In Re Merkin
817 F. Supp. 2d 346
| S.D.N.Y. | 2011Background
- This action stems from Bernard Madoff’s Ponzi scheme affecting investors in Ascot Partners, Gabriel Fund, and Ariel Fund.
- Merkin was the general partner of Ascot and Gabriel; GCC was the investment adviser to Ariel; Merkin and GCC allegedly misrepresented their roles and the Funds’ strategies.
- Auditors BDO USA, BDO Cayman, and BDO Limited allegedly failed to perform GAAS/GAAP and to read relevant offering materials.
- Madoff admitted fraud in 2008; substantial Funds’ assets were invested with BMIS, causing large investor losses.
- Plaintiffs assert seven §10(b)/§20(a) claims and related state-law claims including breach of fiduciary duty, negligence, unjust enrichment, fraud and negligent misrepresentation; some complaints also assert fraudulent concealment and breach of contract.
- Defendants moved to dismiss under Fed. R. Civ. P. 9(b) and 12(b)(6); the court granted the motions and dismissed the Complaints with prejudice, with limited postures on certain state-law claims and contracts.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Section 10(b) material misrepresentation/omission by Merkin and GCC | Merkin/GCC misrepresented involvement and strategies. | Holistic reading of offering documents shows no misrepresentation given warnings and third-party management. | Claims fail under Rule 12(b)(6) for lack of material misstatement/omission. |
| Scienter for §10(b) against Merkin and GCC | Red flags and Merkin’s knowledge show scienter. | No strong inference of scienter; red flags insufficient. | No strong inference of scienter; §10(b) claims fail. |
| Section 10(b) claims against Auditor Defendants | Auditors failed to read materials and detect red flags. | GAAS/GAAP violations alone do not establish scienter. | Claims fail for lack of scienter; no §10(b) liability. |
| SLUSA preemption of state-law fraud claims | State-law claims should not be preempted because of offshore funds. | SLUSA preempts fraud-based state-law claims when in connection with covered securities. | Common-law fraud and negligent misrepresentation claims barred by SLUSA. |
| Martin Act preemption of non-fraud state-law claims | State-law claims should not be dismissible on Martin Act grounds. | Martin Act preempts non-fraud claims. | Breach of fiduciary duty, gross negligence, mismanagement, and unjust enrichment dismissed as preempted. |
Key Cases Cited
- Ashcroft v. Iqbal, 556 U.S. 662 (U.S. 2009) (pleading plausibility standard)
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (U.S. 2007) (heightened pleading standard)
- In re Morgan Stanley Info. Fund Sec. Litig., 592 F.3d 347 (2d Cir. 2010) (holistic reading of documents; context of offering materials)
- Olkey v. Hyperion 1999 Term Trust, Inc., 98 F.3d 2 (2d Cir. 1996) (prospectuses must be read as a whole)
- ATSI Communications, Inc. v. Shaar Fund, Ltd., 493 F.3d 87 (2d Cir. 2007) (strong inference of scienter required)
- South Cherry Street, LLC v. Hennessee Grp. LLC, 573 F.3d 98 (2d Cir. 2009) (investor advisor scienter standard for Ponzi contexts)
- In re Beacon Assocs. Litig., 745 F. Supp. 2d 386 (S.D.N.Y. 2010) (red flags do not suffice for scienter)
- In re Tremont Sec. Law, State Law and Ins. Litig., 703 F. Supp. 2d 362 (S.D.N.Y. 2010) (SLUSA and related securities-labeled claims preemption)
- Anwar v. Fairfield Greenwich Ltd., 728 F. Supp. 2d 372 (S.D.N.Y. 2010) (debates Martin Act implications in Madoff feeders)