Mlsmk Inv. Co. v. Jp Morgan Chase & Co.

• Decision Date: 07 July 2011
• Docket Number: Docket No. 10–3040–cv.
• Court: U.S. Court of Appeals — Second Circuit
• Parties: MLSMK INVESTMENT COMPANY, Plaintiff–Appellant,v.JP MORGAN CHASE & CO., JP Morgan Chase Bank, NA, Defendants–Appellees.

651 F.3d 268

MLSMK INVESTMENT COMPANY, Plaintiff–Appellant,

v.JP MORGAN CHASE & CO., JP Morgan Chase Bank, NA, Defendants–Appellees.

Docket No. 10–3040–cv.

United States Court of Appeals, Second Circuit.

Argued: May 25, 2011.Final Submission: June 10, 2011.Decided: July 7, 2011.

Howard Kleinhendler, Wachtel & Masyr, LLP (Julian D. Schreibman, Sara G. Spiegelman, of counsel), New York, NY, for Plaintiff–Appellant.Patricia M. Hynes, Allen & Overy LLP (Andrew Rhys Davies, Laura R. Hall, of counsel), New York, NY, for Defendants–Appellees.Before: McLAUGHLIN, POOLER, and SACK, Circuit Judges.SACK, Circuit Judge:

This case arises out of the massive and now infamous Ponzi scheme ¹ perpetrated by Bernard L. Madoff, which culminated abruptly with his arrest in December 2008 but whose aftershocks continue.

Between October and December 2008, the plaintiff, MLSMK Investment Company (“MLSMK”), invested $12.8 million with Madoff's investment company, Bernard L. Madoff Investment Securities (“BMIS”). The defendants, JP Morgan Chase & Co. (“JPMC”) and JP Morgan Chase Bank, N.A. (“Chase Bank”), were, respectively, a trading partner for Madoff's apparently legitimate market-making business and the bank with which Madoff maintained the account for BMIS. MLSMK lost its $12.8 million investment when, on December 11, 2008, Madoff was arrested and his assets seized.

MLSMK subsequently filed this lawsuit in the United States District Court for the Southern District of New York alleging several New York state-law claims against the defendants. It also asserted a federal claim contending that the defendants had conspired with Madoff to “fleece” his victims, in violation of the Racketeer Influenced and Corrupt Organizations Act (“RICO”), 18 U.S.C. §§ 1962(d) and 1964(c). In that connection, MLSMK alleges that by late summer 2008, the defendants became suspicious of Madoff's business activities and therefore undertook a “due diligence” investigation into Madoff's activities, and that the investigation revealed to the defendants that Madoff's investment business was a thoroughly fraudulent enterprise. Nevertheless, MLSMK asserts, the defendants—eager to continue receiving the substantial fees they derived from Madoff's market-making and banking activity—continued to trade with and provide banking services to him. MLSMK asserts that by failing to freeze Madoff's accounts, the defendants became liable for conspiracy to violate RICO by aiding and abetting Madoff's breach of fiduciary duty, commercial bad faith, and negligence.

The district court (Barbara S. Jones, Judge ) dismissed the plaintiff's complaint in its entirety, concluding that the complaint did not adequately plead any of the claims purportedly contained therein. We have affirmed that court's dismissal of the plaintiff's state-law claims for aiding and abetting breach of fiduciary duty, commercial bad faith, and negligence. See MLSMK Inv. Co. v. JP Morgan Chase & Co. (“ MLSMK I ”), No. 10–3040–cv, 431 Fed.Appx. 17, 2011 WL 2176152 (2d Cir. June 6, 2011) (summary order). With regard to the remaining claim brought under RICO, addressing an issue of first impression in this Court, we conclude that the claim also must be dismissed, because it is barred by section 107 of the Private Securities Litigation Reform Act (the “PSLRA”), 18 U.S.C. § 1964(c). We therefore affirm that portion of the district court's judgment that remains on appeal.

BACKGROUND

The following statement of facts is drawn from the plaintiff's complaint. As is required on appeal from a successful motion to dismiss in the district court, we accept as true all well-pleaded factual allegations in the complaint and draw all inferences in the plaintiff's favor. See Mortimer Off Shore Servs., Ltd. v. Fed. Republic of Ger., 615 F.3d 97, 114 (2d Cir.2010), cert. denied, ––– U.S. ––––, 131 S.Ct. 1502, 179 L.Ed.2d 360 (2011); see also Harris v. Mills, 572 F.3d 66, 71–72 (2d Cir.2009) (reciting the Supreme Court's guidance in Bell Atl. Corp. v. Twombly, 550 U.S. 544, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007), and Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009), that we need not credit legal conclusions couched as factual statements or “threadbare recitals of the elements of a cause of action, supported by mere conclusory statements” (alterations and internal quotation marks omitted)).

This suit arises out of Bernard L. Madoff's infamous and long-running Ponzi scheme. MLSMK Investment Company is a Florida partnership, all of whose partners are citizens of that state. JPMC is a global financial services firm providing a panoply of investment banking and financial services to businesses and individuals; Chase Bank, a U.S.-based commercial bank, is a wholly owned subsidiary of JPMC. Both are Delaware corporations with their principal places of business in New York City.²

The general contours of Bernard L. Madoff's businesses and transgressions are notorious. For about forty years preceding his December 2008 arrest, he owned and operated BMIS, a broker-dealer business based in Manhattan. BMIS operated three separate entities providing distinct services: investment-advisory services, market-making services, and proprietary trading. BMIS's market-making business, of which the defendant JPMC was a trading partner, is generally thought (and is conceded by MLSMK) to have been legitimate,³ but BMIS's investment-advisory business, according to MLSMK, was “entirely fictional” and central to Madoff's criminal enterprise. J.A. 10 (Compl. ¶ 20). Madoff accepted funds from individual and corporate clients promising to invest them in the investment-advisory entity through which the clients would earn returns of “up to 10–12% a year.” Id. at 11 (Compl. ¶ 22). Madoff never made those investments. Instead, he used later-invested money to pay “returns” to other investors and to fund his lavish lifestyle: a classic Ponzi scheme.⁴

Having received monthly statements from BMIS for June through September of 2008 indicating a 10 to 12 percent annualized return on previously made investments, MLSMK “caused $12.8 million to be transferred to BMIS by wiring the funds to BMIS'[s] account at Chase Bank in New York” between October 6, 2008, and December 5, 2008. Id. at 7 (Compl. ¶ 5).

MLSMK alleges that all of the money Madoff received “in the [fraudulent] investment advisory business [was] deposited into accounts he held at [defendant] Chase Bank,” id. at 11 (Compl. ¶ 24), and that, because the investor's account number was required to be written on the face of the check, Chase Bank knew that the funds were “not Madoff's or BMIS'[s] but rather belonged to the victim and were being received by BMIS as a fiduciary,” id. at 12 (Compl. ¶ 25). MLSMK asserts that, for many years prior to 2008, BMIS's Chase Bank account “had an average balance of several billion dollars.” Id. (Compl. ¶ 27). With the advent of the global financial crisis in September 2008, however, the account balance “often dropped to near zero.” Id.

MLSMK alleges that JPMC, in addition to operating as a market-making trading partner for BMIS, developed a derivative product “specifically for use with Madoff-related investments.” Id. at 14 (Compl. ¶ 33). JPMC's product, a note it offered primarily to European investors, guaranteed a return of three times the earnings of a fund offered by the Fairfield Greenwich Group, one of Madoff's so-called “feeder fund[s].” Id. (Compl. ¶¶ 34–35) (internal quotation marks omitted).⁵ The Fairfield Greenwich Group's fund, known as the “Sentry Fund,” had assets totaling $7.5 billion, 95 percent of which was invested with BMIS.⁶ Id. at 14–15 (Compl. ¶ 35). According to the complaint, JPMC hedged against the risk assumed by its derivative product by depositing three times the face amount of the notes—up to $250 million by the summer of 2008—directly into the Madoff-linked Sentry Fund. Consequently, if the Sentry Fund did well—as it was expected to do, based on Madoff's consistent 10 to 12 percent (bogus) returns—JPMC's returns “would offset its obligations on the notes.” Id. at 15 (Compl. ¶ 35). According to the plaintiff, this Madoff-invested fund continued to report gains of five percent “due to the returns Madoff was showing on the money invested with BMIS,” even as the financial markets were crumbling in the summer and early fall of 2008. Id. (Compl. ¶ 36).

MLSMK alleges that the Sentry Fund's consistently strong returns despite the market mayhem triggered JPMC's suspicion about Madoff's results. The investment company therefore “embarked on a due diligence investigation of Madoff's operations.” ⁷Id. The complaint alleges that “[a]s a result of its investigation, in or about September 2008, [JPMC] quietly liquidated” its investment in the Madoff-related fund, although it remained liable on its own derivative product. Id. at 16 (Compl. ¶ 40). By that time, the defendants “had unequivocally concluded that Madoff's reported returns were false and illegitimate and that the only way to protect its own capital ... was to liquidate the entirety of its Madoff-related investments.” Id.; see also id. (“In short, by September 2008, [JPMC] knew that Madoff's business was a fraud.”). The plaintiff asserts that “in January 2009, [JPMC] publicly admitted that the withdrawal of its investment was based on concerns and questions raised during the due diligence investigation of Madoff.” Id.

Finally, the complaint alleges that, despite the defendants' actual knowledge that Madoff's investments were a sham, and that Madoff was diverting customer funds, JPMC “continued to trade with Madoff's market making business,” and Chase Bank “continued to provide Madoff with banking services.” Id. at 16–17 (Compl. ¶ 41). According to the plaintiff, the defendants continued these activities because Madoff's account “was very lucrative, having provided Chase for years with substantial earnings and fees from the large cash balances in the...