802 F. Supp. 2d 240
D. Me.2011Background
- Plaintiffs allege that Defendants induced investments in Spring Mountain’s QP1 Fund and Ascot Fund, which were feeders to Bernard Madoff, and concealed that arrangement.
- Defendants sought dismissal; the court granted partial dismissal and denied most counts, preserving several claims.
- Key relationships: Steffens and Ho controlled Spring Mountain entities; Merkin advised Ascot and funded QP1; Goldensons relied on these executives’ representations.
- Investors relied on COMs and assessments of Ascot’s strategy, though later disclosures revealed Madoff’s role and lack of trading.
- Madoff’s 2008 arrest prompted subsequent letters and disclosures; Plaintiffs claim ongoing misrepresentations and concealment through 2008.
- Court proceeding focused on choice of law, statute of limitations, and boundaries between primary and secondary liability under federal and Maine laws.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Timeliness of §10(b) claims | Some facts within five-year repose survive | Most claims time-barred by 5-year/2-year rules | Not all claims time-barred; some within repose survive |
| Primary vs. secondary liability under Rule 10b-5 | Defendants directly misrepresented; not merely third-party actions | Liability limited to primary violators; third-party misstatements insufficient | Amended Complaint plausibly presents primary liability theories against Steffens and Ho |
| Materiality and scienter under PSLRA | Allegations show substantial causation and intent to defraud | Pleading fails to meet PSLRA specificity and scienter standards | Claims survive as to materiality and scienter under PSLRA standards (to be proven at trial) |
| Maine Uniform Securities Act jurisdiction | Counts Eight and Nine allege investment-advice misrepresentations with Maine impact | Maine Act jurisdiction limited by 16610(6) and lacks sales/purchases ties | Counts Eight and Nine survive; Maine jurisdiction appropriate under 16610(6) based on acts in-state or affecting Maine residents |
| Derivative claims and punitive damages/constructive trust | Derivatives and equitable relief are viable given underlying fraud | Derivative claims depend on underlying tort; punitive damages improperly pleaded as a standalone claim; constructive trust questionable | Counts Three, Five survive; punitive damages dismissed as standalone remedy; constructive trust survives |
Key Cases Cited
- Tambone v. Global Nat. Gas Corp., 597 F.3d 436 (1st Cir. 2010) (two strains to distinguish primary vs. secondary liability; court did not adopt one test)
- In re Exxon Mobil Corp. Sec. Litig., 500 F.3d 1223 (3d Cir. 2007) (statute of repose begins at misrepresentation; accrual differs from repose)
- City of Pontiac General Employees’ Retirement System v. MBIA, Inc., 637 F.3d 169 (2d Cir. 2011) (distinguishes two-year vs. five-year periods; repose considerations)
- Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (Supreme Court 2007) (requires cogent and compelling inferences of scienter; balancing competing inferences)
- Boston Scientific Corp. v. Boston Scientific Corp., 523 F.3d 75 (1st Cir. 2008) (treats pleading standards under PSLRA/Rule 9(b) for securities fraud)
- ACA Fin. Guar. Corp. v. Advest, Inc., 512 F.3d 46 (1st Cir. 2008) (establishes scienter standard and PSLRA pleading framework)
- Greebel v. FTP Software, Inc., 194 F.3d 185 (1st Cir. 1999) (noting particularly strict pleading standards for fraud)
- Dura Pharm., Inc. v. Broudo, 544 U.S. 336 (Supreme Court 2005) (requirements for loss causation in securities fraud)