Trs. of the Upstate N.Y. Eng'rs Pension Fund v. Ivy Asset Mgmt.

• Decision Date: 16 September 2015
• Docket Number: No. 13 Civ. 3180(PGG).,13 Civ. 3180(PGG).
• Citation: 131 F.Supp.3d 103
• Parties: TRUSTEES OF the UPSTATE NEW YORK ENGINEERS PENSION FUND, Plaintiff, v. IVY ASSET MANAGEMENT, Lawrence Simon, Harold Wohl, and Bank of New York Mellon Corporation, Defendants.
• Court: U.S. District Court — Southern District of New York

131 F.Supp.3d 103

TRUSTEES OF the UPSTATE NEW YORK ENGINEERS PENSION FUND, Plaintiff,

v.IVY ASSET MANAGEMENT, Lawrence Simon, Harold Wohl, and Bank of New York Mellon Corporation, Defendants.

No. 13 Civ. 3180(PGG).

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

Signed Sept. 16, 2015.

Louis P. Malone, III, R. Richard Hopp, Rebecca Richardson, O'Donoghue & O'Donoghue, L.L.P., Washington, DC, James Leon Linsey, Linsey Law Firm PLLC, New York, NY, for Plaintiff.

Jeffrey A. Rosenthal, Lewis J. Liman, Cleary Gottlieb, New York, NY, Nowell D. Bamberger, Cleary Gottlieb Steen & Hamilton LLP, Washington, DC, for Defendants.

MEMORANDUM OPINION & ORDER

PAUL G. GARDEPHE, District Judge:

The Board of Trustees of the Upstate New York Engineers Pension Fund brings this action pursuant to Section 502 of the Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. § 1132, against Defendants Ivy Asset Management, Lawrence Simon, Harold Wohl, and Bank of New York Mellon Corporation. Plaintiff alleges that Defendants failed to properly advise Plaintiff regarding the Pension Fund's investment in Bernard Madoff's now notorious Ponzi scheme after Defendants discovered information that caused them to believe that the investment was no longer prudent. Plaintiff seeks to recover alleged losses associated with Defendants' alleged breach of fiduciary duty and the disgorgement of profits that Defendants Simon and Wohl allegedly realized as a result of placing Plaintiff's assets at risk. Defendants have moved to dismiss the Amended Complaint pursuant to Fed. R. Civ. P 12(b)(1)and 12(b)(6).

BACKGROUND¹

I. THE PARTIES

Plaintiff is the Board of Trustees (the "Trustees") of the Upstate New York Engineers Pension Fund ("Pension Fund") and the named fiduciary of the Pension Fund under 29 U.S.C. § 1102(a)(2). (Am.Cmplt. (Dkt. No. 29) ¶ 4) The Pension Fund is a Taft–Hartley Trust and a multi-employer plan under 29 U.S.C. § 1002(37)(A). (Id. ) The Pension Fund is the successor to the Engineers Joint Pension Fund (the "Plan"), which consisted of several local unions of the International Union of Operating Engineers. (Id. ) At all relevant times, the Trustees made investments on behalf of the Plan. (See id. ¶ 5)

Defendant Ivy Asset Management ("Ivy") is a Delaware limited liability company with its principal place of business in New York. (Id. ¶ 5) Ivy is a registered investment adviser under the Investment Advisers Act of 1940 (id. ), and provides three core services: (1) managing proprietary funds that are marketed as limited partnerships; (2) managing the assets of high net worth individuals and institutional clients, and creating individual proprietary funds over which Ivy has discretion; and (3) rendering investment advice to other investment advisers, ERISA covered employee benefit plans, and asset managers. (Id. ¶ 13) Beginning in 1990, Ivy entered into a written agreement with Plaintiff whereby Ivy served as an investment manager and provided investment advice to the Trustees. (Id. ¶ 5) Ivy continued in this role until 2009. (Id. ¶ 5)

In 2000, Ivy was acquired by the Bank of New York Mellon (the "Bank"). (Id. ) The Bank is a Delaware corporation with its headquarters in New York. (Id. ¶¶ 5, 8)

Defendants Lawrence Simon and Howard Wohl formed Ivy in 1984. (Id. ¶¶ 6, 7) Simon served as Ivy's president and chief executive officer from 1984 to 2005, and as vice chairman from 2006 until 2008. (Id. ) Wohl served as Ivy's vice president and chief investment officer from 1984 to 2005, and as vice chairman from 2006 until 2008. (Id. ¶ 7) Pursuant to the written agreement between Ivy and the Trustees, Simon and Wohl provided investment advice to the Trustees regarding the Plan's assets, as well as "individualized recommendations of particular investment managers for the investment of the Plan's assets." (Id. ¶¶ 6–7) Ivy collected fees in exchange for providing this advice. (Id. ) When the Bank acquired Ivy in 2000, it purchased Simon and Wohl's shares in Ivy for $50 million each, with an earn-out provision that ultimately yielded each man an additional $50 million. (Id. ) Accordingly, Simon and Wohl each earned $100 million as a result of the Bank's acquisition of Ivy.

II. IVY'S INITIAL CONTACT WITH MADOFF

In the summer of 1987, a client introduced Simon and Wohl to Bernard Madoff. (Id. ¶ 14) Madoff operated Bernard L. Madoff Investment Securities LLC ("BMIS"). (Id. ¶ 9) In October 1987, Simon and Wohl made an investment with Madoff through one of Ivy's proprietary funds. (Id. ¶ 14) Ivy maintained several of these investments until it closed its account in 2000. (Id. )

Madoff explained to Simon and Wohl that he utilized a "split-strike conversion strategy," which involved buying and selling Standard & Poor's 100 Index ("OEX") options to effectuate trades and earn high rates of return on investments. (Id. ¶ 51) Madoff said that his trading strategy involved "the purchase of a basket of common stocks with the simultaneous sale of an index call option and purchase of a put option."² (Id. ¶ 44) In reality, Madoff conducted no actual trading, and his investment business was an enormous Ponzi scheme. (Id. ¶ 10) Madoff generated account statements that purported to show the value of an investor's account, but the stated values were entirely fictitious. See id. ¶¶ 45, 153.

II. The Investment Management Agreement Between Ivy and the Trustees and the Plan's Madoff Investments

In November 1989, Ivy made a presentation to the Trustees regarding its investment advisory services. (Id. ¶ 15) Ivy proposed that the Plan invest in one of "Ivy's limited partnership proprietary funds that engaged in convertible arbitrage with different investment managers, including Madoff...." (Id. ¶ 18) On the recommendation of John Jeanneret, an investment consultant to the Trustees (id. ¶ 17), the Trustees declined to invest in an Ivy proprietary limited partnership. (Id. ¶ 19) Ivy then proposed that the Plan make an investment in BMIS directly. (Id. ¶ 20) After consulting with Ivy and meeting with Madoff in 1990, Jeanneret recommended to the Trustees that the Plan invest directly in BMIS. (Id. ¶ 21)

In April 1990, the Trustees and Ivy entered into a Discretionary Investment Management Agreement ("1990 DIMA") (id. ¶ 22; see id., Ex. 1), which provided that Ivy was a fiduciary to the Plan and that it had the discretion to invest the Plan's assets directly, or to select investment advisers to make such investments. (Id. ¶ 23; see id., Ex. 1 at 2) Ivy acknowledged that it was a fiduciary to the Plan and agreed to carry out its responsibilities under the 1990 DIMA consistent with ERISA and in accordance with the Trustees' investment guidelines. (Id. ¶ 24) Under the Trustees' investment guidelines, Ivy was required to pursue "a conservative investment policy, ... with the primary objective being preservation of capital ... [and the] achievement of the maximum possible investment return consistent with th[is] primary objective." (Id., Ex. 1 at 14) Under the 1990 DIMA, Ivy was paid a base fee and a performance fee by the Plan. (Id. ¶ 26; see id., Ex. 1 at 9)

In May 1990, Ivy invested $4,997,786.02 of the Plan's assets with BMIS. (Id. ¶ 27) In April 1991, the Trustees—on Ivy's recommendation—invested an additional $5,014,706.21 of the Plan's assets with Madoff. (Id. ¶ 28)

In June 1992, the Trustees—on Ivy's recommendation—invested an additional $2 million with Madoff. (Id. ¶ 34) By April 1994, the stated value of the Plan's investment with Madoff was approximately $22 million. (Id. ¶ 35)

In April 1994, Ivy entered into a new Discretionary Investment Management Agreement ("1994 DIMA") with the Plan. See 1994 DIMA (Dkt. No. 29), Ex. 2. The 1994 DIMA provided that Ivy was a fiduciary to the Plan and would serve as the Plan's investment manager. (Am.Cmplt.(Dkt. No. 29) ¶ 37) In the 1994 DIMA, Ivy agreed to (1) select and recommend investment advisers; and (2) supervise and direct the investment of the Plan's assets in accordance with the Trustees' investment guidelines, the Plan's current funding policy, and the terms of the 1994 DIMA. (Id. ¶ 39) The investment guidelines directed Ivy to pursue a conservative investment strategy. (Id. ¶ 40)

The 1994 DIMA also appointed Ivy as the Trustees' attorney-in-fact, allowing it to appoint investment advisers to invest and re-invest Plan assets. (Id. ¶ 38) The 1994 DIMA again provided for a two-tiered compensation structure, consisting of a base fee and a performance fee. (Id. ¶ 41) The performance of the Plan's investment with Madoff was linked directly to the allocation of performance fees. (Id. )

In December 1994, on Ivy's recommendation, the Plan withdrew $1.5 million from its investment with Madoff. (Id. ¶ 47) In June 1996, the Plan invested an additional $1 million with Madoff. (Id. ¶ 49)

Between 1994 and 1996, Ivy made presentations and issued reports to the Trustees regarding the Plan's investment strategy, portfolio composition, and/or investment diversification. (Id. ¶¶ 45, 48) The reports reflected the stated value of the Plan's investment with Madoff. (Id. ) "At no time did Ivy tell the ... Trustees of any concerns about Madoff." (Id. ¶ 48)

Throughout 1997, Ivy continued to issue investment reports to the Trustees. (Id. ¶ 63) In June of 1997, Ivy advised the Trustees to withdraw $359,943 from the Plan's Madoff investment. (Id. ¶ 64) In March 1998, Ivy advised the Trustees to withdraw another $7 million from the Plan's Madoff investment. (Id. ¶ 66) As of December 1998, the Plan's investment with Madoff had a stated value of $36,629,757. (Id. ¶ 83)

Between January and April 1999—on Ivy's recommendation—the Trustees invested an additional $6.3 million with Madoff. (Id. ¶ 95)

III. Ivy's Concerns About Madoff's Alleged Trading Strategy

In early 1997, Ivy discovered information about Madoff that caused it concern about his investment strategy. (Id. ¶ 50) Madoff had initially explained to Simon and Wohl that he purchased and sold OEX options traded on the Chicago...