530 F. App'x 21
2d Cir.2013Background
- Second Circuit affirms district court’s dismissal of putative class action against Family Management Corp. and related defendants and a nominal FM Fund; claims include federal securities fraud, NY fraud, and derivative state-law claims; district court held allegations insufficient to plead scienter and material misrepresentation and denied leave to amend; FM Fund limited partnership organized in Delaware; plaintiffs allege FMC and affiliates misrepresented diversification, investment strategy, and due diligence; Madoff feeder funds allegedly caused ~60% indirect exposure; plaintiffs did not make pre-suit demand and seek to proceed derivatively; exculpatory provisions and business judgment rule implicated; court reviews de novo dismissal for failure to state a claim and demand futility
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether §10(b)/Rule 10b-5 claims were adequately pled | Newman asserts misrepresentations and omissions about diversification and due diligence | FMC and affiliates argue no material misrepresentation and lack of scienter | No, claims inadequately pled under pleading standards |
| Materiality of diversification/strategy statements | Offered as misrepresentation of FM Fund’s risk management | Cautionary disclosures and overall read of offering negated material misrepresentation | No, materials conveyed caution and no actionable misrepresentation |
| Due-diligence representations | ADV statements about initial/ongoing due diligence misrepresented actual monitoring | Red flags shown were insufficient to plead scienter or misrepresentation under PSLRA/Rule 9(b) | No, allegations insufficient to state fraud claim under Rule 9(b) and PSLRA |
| Derivative vs direct claims and demand futility under Delaware law | Claims are direct; some demand futility due to conflicts | Claims derivative; demand should not be excused; no particularized facts show futility | Derivative claims fail; excusal of demand not shown; exculpatory provisions foreclose recovery |
Key Cases Cited
- Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (U.S. 2007) (threshold for inference of fraud under PSLRA)
- Ashcroft v. Iqbal, 556 U.S. 662 (U.S. 2009) (pleading must show plausible entitlement to relief)
- Halperin v. eBanker USA.com, Inc., 295 F.3d 352 (2d Cir. 2002) (materiality and cautionary disclosures affect misrepresentation claims)
- Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031 (Del. 2004) (test for direct vs. derivative claims)
- Spiegel v. Buntrock, 571 A.2d 767 (Del. 1990) (demand futility standards for derivative suits)
- Aronson v. Lewis, 473 A.2d 805 (Del. 1984) (demand futility standard—need for disinterested, independent action)