Williamson v. Stallone

Citation28 Misc.3d 738,905 N.Y.S.2d 740
PartiesRichard A. WILLIAMSON, as Successor Liquidating Trustee on Behalf of Lipper Convertibles, L.P., Plaintiff, v. Sylvester STALLONE and Ehud Shapiro, Defendants. Richard A. Williamson, as Successor Liquidating Trustee on Behalf of Lipper Index No. 100827/2004 Convertibles, L.P., Plaintiff, v. Culbro Corp. Pension Fund, et al., Defendants. Richard A. Williamson, as Successor Liquidating Trustee on Behalf of Lipper, Plaintiff, v. University of Minnesota Foundation, Defendants. Richard A. Williamson, as Successor Liquidating Trustee on Behalf of Lipper Index No. 600593/2006 Convertibles, L.P., Plaintiff, v. Arbitrage Select Fund, L.P., et al., Defendants.
Decision Date30 April 2010
CourtUnited States State Supreme Court (New York)

Labaton Sucharow LLP of NY, for plaintiff Williamson.

Zeichner Ellman & Krause LLP of NY, for defendant Arbitrage.

Schwartz, Ltchtenberg LLP of NY, for defendant Armand Marciano.

Ackerman, Levine, Cullen, Brickman & Limmer, LLP, of Great Neck, for defendant LMF Investment Partnership.

Sonnenschein Nath & Rosenthal of NY, for defendant Sylvester Stallone.

Willkie, Farr & Gallagher LLP of NY, for defendant James Hoge.

Phillips Nizer LLP of NY, for defendants RLH Family Fund and Richard Hirsch.

Riker Danzig Schere Hyland Perretti LLP of NY, for defendant University of Minnesota Foundation.

SHIRLEY WERNER KORNREICH, J.

Pending before the court are motions and cross-motions for summary judgment in related actions concerning a defunct private investment hedge fund, Lipper Convertibles, L.P. (Lipper Convertibles), and certain related entities. Plaintiff Richard A. Williamson is the Successor Liquidating Trustee (Trustee) appointed by the court (Moskowitz, J.) in Lipper Convertibles' liquidation proceeding. In the Matter of the Application of Lipper Holdings, LLC, Case No. 603563/2002. By way of these actions, the Trustee seeks to recover distributions wrongfully paid to defendants limited partners at the time of their respective withdrawals from the fund.

The motions filed by the Trustee seek partial summary judgment as to liability against the following defendants: Sylvester Stallone, Index No. 602395/04 (sequence no. 02); University of Minnesota Foundation, Index No. 604305/04 (sequence no. 03); Arbitrage Select Fund, L.P., Armand Marciano and LMF Investment Partnership, Index No. 600593/06 (sequence no. 03); and RLH Family Fund, Richard Hirsch and James F. Hoge, Jr., Index No. 100827/04 (sequence no. 005).

The Trustee also seeks summary judgment and dismissal of counterclaims by Marciano and Arbitrage for fraud and unjust enrichment, by Marciano for negligent misrepresentation, byRLH Family Fund and Hirsch for false representations, and by the University of Minnesota Foundation for unjust enrichment and for recovery of moneys retained in their capital account. All defendants have filed cross-motions for summary judgment. In support of their cross-motions and in opposition to the Trustee's motions, defendants filed a Joint Commercial Division Rule 19-A Statement and a Joint Memorandum of Law.

Because the motions and cross-motions involve the same subject matter and raise nearly identical issues, the court will treat them jointly for disposition. Issues that pertain to less than all the defendants will be identified and discussed separately.

I. Background

As discussed below, the court (Moskowitz, J.) and the Appellate Division, First Department, have rendered a number of decisions in related actions concerning Lipper Convertibles and related entities, which are relevant to the issues raised here. See generally Serino v. Lipper, 47 A.D.3d 70, 72-73, 846 N.Y.S.2d 138 (1st Dept.), dismissed 10 N.Y.3d 930, 862 N.Y.S.2d 333, 892 N.E.2d 399 (2008) (describing background in context of putative class action against Funds' general partner, auditor and others), and In the Matter of Lipper Holdings, LLC, Index No. 603653/02 (4/11/03 Decision and Order by Moskowitz, J.).

As described in those opinions and established by the motion papers submitted by the parties here, Lipper Convertibles was one of three different private investment funds (the Funds) formed by Lipper & Company, L.P. In October 1997, Lipper Holdings, LLC took over as Lipper Convertibles' general partner. Edward Strafaci was executive Vice President of the general partner and was portfolio manager for the funds, including Lipper Convertibles. After the sudden departure of Strafaci and head researcher Michael Visovsky on January 14, 2002, an internal review revealed that the net asset value (NAV) of Lipper Convertibles' holdings had been significantly overstated. By letter dated March 26, 2002, the limited partners were notified that Lipper Convertibles' NAV had been overstated by approximately 40% and that the decision had been made to dissolve the partnership andliquidate its holdings. Later, the percentage loss was increased to 47%.

Thereafter, Lipper Holdings hired the accounting firm BDO Seidman, LLP, to recalculate the value of Lipper Convertibles' securities from January 1, 1995 through 2001, the period ofovervaluation. The BDO Report concluded that Lipper Convertibles' securities portfolio was cumulatively overvalued by $329,509,000. The disclosure of the overvaluation eventually led to Lipper Convertibles' demise.

On October 3, 2002, Lipper Holdings filed a petition for dissolution (Index No. 603653/02). The petition sought court approval for the plan of distribution based on the revaluation set forth in the BDO Report. By Order dated April 9, 2003, the court (Moskowitz, J.) removed Lipper Holdings, the general partner, as liquidating trustee. By Order dated June 27, 2003, the court appointed plaintiff Williamson as Successor Liquidating Trustee.

On August 11, 2004, Strafaci pled guilty in the Southern District of New York to one count of criminal securities fraud, admitting that he knowingly, willfully and intentionally made untrue statements of material fact in connection with his valuation of the securities contained within the portfolios of Lipper Convertibles and the Series II Fund. At his sentencing on May 20, 2005, the district court (Swain, J.) observed, "His motive in undertaking this conduct is not clear to me. It was, however, clearly not his motive simply to maximize his own financial gain." Transcript at pg. 42. In 2006, the Securities and Exchange Commission charged Lawrence Stoler, the PricewaterhouseCoopers partner assigned to the Lipper account, with knowingly, recklessly, and/or negligently ignoring GAAS and GAAP standards in conducting the 2000 audit. Stoler entered into a consent order in which the SEC found, among other things, that Stoler ignored, discounted, or failed to apprise himself of the substantial audit evidence that Strafaci's valuations were materially overstated.

The Lipper debacle has spawned numerous lawsuits, including the individual lawsuits filed by the Trustee against approximately sixty limited partner defendants seeking to "claw back" overpayments made by Lipper Convertibles based on the inflated valuations. The claw back actions against all but the eight defendants involved in the pending motions, have been resolved. As to each of these defendants, the Trustee makes the following allegations regarding when they withdrew as limited partners from Lipper Convertibles, and the amount of the disbursed overpayments:

Stallone: Withdrew as of July 31, 2001. $1,333,733 overpayment.
RLH family Fund: Withdrew in or around January 2001. $517,892 overpayment.
Richard Hirsch: Withdrew in or around January 2001. $184,713 overpayment.
James F. Hoge, Jr.: Withdrew in or around January 2001. $121,241 overpayment.
LMF Investment Partnership: Withdrew in or around July 2001. $90,203 overpayment.
Armand Marciano: Withdrew in or around July 2001. $313,929.
Arbitrage Select Fund: Withdrew in or around July 2001. $539,785 overpayment.
University of Minnesota Foundation: Withdrew in or around January 2002. $586,539 overpayment.

In 2005, the court (Moskowitz, J.) decided motions to dismiss made by former limited partners of Lipper Convertibles, none of whom is a defendant here. Justice Moskowitz denied the motions in part, sustainingthe allegations of unjust enrichment and money had and received, and dismissing the claim for conversion. The court also denied defenses based on statute of limitations, in pari delicto, unclean hands and others. The defendants in those cases appealed. Defendants here recognized the potential impact of these appeals on the Trustee's claims against them and agreed to an informal stay during the pendency of the appeals. On June 19, 2007, the First Department reversed the court's decision as to statute of limitations only, finding that the limitations period for unjust enrichment is three years. The Court declined to reach any of the other issues raised on appeal. Williamson v. Culbro, 41 A.D.3d 229, 838 N.Y.S.2d 524 (1st Dept. 2007). The Court of Appeals denied the Trustee leave to appeal. 10 N.Y.3d 702, 853 N.Y.S.2d 543, 883 N.E.2d 370 (2008).

In a class action suit by the funds' limited partners, joined by the Trustee, against PwC for malpractice, the court (Moskowitz, J.) partially granted PwC's motion to dismiss the malpractice claims as time-barred. The decision was reversed by the First Department (32 A.D.3d 179, 817 N.Y.S.2d 61 [1st Dept. 2006] ), then reinstated by the Court of Appeals (9 N.Y.3d 1, 840 N.Y.S.2d 730, 872 N.E.2d 842 [2007] ). The claims for malpractice for audits occurring after 1999 and the fraud claims survived. In a subsequent decision, the court (Moskowitz, J.) denied PwC's motion for summary judgment on grounds of in pari delicto. Williamson v. PricewaterhouseCoopers LLP, Index No. 602106/2004, 11/14/07. A settlement of the claims in that suit is pending for approval by the court.

On December 2, 2002, a putative class action ( Serino action) was filed by former limited partners of Lipper Convertiblesagainst Lipper Holdings, Lipper L.P., Ken Lipper, Edward Strafaci, ...

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