Saltz v. FIRST FRONTIER, LP
2010 U.S. Dist. LEXIS 136140
| S.D.N.Y. | 2010Background
- FF Fund is a Delaware LP; Frontier Capital is General Partner; Frontier Advisors is Manager; Ostroff is General Manager; FF Defendants are the entities related to FF Fund.
- FF Fund invested in Madoff via Beacon Fund, a feeder fund; Beacon operated through BAMC owned by Danzinger and Markhoff.
- Beacon, Ivy, and BONY linked to investment decisions and allocations; Plaintiffs allege they were unaware of Beacon/Ivy involvement despite disclosures in audited reports.
- Plaintiffs claim losses of approximately $4.2 million from FF Fund's investments with Madoff; communications about distributions occurred in 2009 but never received.
- Plaintiffs assert state and federal securities claims, common law fraud, fraudulent concealment, gross negligence, and derivative claims; Defendants move to dismiss FAC in full.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether FF Defendants’ 10b-5 claims withstand dismissal | Plaintiffs argue scienter and misrepresentation/omission alleged. | FF Defendants contend lack of particularized scienter and reliance. | Count I dismissed; no strong inference of scienter. |
| whether Ivy Defendants can be liable under 10b-5 as secondary actors | Ivy aided Beacon/Madoff; promised due diligence should be attributed. | No misstatement by Ivy attributable to Plaintiffs; no duty to disclose. | Ivy Defendants' 10b-5 claims dismissed; otherwise derivative/section 20(a) claims dismissed. |
| whether Beacon Defendants can be liable under 10b-5 | Beacon misrepresented/did not disclose; reliance on FF PPM attributed to Beacon. | No misstatements attributed to Beacon; no direct reliance by FF Fund investors. | Beacon 10b-5 claims dismissed; 20(a) claims dismissed. |
| whether remaining state-law claims against FF Defendants are direct or derivative | Constructive fraud, negligent misrepresentation, and accountant’s duty are direct; others derivative. | Most claims derivative under Tooley; exculpatory provisions limit liability. | Direct claims limited to inducement; derivative claims dismissed; several state-law claims dismissed or limited. |
| standing for derivative claims and application of Tooley test | Demand futility argued; Frontier Capital not independent. | Demand not excused; Tooley requires independent review; exculpation provisions apply. | Derivative claims dismissed for lack of demand futility; direct claims survive in limited form. |
Key Cases Cited
- Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (U.S. 2007) (strong inference of scienter required)
- In re AOL Time Warner, Inc. Sec. & ERISA Litig., 381 F. Supp. 2d 192 (S.D.N.Y. 2004) (red flags + GAAS violations can support scienter when combined with other facts)
- Wright v. Ernst & Young LLP, 152 F.3d 169 (2d Cir. 1998) (secondary actors can be liable only for misstatements attributed to them at dissemination)
- Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031 (Del. 2004) (tests direct vs derivative claims by who suffered harm and who receives recovery)