588 F. App'x 27
2d Cir.2014Background
- Elendow Fund, LLC invested in the XL Fund, a Bernard Madoff feeder fund with leveraged derivatives.
- XL Fund suffered indirect and direct losses from Madoff’s fraud, affecting Elendow as an investor.
- Elendow alleged Tremont Partners, Inc. fraudulently induced investment and failed fiduciary duties.
- The district court dismissed Elendow’s complaint in full under Rule 12(b)(6) and 9(b).
- This Court reviews the dismissal de novo and applies Rule 12(b)(6) and heightened pleading standards for securities fraud.
- The court affirms the district court’s ruling, addressing scienter and the derivative nature of the fiduciary duty claim from Tooley-type analysis.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Elendow adequately pled scienter. | Elendow asserts Tremont knew or should have known of frauds. | Tremont contends plaintiff failed to plead strong inference of scienter. | No, scienter not adequately pled. |
| Whether Elendow’s breach of fiduciary duty claim is derivative or direct. | Damages stem from Elendow’s investment in XL Fund. | Claim is derivative since injury and recovery belong to the fund. | Derivative; Elendow cannot sue directly. |
| Whether other claims (fraud, negligent misrepresentation, breach of contract) survive pleading standards. | Claims should proceed given red flags and duty. | Pleading standards unsatisfied for each claim. | All claims fail under pleading requirements. |
Key Cases Cited
- Tellabs, Inc. v. Makar Issues & Rights, Ltd., 551 U.S. 308 (U.S. 2007) (requires a strong inference of scienter)
- Saltz v. First Frontier, LP, 782 F.Supp.2d 61 (S.D.N.Y.2010) (red flag theory insufficient to show strong scienter)
- Newman v. Family Mgmt. Corp., 748 F.Supp.2d 299 (S.D.N.Y.2010) (red flag theory rejected as less compelling than nonfraudulent intent)
- Meridian Horizon Fund, LP v. Tremont Grp. Holdings, Inc., 747 F.Supp.2d 406 (S.D.N.Y.2010) (red flag theory insufficient for strong scienter; later affirmed)
- Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031 (Del.2004) (tests whether injury is direct or derivative)
- Feldman v. Cutaia, 951 A.2d 727 (Del.2008) (claims derivative when harm arises from stock ownership)