San Diego County Employees Ret. Ass'n v. Maounis

• Decision Date: 15 March 2010
• Docket Number: No. 07 Civ. 2618 (DAB).,07 Civ. 2618 (DAB).
• Citation: 749 F.Supp.2d 104
• Parties: SAN DIEGO COUNTY EMPLOYEES RETIREMENT ASSOCIATION, Plaintiff,v.Nicholas M. MAOUNIS, Charles H. Winkler, Robert W. Jones, Brian Hunter, and Amaranth Advisors, LLC, Defendants.
• Court: U.S. District Court — Southern District of New York

749 F.Supp.2d 104

SAN DIEGO COUNTY EMPLOYEES RETIREMENT ASSOCIATION, Plaintiff,

v.Nicholas M. MAOUNIS, Charles H. Winkler, Robert W. Jones, Brian Hunter, and Amaranth Advisors, LLC, Defendants.

No. 07 Civ. 2618 (DAB).

United States District Court, S.D. New York.

March 15, 2010.

Michael D. Newman, Queena Hu, Steven P. Rice, Crowell & Moring LLP, San Francisco, CA, Steven David Greenblatt, William J. McSherry, Jr., Crowell & Moring LLP, New York, NY, for Plaintiff.Christopher M. Green, Boies, Schiller & Flexner, LLP, Armonk, NY, Steven Michael Schwartz, David Emilio Mollon, Winston & Strawn LLP, Shannon Rose Selden, Debevoise & Plimpton, LLP, Michael Sangyun Kim, Kobre & Kim LLP, New York, NY, Dan K. Webb, Matthias A. Lydon, Kristen Victoria Grisius, Stephen J. Senderowitz, Winston & Strawn LLP, Chicago, IL, for Defendants.

MEMORANDUM & ORDER

DEBORAH A. BATTS, District Judge.

Plaintiff San Diego County Employees Retirement Association (“SDCERA”) brings this action against Defendants Nicholas M. Maounis (“Maounis”), Charles H. Winkler (“Winkler”), Robert W. Jones (“Jones”), Brian Hunter (“Hunter”), and Amaranth Advisors, LLC (“Amaranth”), alleging federal securities fraud, common law fraud, gross negligence, breach of contract, breach of fiduciary duty, aiding and abetting breach of fiduciary duty, and vicarious liability. Plaintiff alleges that Defendants—the founder, managers, and chief energy trader of hedge fund Amaranth Partners, LLC (the “Fund”)—fraudulently induced Plaintiff into investment in the Fund, and into holding its investment in the Fund, by making a number of oral and written misrepresentations before and after investment, upon which Plaintiff reasonably relied. Specifically, Plaintiff alleges that Defendants represented that the Fund was a multi—strategy hedge fund that exercised sophisticated risk management controls, while in reality the Fund operated as a single-strategy natural gas fund and did not apply even basic risk management techniques. Plaintiff alleges that the Fund collapsed in late September 2006 as a result of Defendants' fraud and other misconduct, resulting in a loss of over $6 billion in Fund value, including a loss of more than $150 million by SDCERA.

Each of the Defendants has moved individually to dismiss the Complaint pursuant to Rules 12(b)(6), 12(b)(1), 23.1, and 9(b).¹ Defendant Hunter, a citizen and resident of Canada, has additionally moved to dismiss the Complaint for lack of personal jurisdiction, pursuant to Fed.R.Civ.P. 12(b)(2). For the reasons set forth below, Defendant Hunter's Motion to Dismiss for lack of personal jurisdiction is DENIED. All of Defendants' Motions to Dismiss are otherwise GRANTED in their entirety, pursuant to Fed.R.Civ.P. 12(b)(6) and 23.1.

I. BACKGROUND

The following facts alleged in the Complaint in 07 Civ. 2618 (DAB) (“Compl.”) are assumed to be true for purposes of the Motions to Dismiss before the Court. The LLC Agreement, Subscription Agreement, and Confidential Private Placement Memorandum (“PPM”) referenced throughout this section are incorporated by reference in the Complaint. See Yak v. Bank Brussels Lambert, 252 F.3d 127, 130 (2d Cir.2001).

Plaintiff SDCERA is an independent association established by California's County Employees Retirement Law of 1937. (Compl. ¶ 23.) SDCERA collects and invests retirement funds in order to provide retirement and associated benefits for approximately 33,000 eligible employees, former employees, and retirees of the County of San Diego and other participating employers. ( Id.) SDCERA manages a defined benefit plan qualified under section 401(a) of the Internal Revenue Code. ( Id.)

Effective September 1, 2005, SDCERA invested $175 million in Amaranth Partners LLC (the “Fund”), a Connecticut-based hedge fund formed under Delaware's Limited Liability Company Act. ( Id. ¶ 2.) Defendant Amaranth Advisors, LLC (“Amaranth”), a Delaware limited liability company, is the managing member of the Fund. ( Id. ¶ 24.) Up until its collapse in September 2006, the Fund was structured as an unregistered pooled investment, privately organized and administered by Amaranth, its professional investment manager. ( Id. ¶ 30.) The principal office of the Fund and of Amaranth is located in Greenwich, Connecticut. ( Id.)

Defendant Nicholas M. Maounis (“Maounis”) is the co-founder, managing member, principal, President, and Chief Investment Officer of Amaranth; Defendant Charles H. Winkler (“Winkler”), an attorney, is the Chief Operating Officer of Amaranth; and Defendant Robert W. Jones (“Jones”) is Amaranth's Chief Risk Officer. (Compl. ¶¶ 25–27.) Upon information and belief, Maounis, Winkler, and Jones are residents of Greenwich, Connecticut. ( Id.) Defendant Brian Hunter (“Hunter”) was, at various times, a trader, co-Portfolio Manager, or Portfolio Manager at Amaranth for Amaranth's energy trading desk, and head of Amaranth's natural gas trading desk. ( Id. ¶ 28.) Hunter is no longer employed by Amaranth. ( Id.) Upon information and belief, Hunter is a resident of Calgary, Alberta, Canada. ( Id.)

In August 2002, SDCERA entered into a Consulting Engagement and Advisory Agreement with Rocaton Advisors, LLC (“Rocaton”), pursuant to which Rocaton provided SDCERA with investment advice. (Compl. ¶ 38.) In July 2004, SDCERA and Rocaton expanded this engagement to include hedge fund consulting. ( Id.) In late December 2004 or early 2005, Rocaton introduced the Fund to SDCERA. ( Id. ¶ 39.) Plaintiff alleges that Rocaton rated the Fund as a “buy” due to Amaranth's representations regarding the Fund's diverse set of investment strategies and rigorous risk management controls. ( Id. ¶¶ 39–40.) Plaintiff alleges that Rocaton met with Amaranth several times prior to SDCERA's investment in the Fund. ( Id. ¶ 41.) Plaintiff further alleges that prior to investment, Amaranth “repeatedly represented the Fund as being a highly diversified multi-strategy hedge fund with a sophisticated and independent risk management team and a broad base of diversified strategies with a global focus.” ( Id. ¶ 45.)

In March 2005, as part of SDCERA's due diligence process, SDCERA's in-house investment professionals. Chief Investment Officer David Deutsch (“Deutsch”) and Assistant Chief Investment Officer Lisa Needle (“Needle”) visited Amaranth's offices in Connecticut, and met with Maounis, Winkler, and Jones, together with a representative from Rocaton. ( Id.) Plaintiff alleges that during this meeting, Amaranth introduced the portfolio managers of the Fund's assets to discuss their various strategies, and represented that “energy trading” was only one of five substantial sectors that the Fund was pursuing at that time. ( Id. ¶ 42.) At the meeting, Amaranth emphasized the Fund's superior risk management controls, including the size of the Fund's 14–member risk management team, which Maounis, Winkler, and Jones told SDCERA was a proactive as well as reactive group. ( Id. ¶ 43.)

On July 21, 2005, Maounis personally attended and made a presentation about Amaranth and the Fund to SDCERA's Retirement Investment Board (the “Board”) in San Diego, California. (Compl. ¶ 44.) Plaintiff alleges that Maounis explained to the Board at that time, regarding Amaranth's methods for avoiding risk, that

“When we analyze a bond or a stock, we're not looking for a 500, uh, a five times return on investment. We want to make investments where if we spend a million dollars, we're sure we're going to make a million and a half dollars back. We want to make that decision because that decision is in fact in the best interest of our investors .... The most important thing for us is really to minimize the downside .... We don't want to hit home runs, we want to get singles and doubles. So we want to minimize that downside. It's not okay to lose money in the year. And that's really what we try to do .... We're targeting high single-digit to low double-digit returns with small volatility. That's what we're targeting.”

( Id.)

Effective September 1, 2005, SDCERA invested $175 million in the Fund, thereby becoming a “member” of the Fund. (Compl. ¶ 50.) Plaintiff alleges that it invested in the Fund in reliance on Amaranth's representations during SDCERA's due diligence process, including those made by Maounis, Winkler and Jones to SDCERA's investment professionals at the March 2005 meeting, and the statements made by Maounis to SDCERA's Board at its July 21, meeting. ( Id.) In order to invest, SDCERA became a party to the Fund's LLC Agreement, which provided that Amaranth had the sole power to manage and operate all aspects of the Fund's investing and trading, received a Confidential Private Placement Memorandum dated March 2003 (“PPM”), and executed the Fund's Subscription Agreement. ( Id. ¶ 31.) As a condition precedent to investment, Amaranth required that all investors keep confidential certain operating information. ( Id. ¶ 51.) As such, Amaranth executed a separate confidentiality agreement with Rocaton, which permitted Rocaton to receive information regarding the Fund's business and assets on behalf of SDCERA. ( Id.)

As part of the Subscription Agreement executed by SDCERA at the time of investment, Plaintiff agreed to a number of “Representations, Warranties and Acknowledgments” “[a]s an inducement to the Fund to accept th[e] Subscription Agreement.” (Subscription Agreement at S–2, at Def.'s Mem., Ex. A.) Among these representations, Plaintiff warranted that it

“has been furnished a copy of the [PPM] and has carefully read and understands the [PPM], has evaluated the risks of a purchase of the Interest, including the risks set forth in the [PPM] ... and has relied solely on the information contained in the [PPM] in deciding whether to invest in the Fund (irrespective of any other materials and information furnished to [SDCERA] in connection with such investment)”.

( Id.)

The cover page of the 2003 PPM, just below its title, states in bold, capital letters, ...