Trs. of the Upstate N.Y. Eng'rs Pension Fund v. Ivy Asset Mgmt., Docket No. 15-3124

Citation843 F.3d 561
Decision Date08 December 2016
Docket NumberDocket No. 15-3124,August Term, 2016
Parties Trustees of the Upstate New York Engineers Pension Fund, Plaintiff–Appellant, v. Ivy Asset Management, Lawrence Simon, Howard Wohl, and Bank of New York Mellon Corporation, Defendants–Appellees.
CourtUnited States Courts of Appeals. United States Court of Appeals (2nd Circuit)

LOUIS P. MALONE III, O'Donoghue & O'Donoghue LLP, Washington, D.C. (Jennifer R. Simon ; and James L. Linsey, Linsey Law Firm, PLLC, New York, NY, on the brief ), for PlaintiffAppellant .

LEWIS J. LIMAN (Jeffrey A. Rosenthal, on the brief ), Cleary Gottlieb Steen & Hamilton LLP, New York, NY, for DefendantsAppellees .

Before: KEARSE, JACOBS, and POOLER, Circuit Judges.

Opinion

DENNIS JACOBS, Circuit Judge:

An ERISA pension fund, by its trustees, sues its investment manager (and principals), alleging: that these defendants knew by 1998 that investing with Bernard L. Madoff Investment Securities LLC ("BLMIS") was imprudent; that these defendants breached their fiduciary duty by failing to warn the fund of this fact; that if warned, the fund would have withdrawn the full sum appearing on its 1998 BLMIS account statements; and that prudent alternative investment of that sum would have earned more than the fund's actual net withdrawals from its BLMIS account between 1999 and 2008. The trustees seek to obtain the difference by way of damages, among other remedies. The trustees also sue Bank of New York Mellon Corporation, which acquired the investment manager in 2000, alleging that it knowingly participated as a non-fiduciary in the fiduciary breach. They appeal from a judgment of the United States District Court for the Southern District of New York (Gardephe, J.), dismissing their complaint for failure to state a claim pursuant to Federal Rule of Civil Procedure 12(b)(6) and for failure to allege an actual injury sufficient to establish Article III standing pursuant to Federal Rule of Civil Procedure 12(b)(1).

I

Unless otherwise noted, all facts are taken from the first amended complaint (the "complaint").

In 1990, Ivy Asset Management ("Ivy") agreed with the Trustees of the Upstate New York Engineers Pension Fund (the "Plan") to serve as an investment manager and provide advice in the investment of Plan assets. Ivy, which was formed and run by defendants Lawrence Simon and Howard Wohl, continued in this role until 2009. The Plan paid Ivy an annual "basic fee" as well as a "performance fee" equal to a percentage of investment profits above a target threshold. App'x 101, 142. Guided by Ivy, the Trustees invested a portion of Plan assets with BLMIS (Bernie Madoff's investment advisory business) starting in 1990 and continuing until December 2008, when the Madoff Ponzi scheme was exposed.

As this court well knows, BLMIS conducted no actual securities or options trading on behalf of its customers. Instead,

BLMIS deposited customer investments into a single commingled checking account and, for years, fabricated customer statements to show fictitious securities trading activity and returns ranging between 10 and 17 percent annually. When customers sought to withdraw money from their accounts, including withdrawals of the fictitious profits that BLMIS had attributed to them, BLMIS sent them cash from the commingled checking account.

Picard v. Ida Fishman Revocable Tr. (In re Bernard L. Madoff Inv. Sec. LLC), 773 F.3d 411, 415 (2d Cir. 2014).

Under the Employee Retirement Income Security Act ("ERISA"), 29 U.S.C. § 1001 et seq., Ivy, Simon, and Wohl owed fiduciary duties to the Plan. We start from the allegation that they breached these duties beginning in December 1998 by concealing their well-founded belief that investing with BLMIS was imprudent. It is not alleged that Ivy, Simon, or Wohl knew that Madoff was operating a Ponzi scheme, only that they knew that his investment strategy was incoherent and his representations regarding his supposed trades were inconsistent with publicly available information. In 1998, Ivy expressed general concerns about Madoff's operations and sought to limit the Plan's investment with BLMIS, but it did not advise the Trustees to get out.

Ivy, Simon, and Wohl allegedly concealed their doubts about Madoff "so as to maintain [Ivy's] assets under management and receive the fees generated by these assets." App'x 71. Performance fees linked to the Plan's BLMIS investment totaled $1.8 million after December 1998.

The chart below summarizes the Plan's BLMIS investments and withdrawals from the initial date.1 As the chart reflects, the Plan's withdrawals exceeded investments beginning in 2002. By December 2005, after which date the Plan made no further investments or withdrawals, the Plan had withdrawn nearly $33 million more than it had invested.

 Date Event Net Investment/Profit
                1990 — May 1997     Invested $13,085,201     $13,085,201 net investment
                June 1997            Withdrew $359,943        $12,725,258 net investment
                March 1998           Withdrew $7,000,000      $5,725,258 net investment
                January 1999         Invested $2,300,000      $8,025,258 net investment
                April 1999           Invested $4,000,000      $12,025,258 net investment
                March 2000           Withdrew $7,000,000      $5,025,258 net investment
                September 2000       Withdrew $5,000,000      $25,258 net investment
                March 2002           Withdrew $6,000,000      $5,974,742 net profit
                December 2002        Withdrew $3,000,000      $8,974,742 net profit
                June 2003            Withdrew $10,000,000     $18,974,742 net profit
                December 2004        Withdrew $7,000,000      $25,974,742 net profit
                December 2005        Withdrew $7,000,000      $32,974,742 net profit
                

In November 2010, the bankruptcy trustee for BLMIS attempted to claw back the nearly $33 million in net profit withdrawn by the Plan, but was frustrated by the intervening statute of limitations.

As of December 1998 (when it is alleged the Plan would have pocketed its profits if well-advised), the Plan's investment with BLMIS (net of withdrawals) was $5,725,258. At that point, the stated value of its BLMIS account was $36,629,757—though, because BLMIS was a Ponzi scheme, this account entry was fictitious. Nonetheless, as the Trustees point out, as long as BLMIS had adequate funds in hand, the entire $36,629,757 could have been withdrawn—nearly $31 million more than the Plan's net investment—and could then have been invested elsewhere.

Instead of withdrawing and reinvesting the $36,629,757 stated value of the BLMIS account in December 1998, the Trustees invested an additional $6,300,000 over the next year (on top of the $5,725,258 net investment at that time) and then withdrew $45,000,000 over the following six years, for a net profit of $32,974,742. These withdrawals, however, did not deplete the stated value of the Plan's BLMIS account, which grew apace. When Madoff's fraud was exposed in December 2008, the stated value of the account exceeded $50 million. But because the Plan was a "net winner" in Madoff's fraud—that is, it had withdrawn more than it invested—it could not recover any of these fictitious funds in BLMIS's liquidation.

Of the four counts in the complaint, three assert claims against Ivy, Simon, and Wohl: that they breached the duty of prudence, the duty of loyalty, and the duty to administer the Plan in accordance with its governing documents. In connection with these breach-of-duty claims, the Trustees allege the following injuries: (1) the Plan lost the opportunity to withdraw the full stated value of its BLMIS account in December 1998 and invest the (largely notional) $36,629,757 elsewhere; (2) the Plan paid Ivy $1.8 million in performance fees, some or all of which related to imaginary or unrecoverable profits; (3) the Trustees increased Plan members' vested pension fund benefits in July 1999 (acting in part on the mistaken belief that the stated performance of the BLMIS account reflected reality), a step they allege they would not have taken if Ivy, Simon, or Wohl had dissuaded them from continuing to maintain an account with BLMIS; (4) the Plan incurred the expense of responding to subpoenas issued by the United States Department of Labor and the Attorney General of the State of New York related to the Plan's investment with BLMIS; and (5) the Plan incurred legal and related expenses defending against the clawback litigation initiated by the BLMIS bankruptcy trustee.

In addition to these alleged injuries, the Trustees seek disgorgement of the $200 million earned by Simon and Wohl when Bank of New York Mellon Corporation ("BNY Mellon") acquired Ivy in 2000. The Trustees allege that the reason Ivy, Simon, and Wohl concealed negative information about Madoff was that they feared the Trustees' withdrawal of the BLMIS investment would reduce Ivy's assets under management and, by extension, its acquisition value.

The fourth count is pled against BNY Mellon. Without claiming that BNY Mellon itself assumed a fiduciary duty to the Plan as a consequence of its acquisition of Ivy, the Trustees allege that BNY Mellon knowingly participated in the fiduciary breach "[b]y virtue of its acquiescence and its receipt of the investment advisory fees paid by the Plan." App'x 90–91. In connection with this count, the Trustees seek disgorgement of those fees as well as any profits earned by Simon and Wohl as a result of their fiduciary breach.2

In September 2015, the complaint was dismissed for lack of Article III standing pursuant to Federal Rule of Civil Procedure ("Rule") 12(b)(1) and, in the alternative, for failure to state a claim pursuant to Rule 12(b)(6). The district court held that the Plan suffered no legally cognizable injury because it had no right to fictitious profits and because its gains exceeded the performance fees and legal expenses relating to the BLMIS investment. Trs. of the Upstate N.Y. Eng'rs Pension Fund v. Ivy Asset Mgmt., 131 F. Supp. 3d 103, 121–26 (S.D.N.Y. 2015). The district court further ruled that: (1) the Trustees' claim regarding...

To continue reading

Request your trial
323 cases
  • Augusto Fernandes, Maria Fernandes, Acf Family Holding Corp v. Moran
    • United States
    • U.S. District Court — Eastern District of New York
    • May 7, 2018
    ...the complaint as true and draw all reasonable inferences in favor of the Plaintiffs. See, e.g., Trs. of Upstate N.Y. Eng'rs Pension Fund v. Ivy Asset Mgmt., 843 F.3d 561, 566 (2d Cir. 2016); Walker v. Schult, 717 F.3d 119, 124 (2d Cir. 2013); Cleveland v. Caplaw Enters., 448 F.3d 518, 521 (......
  • Onosamba-Ohindo v. Barr, 1:20-CV-00290 EAW
    • United States
    • U.S. District Court — Western District of New York
    • September 2, 2020
    ...all factual allegations as true and drawing all reasonable inferences in favor of the plaintiff." Trs. of Upstate N.Y. Eng'rs Pension Fund v. Ivy Asset Mgmt. , 843 F.3d 561, 566 (2d Cir. 2016), cert. denied , ––– U.S. ––––, 137 S. Ct. 2279, 198 L.Ed.2d 703 (2017). To withstand dismissal, a ......
  • Watkins v. Town of Webster
    • United States
    • U.S. District Court — Western District of New York
    • March 17, 2022
    ...all factual allegations as true and drawing all reasonable inferences in favor of the plaintiff." Trs. of Upstate N.Y. Eng'rs Pension Fund v. Ivy Asset Mgmt. , 843 F.3d 561, 566 (2d Cir. 2016). To withstand dismissal, a plaintiff must set forth "enough facts to state a claim to relief that ......
  • In re Soundview Elite Ltd.
    • United States
    • United States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Southern District of New York
    • November 6, 2018
    ...invested like other funds being invested during the same period in proper transactions." Trustees of Upstate New York Engineers Pension Fund v. Ivy Asset Mgmt. , 843 F.3d 561, 567 (2d Cir. 2016) (citing Donovan , 754 F.2d at 1056 ) (quotations omitted). See also Scalp & Blade, Inc. v. Adves......
  • Request a trial to view additional results

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT