950 F. Supp. 2d 621
S.D.N.Y.2013Background
- Plaintiffs Sapirstein-Stone-Weiss Foundation and Irving I. Stone Foundation invested in Ariel Fund Limited, a Cayman Islands hedge fund; GCC served as Ariel’s investment advisor and Merkin was its sole shareholder and director.
- From 2001 to 2008, Defendants increasingly allocated Plaintiffs’ capital to Ariel, which was later revealed to be investing with Bernard Madoff in a Ponzi scheme.
- Madoff admitted the fraud in December 2008 and was sentenced in June 2009; Defendants had entrusted at least 25% of Ariel’s capital to Madoff at the time of the fraud’s exposure.
- Plaintiffs allege Governing Documents, Subscription Agreements, and Quarterly Letters misrepresented or failed to disclose key facts, including Merkin’s role, Ariel’s investments with Madoff, and the true investment strategy.
- Plaintiffs contend the documents omitted the fact of Madoff investment and the ‘split strike conversion’ strategy, despite disclosures to Ascot and Gabriel; Plaintiffs allege failure of due diligence and misleading statements about Morgan Stanley as sole prime broker.
- The court granted the motion to dismiss in part and denied it in part, addressing tolling, fraud, breach of duty, unjust enrichment, and punitive damages.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Does American Pipe tolling apply to state-law claims here? | Plaintiffs rely on American Pipe tolling via the pending class action in Merkin to toll their Ariel claims. | Defendants contend tolling is inapplicable to these state-law claims and that the class action tolling should not affect Ariel-related claims. | Yes; tolling applies and preserves timeliness. |
| Are the fraud-based claims adequately pled with scienter? | Plaintiffs allege deliberate omissions and misrepresentations about Madoff, Ariel’s strategy, and custodianship, with scienter shown by knowledge of falsity. | Defendants argue red flags and alleged facts are insufficient to plead scienter. | Plaintiffs adequately pleaded scienter; common law fraud claim survives. |
| Are non-fraud breach of duty claims viable given exculpatory language and other defenses? | Plaintiffs contend fiduciary duties and misrepresentations breach duties independent of any exculpatory provisions. | Defendants argue exculpatory provisions and lack of fiduciary duty bar these claims. | Yes; non-fraud breach of duty claims adequately pleaded. |
| Does the contract bar unjust enrichment claims? | Plaintiffs claim recovery should proceed where unjust enrichment is implied by wrongful conduct. | Governing Documents and Investment Advisory Agreement create a contract governing the subject matter, precluding quasi-contract recovery. | Unjust enrichment claim dismissed. |
| Are punitive damages available for these breaches? | Punitive damages may be warranted for egregious, willful misconduct. | Punitive damages are unavailable in private breach-of-contract actions; insufficient record currently. | Punitive damages claim dismissed without prejudice. |
Key Cases Cited
- Ashcroft v. Iqbal, 556 U.S. 662 (U.S. 2009) (plausibility standard for pleading)
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (U.S. 2007) (plausibility standard for pleading)
- Casey v. Merck & Co., 653 F.3d 95 (2d Cir. 2011) (state tolling rules apply to class actions)
- In re Merkin, 817 F. Supp. 2d 346 (S.D.N.Y. 2011) (arising from Merkin class action on tolling)
- South Cherry St., LLC v. Hennessee Grp. LLC, 573 F.3d 98 (2d Cir. 2009) (fraudulent intent and scienter considerations)
- Fraternity Fund Ltd. v. Beacon Hill Asset Mgmt. LLC, 376 F. Supp. 2d 385 (S.D.N.Y. 2005) (claims related to misrepresentations and reliance)
- WorldCom Sec. Litig., 496 F.3d 245 (2d Cir. 2007) (American Pipe tolling applicability to class actions)
- IndyMac, 2013 WL 3214588 (2d Cir. 2013) (tolling and statutes of repose distinction)