In re Beacon Associates Litig..This Document Relates To: All Actions.

Decision Date05 October 2010
Docket NumberNo. 09 Civ. 777(LBS).,09 Civ. 777(LBS).
Citation745 F.Supp.2d 386
PartiesIn re BEACON ASSOCIATES LITIGATION.This Document Relates to: All Actions.
CourtU.S. District Court — Southern District of New York

OPINION TEXT STARTS HERE

Barbara J. Hart, Thomas Michael Skelton, Todd Seth Garber, Deborah A. Rogozinski, Barbara J. Hart, Thomas Michael Skelton, Todd Seth Garber, Lowey Dannenberg Cohen & Hart, P.C., White Plains, NY, Daniel W. Krasner, Demet Basar, Gregory Mark Nespole, Stacey Theresa Kelly, Kate Marietta McGuire, Wolf Haldenstein Adler Freeman & Herz LLP, New York, NY, Anna K. Ryon, Lisa Marie Mezzetti, Michelle Celia Yau, Cohen Milstein Sellers & Toll PLLC, Karen L. Handorf, Washington, DC, Catherine A. Torell, Cohen Milstein Sellers & Toll PLLC, New York, NY, Marc Ira Machiz, Cohen Milstein Sellers & Toll, Philadelphia, PA, for Plaintiffs.Jay Raubvogal Ira, pro se.James Rounds, pro se.Lyle D. Fassett, pro se.James Engler, pro se.I.B.E.W. Local 43 and Electrical Contractors Welfare Fund, pro se.Oswego County Laborers' Local 214 Pension Fund, pro se.Grand Metro Builders of NY Corp. Defined Benefit Plan, pro se.Steven Michael Kaplan, Tab Keith Rosenfeld, Rosenfeld & Kaplan, LLP, Lewis J. Liman, Jeffrey A. Rosenthal, Cleary Gottlieb Steen & Hamilton LLP, Louis Gerard Corsi, Stephen Jacobs, Landman Corsi Ballaine & Ford PC, James Joseph Sabella, Grant & Eisenhofer P.A., New York, NY, Steven J. Kaiser, Cleary Gottlieb Steen & Hamilton LLP, Washington, DC, Carolyn Anne Marcotte, Brian E. Whiteley, Hiscock & Barclay, L.L.P., Boston, MA, John Donald Cook, Hiscock & Barclay, L.L.P., Syracuse, NY, for Defendants.

OPINION & ORDER

SAND, District Judge.

Plaintiffs in these consolidated cases are investors in the Beacon Associates investment fund (“Beacon”), which served as a “feeder fund” to Bernard L. Madoff Securities LLC (“BMIS”). Plaintiffs bring claims against various Defendants associated with the Beacon Fund based on losses ultimately sustained as a result of Madoff's massive Ponzi scheme. All Defendants have moved to dismiss the Second Consolidated Amended Complaint (“SCAC”). For the following reasons, the motions are granted in part, denied in part.1

I. Background 2

The basic facts surrounding Madoff's historic Ponzi scheme are now well known. Madoff was a prominent and respected member of the investing community, and had served as a member of the NASDAQ stock market's Board of Governors and as the vice-chairman of the National Association of Securities Dealers (“NASD”). Madoff's investment company, BMIS, had operated since approximately 1960. Madoff, who was notoriously secretive, claimed he utilized a “split-strike conversion strategy” to produce consistently high rates of return on investment. The split-strike conversion strategy supposedly involved buying a basket of stocks listed on the Standard & Poor's 100 index and hedging through the use of options.

However, since at least the early nineties, Madoff did not actually engage in any trading activity. Instead, Madoff generated false paper account statements and trading records; if a client asked to withdraw her money, Madoff would pay her with funds invested by other clients. During this time, Madoff deceived countless investors and professionals, as well as his primary regulators, the Securities and Exchange Commission (“SEC”) and the Financial Industry Regulatory Authority (“FINRA”). On December 11, 2008, news broke that Madoff had been operating a multi-billion dollar Ponzi scheme for nearly twenty years. Madoff pleaded guilty to securities fraud and related offenses on March 12, 2009, and was subsequently sentenced to 150 years in prison.

Many individuals and institutions that invested with Madoff did so through feeder funds such as the Beacon Fund. Investors would invest in the feeder fund, which would then invest its assets with Madoff. The Beacon Fund invested approximately 71% of its assets with Madoff. NYAG Compl. ¶ 43. Between 1995 and 2008, Beacon invested approximately $164 million with Madoff and withdrew approximately $26 million, leaving a net investment of approximately $138 million. Id. In November 2008, just prior to the revelation of Madoff's fraud, the reported value of the Beacon Fund's Madoff account was approximately $358 million. Id.

After Madoff's fraud became public, the Beacon Fund's managing members decided to liquidate the Beacon Fund and distribute its remaining assets. The fund's liquidation forms the subject matter of another action before this Court and Magistrate Judge Peck. See Beacon Assocs. Mgmt. Corp. v. Beacon Assocs. LLC I, No. 09 Civ. 6910(AJP), 725 F.Supp.2d 451, 2010 WL 2947076 (S.D.N.Y. July 27, 2010); Rounds v. Beacon Assocs. Mgmt. Corp., No. 09 Civ. 6910(LBS), 2009 WL 4857622 (S.D.N.Y. Dec. 16, 2009).3

a. Formation of the Beacon Fund

In 1983, Defendants Lawrence Simon and Howard Wohl formed Ivy Asset Management, LLC (“Ivy”). Ivy is a registered investment advisor, and provides three categories of services: (i) providing investment advice to asset managers and other investment advisors, (ii) managing the assets of high net worth individuals and institutions, and (iii) managing proprietary funds of funds (“FOFs”) in which Ivy, Ivy's principals, and certain qualified individuals invested. A client introduced Simon and Wohl to Madoff in 1987, and Ivy then began to invest the assets of some of its proprietary funds with Madoff.

In the late 1980s, Simon met John P. Jeanneret in a restaurant in upstate New York. Jeanneret offered asset management and investment consulting services to upstate New York union pension and welfare funds as president and owner of J.P. Jeanneret Associates, Inc. (“JPJA”), alongside director Paul L. Perry. In 1990, Ivy introduced Jeanneret to Madoff. In 1991, Ivy and JPJA entered into a advisory agreement under which JPJA would pay Ivy 50% of any fees it earned by placing investors with Madoff or other Ivy-recommended investment managers. If the number of JPJA clients invested with Ivy-recommended managers dropped below two, Ivy would instead be entitled to receive 60% of the investment management fees. In 1992, JPJA founded the Income Plus Investment Fund (“Income Plus”) as a vehicle through which pension funds could invest with Madoff.4 JPJA would amass a total of over $1 billion in pension fund assets under management by 2008.

In 1991 or 1992, Ivy was introduced to Joel Danziger, Esq., and Harris Markhoff, Esq. Danziger and Markhoff practiced law together at the firm Danziger & Markhoff, LLP, and also managed two investment partnerships. Simon encouraged Danziger and Markhoff to found and manage an investment fund, with Ivy acting as the managers' investment consultant. Danziger and Markhoff formed Andover Associates Management Corporation (“AAMC”), which they owned and of which they were the principals, to serve as general partner for the investment fund. Prior to the formation of the fund, AAMC entered into a consulting agreement with Ivy under which AAMC would pay Ivy 50% of any fees it earned, and Ivy would evaluate and recommend investment managers. In 1993, Danziger and Markhoff founded Andover Associates, LP (“Andover”), with AAMC serving as the general partner. Andover invested with several managers recommended by Ivy, including Madoff.5

This arrangement served as the blueprint for Danziger and Markhoff' s second feeder fund, Beacon Associates, LLC (“Beacon”),6 which is the focal point for the claims in this action. Danziger and Markhoff formed Beacon Associates Management Corporation (“BAMC”) to serve as the fund's general partner. In 1995, BAMC entered into a consulting agreement with Ivy. The agreement noted that Ivy had “introduced the Principals [of BAMC] to Madoff,” and that the “Principals intend to form an investment limited liability company ... for the purpose of pooling investment funds to be managed by Madoff.” Rosenthal Decl. Ex. D (“1995 BAMC–Ivy Agreement”), at 1. BAMC agreed to pay Ivy 50% of all management fees it earned, as well as 50% of all fees it earned through introducing a third party to Madoff. In return, Ivy agreed to provide BAMC with certain administrative services, including maintaining account records for all Beacon monies invested in BMIS, reconciling BMIS account statements against “trade tickets received and dividends and interests accrued,” maintaining original “books of entry” for all of Beacon's BMIS accounts reflecting account activity, and calculating “changes in monthly value” of Beacon's BMIS accounts based on the foregoing data. Id. at 3–4.

Participation in the Beacon Fund was offered to investors through confidential Offering Memoranda (“OMs”). Offering Memoranda were released in 2000 and 2004, and were substantially identical. The minimum capital contribution was generally $500,000. The OMs represented that BAMC retained sole discretion to invest and reallocate Beacon assets, and would do so after consultation with Ivy. BAMC was responsible for selecting investment managers with which to invest (such as BMIS), and for “monitoring the Managers' performance and their adherence to their stated investment strategies and objectives.” Rosenfeld Decl. Ex. C (“2004 OM”), at 10. BAMC represented that it would “factor[ ] in” analyses of risk control, speed of recovery from drawdowns, experience, organizational infrastructure, and correlation with traditional investments such as stocks and bonds into its “continuing evaluation of Managers.” 2004 OM, at 10.

The OMs described Ivy, which was acquired by the Bank of New York Company, Inc. (“BONY”) in 2000, as a “global leader in alternative investment fund-of-funds portfolio management” with “approximately $12 billion of assets under management.” Id. at 27. It further stated that Ivy's “staff of approximately 125 includes 25 research analysts and other senior investment professionals who devote 100% of their time to researching, reviewing, monitoring and analyzing current and prospective alternative investment managers, 21...

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