Criterium Capital Funds B.V. v. Tremont (Bermuda) Ltd.
2015 U.S. App. LEXIS 6725
| 2d Cir. | 2015Background
- Plaintiffs are investors in offshore "feeder" funds (Kingate Global and Kingate Euro) that funneled almost all assets to Madoff/BMIS; plaintiffs lost most of their investments when Madoff’s Ponzi scheme was revealed.
- Plaintiffs dismissed their federal securities claims and filed a consolidated state-law class action alleging various theories (fraud, negligent misrepresentation, breach of fiduciary duty, aiding and abetting, unjust enrichment, fee recovery, etc.).
- The funds’ investors bought shares in the offshore funds (not SLUSA "covered securities") but the funds purportedly invested in S&P 100 securities (which are SLUSA "covered securities").
- District court dismissed the entire complaint under SLUSA as precluded and denied leave to re-plead; plaintiffs appealed.
- The Second Circuit vacated and remanded, holding SLUSA preclusion must be applied claim-by-claim: claims predicated on defendants’ own false or complicit conduct in connection with covered securities are barred; claims premised on defendants’ non-fraud breaches or failures to detect Madoff (where defendants are victims, not alleged fraudsters) are not barred.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| 1. When is falsity "in connection with" purchase/sale of a covered security? | Chadbourne and Herald should not bar because plaintiffs bought non-covered offshore shares. | SLUSA bars claims where plaintiffs indirectly sought interests in covered securities via feeder funds. | Following Chadbourne and Herald II, falsity is "in connection with" covered securities where plaintiffs indirectly attempted to invest in covered securities through feeder funds. |
| 2. Does any pleaded reference to falsity trigger SLUSA, or must falsity be essential to liability? | SLUSA should not apply if falsity is peripheral or irrelevant. | Any complaint including misrepresentation allegations should be barred. | SLUSA does not reach extraneous allegations; it applies only where the state-law claim is predicated on falsity that forms the basis of the defendant's liability. |
| 3. Must defendant be alleged to have engaged in or been complicit in the falsity? | Claims based on failures to detect third‑party fraud (defendant as victim) are not SLUSA-covered. | Defendants argued broad application even when falsity was third‑party conduct. | SLUSA applies only to claims alleging falsity by or with the complicity of the defendant; claims charging only negligent failure to detect a third party’s fraud are not precluded. |
| 4. If some claims are SLUSA‑barred, must the entire complaint be dismissed? | Plaintiffs: non-covered claims should proceed. | Defendants: entire class action must be dismissed because SLUSA precludes a "covered class action." | Court rejects wholesale dismissal; dismiss only SLUSA‑precluded claims and allow non‑precluded claims to proceed. |
Key Cases Cited
- Chadbourne & Parke LLP v. Troice, 134 S. Ct. 1058 (2014) (interpreting "in connection with" and holding SLUSA did not bar CD purchasers where only fraudsters purchased covered securities)
- In re Herald, 753 F.3d 110 (2d Cir. 2014) (applying Chadbourne and holding feeder‑fund investors’ claims were SLUSA‑barred because they sought indirect interests in covered securities)
- Dabit v. Merrill Lynch, Pierce, Fenner & Smith Inc., 547 U.S. 71 (2006) (SLUSA should be read consistent with congressional intent to close PSLRA evasion; "in connection with" covers holders in some contexts)
- Rowinski v. Salomon Smith Barney Inc., 398 F.3d 294 (3d Cir. 2005) (SLUSA applies where misrepresentation allegations serve as factual predicate of state‑law claim)
- Segal v. Fifth Third Bank, N.A., 581 F.3d 305 (6th Cir. 2009) (substance over form: court must look to complaint’s substance to determine SLUSA applicability)