195 F. Supp. 3d 528
S.D.N.Y.2016Background
- Virtus Investment Partners created and marketed AlphaSector funds whose pre-2008 historical performance was represented in marketing and SEC filings as having an "inception date" of April 1, 2001 and suggesting live client trading for that period.
- In December 2012 at a Boca Raton wholesaler conference, F‑Squared’s principal claimed the index had live trading from 2001; a Virtus product manager then told wholesalers that pre‑2008 returns were back‑tested, startling attendees.
- Despite that disclosure and a subsequent SEC investigation into F‑Squared, Virtus continued to include the 2001 "inception date" language in its January 2013 registration statement and prospectus; later removed the pre‑2008 track record language without corrective disclosure.
- F‑Squared ultimately admitted willful securities law violations and settled with the SEC for $35 million; Plaintiff (Arkansas Teacher Retirement System) sued under Section 10(b), Rule 10b‑5 and Section 20(a) on behalf of purchasers of Virtus securities (class period Jan. 25, 2013–May 11, 2015).
- The Complaint alleges misrepresentations about AlphaSector’s live performance, misleading statements/omissions about drivers of Virtus’s revenue, and false assurances about manager selection and monitoring; Defendants moved to dismiss.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether SEC filings and prospectus misrepresented AlphaSector’s pre‑2008 performance as live returns | Statements (e.g., "inception date" 2001) conveyed live performance; materially misleading because returns were back‑tested until 2008 | Disclosures elsewhere (note that NASDAQ began dissemination in 2008) and context cure any alleged misleading impression | Court: Misstatement plausibly alleged as to Virtus Trust/Partners’ filings; survives dismissal as reasonably read to imply live pre‑2008 returns |
| Whether Virtus omitted that improper sources drove rising revenues | Plaintiff: statements attributing sales/net flows to manager performance concealed that misleading back‑tested track record drove sales | Defendants: no duty to self‑accuse; financial statements accurately reported revenues | Court: One conference‑call statement tying sales to performance was a half‑truth and actionable; broader revenue statements were not sufficiently connected and fail |
| Whether statements about manager selection/monitoring and AlphaSector descriptors were actionable | Plaintiff: "disciplined" oversight and "proprietary" strategy misled investors given poor sub‑adviser quality | Defendants: such statements are puffery/forward‑looking and immaterial | Court: These statements are generalized puffery and inactionable; claims based on them dismissed |
| Whether defendants acted with scienter and which individuals made/controlled the statements (primary and control liability) | Plaintiff: Boca Raton meeting, directive to destroy materials, and executives’ stock sales and signatures show knowledge and control (Aylward, Cerutti, Wattman) | Defendants: allegations rely on a single confidential witness, lack particularized scienter, and Janus limits attribution to the issuer who "made" the statements | Court: Confidential witness and circumstantial facts suffice for strong inference of scienter as to Aylward, Cerutti, Wattman; scienter not plausibly alleged for Angerthal. Under Janus, Aylward (signatory) is a maker; Virtus Partners plausibly exercised control over Trust’s filings so Partners (and signatories) may be attributed statements. Section 10(b) claims dismissed as to Angerthal, Cerutti, Wattman for primary liability; Section 20(a) dismissed as to Angerthal but survives for others. |
Key Cases Cited
- Ashcroft v. Iqbal, 556 U.S. 662 (2009) (plausibility standard for pleading)
- Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007) (heightened pleading and Twombly standard)
- Janus Capital Group, Inc. v. First Derivative Traders, 564 U.S. 135 (2011) (maker of a statement is the person with ultimate authority over statement content)
- Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007) (holistic assessment of scienter allegations)
- Novak v. Kasaks, 216 F.3d 300 (2d Cir. 2000) (requirements for confidential witnesses and particularized pleading)
- ECA, Local 134 IBEW Joint Pension Trust v. JP Morgan Chase Co., 553 F.3d 187 (2d Cir. 2009) (puffery and scienter guidance)
- In re ProShares Trust Sec. Litig., 728 F.3d 96 (2d Cir. 2013) (context can cure isolated misleading statements)