint and draws all reasonable inferences in the plaintiff's favor.45 Dismissal is inappropriate "unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief."46 A district court may consider the full text of documents attached as exhibits to the complaint or incorporated by reference.47
As this is a securities fraud case, the Complaint must meet the heightened pleading requirements of Rule 9(b) and the Private Securities Litigation Reform Act of 1995 ("PSLRA").48 The PSLRA requires that a complaint...
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