Pension of Univ. Of Montreal v. Banc of America
| Decision Date | 20 July 2006 |
| Docket Number | No. 05 Civ. 9016(SAS).,05 Civ. 9016(SAS). |
| Citation | 446 F.Supp.2d 163 |
| Parties | THE PENSION COMMITTEE OF THE UNIVERSITY OF MONTREAL PESION PLAN, et al., Plaintiffs, v. BANC OF AMERICA SECURITIES, LLC; Citco Fund Services (Curacao) N.V.; The Citco Group Limited; International Fund Services (Ireland) Limited; Pricewaterhousecoopers (Netherland Antilles); John W. Bendall, Jr.; Richard Geist; Anthony Stocks; Kieran Conroy; and Declan Quilligan, Defendants. |
| Court | U.S. District Court — Southern District of New York |
Scott M. Berman, Anne E. Beaumont, Amy C. Brown, Jenny F. Cohen, Friedman, Kaplan, Seiler & Adelman LLP, New York, New York, for Plaintiffs.
Lewis N. Brown, Dyanne E. Feinberg, Terence M. Mullen, Gilbride, Heller & Brown, Miami, FL, Eliot Lauer, Michael Moscato, Milos Naumovic, Curtis, Mallet-Prevost, Colt & "Mosle LLP, New York, New York, for Defendants CGL, Citco NV, Kieran Conroy, Declan Quilligan, and Anthony J. Stocks.
Peter K. Vigeland, Dawn M. Wilson, Wilmer Cutler Pickering, Hale and Dorr LLP, New York, New York, for Defendant BAS.
Seth Marc Schwartz, Skadden, Arps, Slate, Meagher & Flom LLP, New York, New York, for Defendant IFSI.
A group of investors brings this action to recover losses stemming from the liquidation of two British Virgin Islands ("BVI") based hedge funds in which they held shares: Lancer Offshore, Inc. and the OmniFund Ltd. ("Funds").1 The Funds were managed by Michael Lauer ("Lauer") through Lancer Management Group, LLC ("Lancer Management").2 Plaintiffs bring claims for violations of section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder against three former directors of Lancer Offshore, Anthony J. Stocks, Kieran Conroy, Declan Quilligan (collectively, "Citco Directors"), and a former administrator of the Funds, Citco Fund Services (Curacao) N.V. ("Citco NV," and together with the Citco Directors, "Citco Defendants").3 Plaintiffs also bring a claim under section 20(a) of the Securities and Exchange Act against The Citco Group Limited ("CGL"), based on CGL's alleged status as a control person of Citco NV.4 Plaintiffs also bring various common-law claims under New York law against the Citco Defendants, International Fund Services (Ireland) Limited ("IFSI"), a former administrator of the Funds,5 and Banc of America Securities, LLC ("BAS"), the former prime broker and custodian of the Funds.6 The Citco Defendants, CGL, IFSI, and BAS now move to dismiss all claims against them.
Plaintiffs are eighty-seven investors from a variety of countries, four of whom are located in New York.8 Each plaintiff invested money in the Funds during the period from 1997 until 2002, with the amount invested ranging from fifty thousand to fifty million dollars.9 Virtually all of the money invested in the Funds, upwards of five hundred eighty million dollars, has been lost.10
Citco NV is allegedly a division and wholly-owned and controlled subsidiary of CGL.11 Citco NV is a business entity organized under the laws of the Netherlands Antilles, with places of business in Curacao, Netherlands Antilles, and Tortola, British Virgin Islands.12 Citco NV performs fund administration services for hundreds of hedge funds throughout the world, including many in the United States, and receives substantial revenue from sources in the United States, including New York.13 Citco NV acted as administrator of the Funds until September 2002, at which time it was replaced by IFSI, a business entity organized under the laws of Ireland, with a principal place of business in Ireland.14
Citco NV assigned three officers, the Citco Directors, to serve as directors of the Funds "in furtherance of their duties on behalf of Citco NV."15 Stocks, who resides in London, England, served as a director of Lancer Offshore from 1995 until July 2001, during which time he was also a director of CGL's International Fund Services division.16 Conroy, who resides in Dublin, Ireland, served as a direct of Lancer Offshore from 1998 until early 2002, during which time he was also a managing director of Citco NV.17 Quilligan, who resides in Curacao, Netherlands Antilles, was a director of Lancer Offshore from 2001 until early 2002, during which time he was also a managing director of Citco NV.18 The Citco Directors participated in fund administration activities by Citco NV directed to the United States and New York.19
BAS is a New York limited liability corporation with a principal place of business in New York.20 BAS acted as the prime broker and custodian for the Funds, holding the Funds' securities in custody "at least through December 3, 2001."21
All of the claims asserted in the Complaint derive from the same set of operative facts related to mismanagement of the Funds by Lauer and Lancer Management and Lauer in the United States.22 Plaintiffs allege that their losses were caused by a fraudulent scheme known as "marking the close."23 To execute this scheme, Lauer and Lancer Management acquired substantial and sometimes controlling stakes in thinly-traded stocks on behalf of the Funds.24 Then, prior to the end of the Funds' reporting periods, Lauer would purchase additional shares of these stocks at significantly higher prices, with the intent of raising the closing market price of the stocks.25 Each Fund would report its net asset value ("NAV") based on the artificially high prices, creating the appearance of a portfolio value vastly higher than its true value, and generating large fees for Lauer and Lancer Management.26
Plaintiffs contend that this scheme was successful due to misrepresentations in the Funds' private placement memoranda ("PPMs"), monthly newsletters, and other materials.27 These misrepresentations pertained to the types of investments that would be made by the Funds, the processes for determining the values of securities held by the Funds, and the performance of the Funds' portfolios.28 Plaintiffs also allege that "from at least March 2000" they received monthly statements of the Funds' NAVs which included fraudulently manipulated month-end closing prices of securities held by the Funds.29 Lancer Offshore's annual reports for 2000, 2002, and 2003 also contained fraudulent NAV figures.30 Plaintiffs allege that defendants, as the Funds' directors and service providers, were pivotal to this fraudulent scheme.31
As the Funds' administrator, Citco NV was responsible for providing various services, including maintenance of the Funds' corporate records and books of accounts preparation and dissemination of the Funds' annual financial statements and quarterly reports, and communication with shareholders and the general public.32 The PPMs represented that the Citco Directors would fairly and reasonably report the values of securities held by the Funds.33 The restated audited financial statements for 2000, and audited financial statements for 2001 state that the Funds' "Board of Directors in conjunction with the investment manager determine at what value the investment securities are reported for the determination of the [NAV] of the Fund."34 Plaintiffs claim that the Citco Defendants breached their obligations by failing to conduct a fair and independent valuation of the Funds and failing to disclose irregularities in the conduct of the Funds to investors.35
Plaintiffs allege that the Citco Defendants are responsible for false statements of the Funds' NAVs. Citco NV provided materials to investors stating that "Citco NV itself prepares monthly NAV calculations for the Funds" and "each month, Citco NV distributed to each shareholder of the Funds a statement setting forth the NAVs of the Funds."36 Plaintiffs allege that the Citco Defendants knew or recklessly disregarded the fact that the "NAV statements, monthly newsletters and offering materials sent to the plaintiffs" included fraudulently inflated NAV figures.37
Plaintiffs also allege that the Citco Defendants made false statements about their procedures for ensuring accurate valuations of the Funds. Plaintiffs allege that "Citco NV's marketing materials" and "materials prepared by Citco NV and provided to certain investors" stated that Citco followed procedures to ensure accurate valuation of the Funds, such as reconciling manager's reports with third-party information on pricing.38 Plaintiffs allege that the Citco Directors made similar misstatements in the PPMs and other offering materials.39 Plaintiffs allege that these statements were materially false because "Citco NV failed to independently value the portfolios and instead slavishly adhered to the valuations provided by Lauer."40
Citco NV "knew or should have known of the fraud because, among other things, three of its employees were also member of the Funds' Board of Directors."41 The Citco Directors, and therefore Citco NV, had "intimate involvement" in the "affairs of the Funds" and "access to non-public information concerning the Funds' financial affairs and business practices, including periodic internal reports detailing revenues, holdings, and other financial information."42 Thus, the Citco Defendants "knew, or should have known, that the valuations provided by Lauer and Lancer Management to Citco NV were false."43
Plaintiffs claim that IFSI, Citco NV's successor as administrator to the Funds, also negligently disseminated misleading NAV statements based upon Lauer's false valuations.44 Plaintiffs also claim that IFSI breached its duty to independently value the portfolios.45
BAS, as prime broker and custodian to the Funds, allegedly aided and abetted Lauer's fraud and breach of duty by providing Lauer with dial-in access to its computer network and allowing him to generate false position...
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