In Re Tremont Securities Law

Citation703 F.Supp.2d 362
Decision Date30 March 2010
Docket NumberMaster File No.: 09 md 2052.,No. 08 Civ. 11117(TPG).,08 Civ. 11117(TPG).
PartiesIn re TREMONT SECURITIES LAW, STATE LAW AND INSURANCE LITIGATION.This Document Relates to: Securities Law Action 08 Civ. 11212(TPG).
CourtUnited States District Courts. 2nd Circuit. United States District Courts. 2nd Circuit. Southern District of New York

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Andrew J. Entwistle, Richard William Gonnello, Stephen David Oestreich, Entwistle & Cappucci LLP, Thomas George Ciarlone, Jr., Shalov Stone & Bonner & Rucco LLP, Jeffrey Michael Haber, Jeffrey D. Lerner, Joseph R. Seidman, Sandy A. Liebhard, Bernstein Liebhard, LLP, Daniel W. Krasner, Demet Basar, Stacey Theresa Kelly, Wolf Haldenstein Adler Freeman & Herz LLP, Jeffrey Koenig, Spar & Bernstein, PC, Christopher Lometti, Cohen Milstein Sellers & Toll P.L.L.C., Joel Paul Laitman, Schoengold & Sporn, P.C., New York, NY, Reed Richard Kathrein, Hagens Berman Sobol Shapiro LLP, Berkeley, CA, Robert N Cappucci, Entwistle & Cappucci LLP, Florham Park, NJ, Vincent T. Gresham, Vincent T. Gresham, Law Office, Atlanta, GA, David Pastor, Gilman and Pastor, LLP, Peter A. Lagorio, Peter A. Lagorio, Law Office, Boston, MA, Claude F. Renaud, Eric Baronet Landry, Van R. Mayhall, Jr., Breazeale, Sachse & Wilson, L.L.P., Baton Rouge, LA, David Avi Rosenfeld, Edward Y. Kroub, Robbins Geller Rudman & Dowd LLP, Melville, NY, Steve W. Berman, Hagens Berman Sobol Shapiro LLP, Seattle, WA, for Plaintiffs.

The 2005 Tomchin Family Charitable Trust, pro se.

John F. Keane, Jr., pro se.

Jamie Benjamin Walton Stecher, Tannenbaum Helpern Syracuse & Hirschtritt LLP, Kenneth Ian Schacter, Bingham McCutchen LLP, William Kennedy Dodds, Dechert, LLP, Seth M. Schwartz, Skadden, Arps, Slate, Meagher & Flom LLP, George Foulke Du Pont, Jamie Benjamin Walton Stecher, Tannenbaum Helpern Syracuse & Hirschtritt LLP, Harold Keith Gordon, Jones Day, Carrie Ann Tendler, Jonathan David Cogan, Michael Sangyun Kim, Kobre & Kim LLP, Nicholas Kord Lagemann, Sidley Austin LLP, New York, NY, David Jeffrey Kanfer, Talisman, Rudin & Delorenz P.C., Brooklyn, NY, Frances S. Cohen, Carol Elisabeth Head, Joseph L. Kociubes, Bingham McCutchen LLP, E. Macey Russell, Choate, Hall & Stewart, LLP, Boston, MA, Mitchell H. Kaplan, Bingham McCutchen LLP, Los Angeles, CA, David Adam Kotler, Robert Warren Topp, Dechert, LLP, Princeton, NJ, Geoffrey J. Ritts, Richard Joseph Bedell, Jr., Jones Day, Cleveland, OH, Thomas K. Cauley, Sidley Austin, LLP, Chicago, IL, Ben V. Seessel, Jeffrey L. Williams, Thomas J. Finn, Jorden Burt LLP, Simsbury, CT, for Defendants.

OPINION

THOMAS P. GRIESA, District Judge.

This putative class action arises out of the massive Ponzi scheme orchestrated by Bernard L. Madoff. Plaintiffs are investors in hedge funds managed by Tremont Partners, Inc. (“Tremont Partners”), which served as feeder funds by investing the funds' assets with Madoff and his investment firm, Bernard L. Madoff Securities LLC (“BMIS”).

As indicated, all of the funds in question were managed by Tremont Partners. Three of the funds were the Rye Select Broad Market Fund, L.P. (the “Market Fund”), the Rye Select Broad Market Prime Fund L.P. (the “Prime Fund”), and the Rye Select Broad Market XL Fund, L.P. (the “XL Fund”), sometimes referred to as the “Rye Funds.” These were Delaware partnerships in which Tremont Partners was the general partner and the investors were limited partners. The partnership agreements authorized Tremont Partners to delegate management of the funds' assets to a single manager chosen in its sole discretion. Based on this grant of authority, Tremont Partners selected Madoff or his company as the exclusive asset manager of the Rye Funds. The other fund was the Tremont Market Neutral Fund, L.P. (“Market Neutral Fund”), a Delaware partnership in which Tremont Partners served as the general partner and the investors as limited partners. In contrast to the Rye Funds, the Market Neutral Fund allocated fund assets to multiple outside investment managers. Tremont Partners chose Madoff or his company as one of the asset managers, investing 27% of fund assets with him.

Plaintiffs

Plaintiffs are Arthur M. Brainson (on behalf of the Arthur M. Brainson IRA R/O), Yvette Finkelstein, and Group Defined Pension Plan & Trust (“Group Defined”). Plaintiff Brainson is a limited partner in the Market Fund, plaintiff Finkelstein is a limited partner in the Prime Fund, and Group Defined is a limited partner in the Market Neutral Fund. There is no plaintiff who was an investor in the Rye Fund known as the XL Fund. A class claim is asserted on behalf of the investors in all of the funds, even the XL Fund, although no plaintiff claims to have been an investor in that fund. The court emphasizes that the class claim is asserted on behalf of a single class.

Defendants

Defendants are Tremont Partners, Tremont Group Holdings, Inc. (“Tremont Group”), Tremont Capital Management, Rye Investment Management, Robert Schulman, Jim Mitchell, and Rupert Allan (collectively, the “Tremont Defendants); Sandra L. Manzke; the Rye Funds; the Market Neutral Fund; Tremont Group's direct corporate parent, Oppenheimer Acquisition Corporation (“Oppenheimer”); MassMutual Holding LLC, Massachusetts Mutual Life Insurance Co. (collectively, “MassMutual Defendants), the parent companies of Oppenheimer; and auditors KPMG LLP (“KPMG”), and Ernst & Young LLP (“E & Y”) (collectively, the “Auditors”).

The Motions

This opinion addresses the motions to dismiss which defendants E & Y and KPMG have filed. The Auditors 1 assert that plaintiffs' claims should be dismissed on multiple grounds pursuant to Rules 9(b), 12(b)(1), and 12(b)(6) of the Federal Rules of Civil Procedure and the Private Securities Litigation Reform Act (“PSLRA”), 15 U.S.C. § 78u-4(b). Specifically, the Auditors argue that: (1) plaintiffs fail to plead with particularity a violation of Section 10(b) of the Exchange Act; (2) plaintiffs fail to plead their common law fraud claim with particularity; (3) plaintiffs' non-fraud common law claims for breach of fiduciary duty, negligent misrepresentation, and aiding and abetting breach of fiduciary duty are preempted by the Martin Act, N.Y. Gen. Bus. Law § 352 et seq. ; (4) all of plaintiffs' common law claims are preempted by the Securities Litigation Uniform Standards Act (“SLUSA”), 15 U.S.C. §§ 78bb(f), 77p(b); and (5) plaintiffs' common law claims fail to state a claim for relief. In addition, KPMG asserts that to the extent plaintiffs state a valid claim, it is subject to mandatory arbitration.

As explained below, the motions to dismiss are granted.

THE COMPLAINT

The following allegations are taken from the consolidated and amended class action complaint (the “Complaint”) and the documents on which it relies. For the purpose of these motions, the allegations in the Complaint are assumed to be true.

Madoff's Ponzi Scheme

The basic facts surrounding Madoff's fraudulent Ponzi scheme are well-known. Madoff told his customers that he was investing their assets through a strategy called “split-strike conversion,” which involved the supposed purchase and sale of stocks in the S & P 100 Index as well as options on that index.2 Madoff sent account statements and trade tickets to his customers purporting to reflect this trading.

On December 11, 2008, news broke that Madoff, through BMIS, had been operating an enormous $50 billion Ponzi scheme for nearly 20 years. Rather than using his customers' money to purchase publicly traded securities, Madoff used investments from new customers to pay returns to other customers. In fact, he never purchased a single security. And the account statements and trade tickets that Madoff had been sending to customers were complete fabrications. These bogus trade confirmations were designed to give the appearance that Madoff had executed his strategy with perfect market timing-buying stocks when they were towards the bottom of the price range for a given day and selling close to the peak. Madoff admitted that the audited financial statements he filed with the SEC were false and misleading.

Upon the revelation of this fraud, the United States Attorney for the Southern District of New York charged Madoff with violations of the federal securities laws. On March 13, 2009, Madoff pleaded guilty to these charges. Bernard Madoff has since been sentenced to 150 years in prison for his crimes. While the conviction is not pled in this complaint, which was filed about two months before the sentencing, the court takes judicial notice of this fact as a matter of public record extensively and globally covered in news.

On April 6, 2009, the New York Attorney General brought civil fraud charges under New York's Martin Act against hedge fund operator J. Ezra Merkin based on his feeder funds' role in supplying money to Madoff. The Attorney General alleges that Merkin steered his clients' money to Madoff without permission in exchange for management and incentive fees and ignored glaring “red flags” related to Madoff's investments.

Tremont Defendants, Oppenheimer, and MassMutual Defendants

Plaintiffs allege that the Tremont Defendants, through the funds, invested enormous amounts of money with Madoff and received fees for doing so. Plaintiffs allege that this was done with the knowledge, approval, and assistance of the other corporate defendants-Oppenheimer and the MassMutual Defendants. Plaintiffs contend that there were various “red flags” which should have alerted these defendants as to the grave problems with Madoff, but these warnings were not heeded: that Madoff's returns could not be duplicated by others who attempted to do so using his reported investment strategy; that the volume of Madoff's purported options traded exceeded actual trading volumes reported by the markets; that BMIS's records did not report customer activity; that BMIS essentially was an inside, family business; that Madoff ran his own back-office operations; and that Madoff lacked transparency, limiting access to his...

To continue reading

Request your trial
46 cases
  • In re J.P. Jeanneret Associates Inc.
    • United States
    • U.S. District Court — Southern District of New York
    • January 31, 2011
    ...fund's outside auditors; courts confronted with such claims routinely dismiss them. In re Tremont Securities Law, State Law, and Insurance Litigation, 703 F.Supp.2d 362 (S.D.N.Y. March 30, 2010), In re Beacon Associates Litigation, 745 F.Supp.2d 386 (S.D.N.Y.2010), Stephenson v. Citco Group......
  • In re Beacon Associates Litig..This Document Relates To: All Actions.
    • United States
    • U.S. District Court — Southern District of New York
    • October 5, 2010
    ...that investors who elected not to deal with Madoff informed the [Defendants] of their decisions.” In re Tremont Secs. Law, State Law and Ins. Litig., 703 F.Supp.2d 362, 371 (S.D.N.Y.2010); see also S.E.C. v. Cohmad Sec. Corp., No. 09 Civ. 5680(LLS), 2010 WL 363844, at *2 (S.D.N.Y. Feb. 2, 2......
  • Picard v. JPMorgan Chase & Co.
    • United States
    • U.S. District Court — Southern District of New York
    • November 1, 2011
    ...(S.D.N.Y.2010); Anwar v. Fairfield Greenwich Ltd., 728 F.Supp.2d 372, 387, 389–90 (S.D.N.Y.2010); In re Tremont Sec. Law, State Law & Ins. Litig., 703 F.Supp.2d 362, 367–68 (S.D.N.Y.2010). 2. The affiliates are UBS (Luxembourg) SA, UBS Fund Services (Luxembourg) SA, and UBS Third Party Mana......
  • Levy v. Maggiore
    • United States
    • U.S. District Court — Eastern District of New York
    • September 29, 2014
    ...LLP, 482 Fed.Appx. 618, 623 (2d Cir.2012), as amended (June 13, 2012) (quoting In re Tremont Sec. Law, State Law and Ins. Litig., 703 F.Supp.2d 362, 370 (S.D.N.Y.2010) ). “The failure of a non-fiduciary accounting firm to identify problems with a company's internal controls and accounting p......
  • Request a trial to view additional results

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT