Stephenson v. Citco Group Ltd.
| Decision Date | 01 April 2010 |
| Docket Number | No. 09 CV 00716(RJH).,09 CV 00716(RJH). |
| Citation | 700 F.Supp.2d 599 |
| Parties | G. Philip STEPHENSON, as Trustee of the Philip Stephenson Revocable Living Trust, Plaintiff,v.CITCO GROUP LIMITED; CITCO Fund Services (Europe) BV; CITCO (Canada), Inc.; and PricewaterhouseCoopers, LLP (an Ontario limited liability partnership), Defendants. |
| Court | U.S. District Court — Southern District of New York |
COPYRIGHT MATERIAL OMITTED
Herbert I. Deutsch, Christian Vincent Cangiano, Jeremy Evan Deutsch, Deutsch, Coffey & Metz, LLP, New York, NY, for Plaintiff.
Amanda McGovern, Dyanne Eyce Feinberg, Elizabeth A. Izquierdo, Lewis Nathan Brown, Terence Michael Mullen, Gilbride Heller & Brown P.A, Miami, FL, Eliot Lauer, Michael Joseph Moscato, Timothy Neil McCabe, Curtis, Mallet-Prevost, Colt & Mosle, LLP, Andrew M. Genser, Mindy M. Yu, Kirkland & Ellis LLP, New York, NY, Matthew Buckley, Amy E. Crawford, Brenton Rogers, David Tressler, Emily Nicklin, Timothy A. Duffy, Kirkland & Ellis LLP, Chicago, IL, for Defendants.
The parties are individuals and entities who, like most of the country, were unaware until December 2008 that Bernie Madoff was operating a Ponzi scheme.1,2 Unlike most of the country however, the parties had the misfortune of being directly involved.
The plaintiff is G. Philip Stephenson, the trustee and namesake of the Philip Stephenson Revocable Living Trust, which invested $60 million as a limited partner in a fund called Greenwich Sentry. Greenwich Sentry in turn invested most of its assets with Bernie Madoff Investment Securities (BMIS), the fake fund through which Madoff perpetrated his multi-billion dollar fraud. Greenwich Sentry is not a party to this action, but as one of a number of so-called “feeder funds” provided a vehicle for plaintiff () to invest with BMIS. Greenwich Sentry had as its administrator defendant Citco (Canada) Inc., and as its sub-administrator defendant Citco Fund Services (Europe) Inc. 3 Finally, defendant PricewaterhouseCoopers Canada (“PWC”) was Greenwich Sentry's independent auditor.4
Plaintiff has never received back a penny of the $60 million that his trust invested in BMIS through Greenwich Sentry. As a result of that loss he has brought this direct action against Greenwich Sentry's administrators and its independent auditor.5 The Complaint 6 features seven state law claims: (I) breach of fiduciary duty against Citco, (II) gross negligence against Citco, (III) negligence/professional malpractice against PWC, (IV) fraud against PWC, (V) breach of contract (third party beneficiary) against Citco, (VI) breach of contract (third party beneficiary) against PWC, and (VII) aiding and abetting breach of fiduciary duty, against Citco and PWC.
The defendants have filed three separate motions seeking to dismiss the complaint in its entirety. ( [38], [43], and [46].) With respect to plaintiff's breach of fiduciary duty, gross negligence, negligence, and aiding and abetting breach of fiduciary duty claims, defendants assert preemption by the Martin Act, New York's blue sky law. With respect to plaintiff's fraud claim, PWC contends that the Complaint does not plead fraud with particularity as required by Federal Rule of Civil Procedure 9(b). With respect to all claims, defendants assert that (1) they are derivative and cannot be brought directly by Stephenson, and (2) they are not adequately plead and should be dismissed pursuant to Federal Rule of Civil Procedure 12(b)(6).
For the reasons that follow the Court finds that plaintiff's first, second, third, and seventh causes of action are preempted by the Martin Act, and that his first, second, third, fifth, sixth, and seventh causes of action are derivative and cannot be brought directly. The Court also finds that plaintiff's fourth claim, alleging fraud against PWC, has not been plead with an adequate allegation of scienter. Accordingly the Court dismisses plaintiff's complaint in its entirety.
The factual allegations in the Complaint are as follows:
1. The parties and other relevant entities
Several non-parties (other than, of course, BMIS) had important roles in the facts underlying the complaint. Most central among them is Greenwich Sentry, the Madoff feeder fund that connects plaintiff to the defendants. Greenwich Sentry operates principally out of New York, where its offices are located. (Cl. ¶ 6.) Greenwich Sentry was set up by Fairfield Greenwich Group, a Delaware limited liability company that operates principally out of New York, and which also set up a number of Madoff feeder funds similar to Greenwich Sentry. (Cl. ¶¶ 6-7.) Fairfield Greenwich's “core product business model is the investment management and oversight of the split strike conversion strategy, implemented through [the feeder funds],” and Fairfield Greenwich made substantial representations as to the extent and quality of its due diligence in that capacity. (Cl. ¶¶ 31-38.)
Greenwich Sentry operated as a “feeder fund,” placing substantially all of its Limited Partners' investments into a brokerage account in the custody of Madoff, who acted as trader, broker, and custodian of all funds and securities in the account. (Cl. ¶ 26.) Madoff reported account data and trading results back to Greenwich Sentry, which were in turn handed over to Greenwich Sentry's administrator and auditor to process reports. (Cl. ¶ 26.)
The limited partners bought shares of Greenwich Sentry, which in turn invested in BMIS. They could withdraw funds monthly by placing requests directly with Greenwich Sentry, which would either pay them out of a separate account that it maintained for the purpose of monthly adjustments, (Cl. ¶ 27), or forward the requests to BMIS which would send back the funds for distribution. In December 2008 when the Ponzi scheme was disclosed, Greenwich Sentry ceased honoring withdrawal requests. (Cl. ¶ 29.)
The Citco defendants acted in various capacities as Greenwich Sentry's hedge fund administrators. According to the complaint, Citco Group Limited (CGL) is an integrated financial services holding company that includes among its subsidiaries Citco (Canada), Inc. and Citco Fund Services (Europe) BV. (Cl. ¶ 8.) Operating solely through its subsidiaries, CGL represents itself and its subsidiaries as the world's top providers of hedge fund administration services. (Cl. ¶ 11.) CGL explains these services on its web site:
Our Hedge Fund Service offering includes fund accounting and net asset value calculations, investor relations services, anti-money laundering compliance, corporate & legal services, ... tax reporting and financial statement preparation. Citco's online reporting tools, ... offer both investment managers and investors an extensive suite of online reports to provide them with the tools they need to operate efficiently and effectively. Citco also offers a complete front-to-back offering for single manager funds, combining portfolio capture and real-time position monitoring technology ... with middle and back office operations support. (Cl. ¶ 12.)
Citco (Europe) Inc. is a Netherlands limited liability company and wholly owned subsidiary of CGL that operates principally out of Amsterdam. (Cl. ¶ 9.) It has been Greenwich Sentry's fund administrator since September 1, 2006. (Cl. ¶ 9.) Citco (Europe) was primarily responsible for: communicating with limited partners, maintaining a record of accounts, processing subscriptions and withdrawals, preparing and maintaining financial and accounting records and statements, calculating account balances, arranging for the provision of accounting, clerical, and administrative services, and maintaining corporate records. (Cl. ¶ 49.)
Citco (Canada) Inc. is a Canadian corporation and wholly owned subsidiary of CGL that operates principally out of Ontario, Canada. (Cl. ¶ 9.) Citco (Canada) was delegated by Citco (Europe) to function as sub-administrator of Greenwich Sentry. (Cl. ¶ 10.) It has done so since September 2006. ( Id.)
The Citco entities issued reports as to Greenwich Sentry's portfolio and limited partners' NAV valuations, which they represented they would verify and investigate through due diligence applying their substantial expertise in that area. (Cl. ¶ 45.) They held themselves out as a fiduciary to the investors of the funds they administered. (Cl. ¶ 46.) According to their website:
By providing fully independent services, we act as a reliable fiduciary to safeguard the interests of investors. We train our staff to provide specialist accounting and valuation support, investor relations, corporate services, and day to day management. (Cl. ¶ 46.)
PricewaterhouseCoopers, LLP (PWC) is an Ontario limited liability partnership, (Cl. ¶ 14), and a member firm of PricewaterhouseCoopers International, which operates a network of inter-connected member firms providing auditing, accounting and other investment and advisory services across an international platform, maintaining centralized control over information, training, standards of care, marketing, and quality of work. (Cl. ¶ 15.) The network of PricewaterhouseCoopers entities hold themselves out and operate as a unified business entity comprising a leading accounting and auditing firm with specialized expertise in hedge funds and investment vehicles. (Cl. ¶ 15; Cl. ¶ 60.) Defendant PWC was the auditor of Greenwich Sentry from 2006 through 2008. (Cl. ¶ 16.) It conducted an annual audit of Greenwich Sentry, (Cl. ¶ 63), for the purposes of which it was given complete access to Greenwich Sentry's records. (Cl. ¶ 65.) It annually issued an unqualified audit report, with the salutation “To the Partners of Greenwich Sentry, L.P.” attesting to the accuracy of Greenwich Sentry's financial statements. (Cl. ¶ 63.) In preparing this report PWC undertook to “prepare an annual audited financial report setting forth a balance sheet of Greenwich Sentry, a profit and loss statement showing the results of operations of Greenwich...
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