Trustees of the Upstate New York Engineers Pension Fund v. Ivy Asset Management
843 F.3d 561
| 2d Cir. | 2016Background
- Upstate N.Y. Engineers Pension Fund (the Plan) retained Ivy Asset Management (Ivy) and its principals Lawrence Simon and Howard Wohl as fiduciary investment managers from 1990 to 2009; the Plan invested with Bernard L. Madoff Investment Securities LLC (BLMIS) from 1990–2008.
- Trustees allege that beginning December 1998 Ivy, Simon, and Wohl believed investing with Madoff was imprudent (though they did not allege knowledge of the Ponzi scheme) and concealed those doubts to preserve assets under management and performance fees.
- As of December 1998 the Plan’s BLMIS account showed a stated value of $36,629,757 while net investment was $5,725,258; over time the Plan withdrew ~$33 million more than it invested and thus was a net winner when Madoff’s fraud was exposed.
- Trustees sued Ivy, Simon, Wohl (breach of prudence, loyalty, plan administration) seeking recovery of losses and disgorgement of profits, and sued BNY Mellon (acquirer of Ivy) for knowingly participating in the breach and for disgorgement of fees and acquisition proceeds.
- The district court dismissed for lack of Article III standing and failure to state a claim; the Second Circuit affirmed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether loss may be measured by the Plan’s missed opportunity to withdraw fictitious BLMIS profits in 1998 and invest elsewhere | Trustees: if warned in 1998 Plan would have withdrawn the $36.6M stated value and realized ~ $31M, invested prudently and earned more than actual BLMIS withdrawals | Defendants: those ‘‘profits’’ were fictitious and would have been fraudulent transfers of other customers’ funds; courts will not lend effect to a fraud | Held: No cognizable loss from missed opportunity to take other investors’ funds; cannot base ERISA loss on fictitious paper profits. |
| Whether Plan plausibly alleged it would have earned more investing its true net principal elsewhere (prudent alternative) | Trustees: withdrawing the Plan’s net principal in 1998 and investing prudently would have yielded more than actual BLMIS-derived profits | Defendants: implausible—BLMIS reported artificially high returns; realistic/prudent alternatives would not match BLMIS withdrawals | Held: Implausible as pleaded; trustees failed to allege a plausible alternative-return theory sufficient to show loss. |
| Whether performance fees and legal/compliance costs constitute recoverable losses that overcome the Plan’s net gain | Trustees: $1.8M in performance fees plus legal costs are losses caused by the breach | Defendants: Plan’s net gain (~$33M) exceeds those costs; trustees do not plausibly plead losses exceeding gains | Held: Fees/legal costs do not plausibly exceed Plan’s excess profits; no Article III injury. |
| Whether BNY Mellon knowingly participated in fiduciary breach and is liable for disgorgement of acquisition proceeds | Trustees: BNY Mellon acquiesced and received fees, knowingly participated in breach; acquisition proceeds ($200M) derived from inflated AUM caused by concealment | Defendants: mere receipt of fees/acquiescence insufficient; no allegations BNY affirmatively assisted or that concealment affected acquisition price | Held: Complaint fails to plead the required affirmative assistance/causal nexus; claim against BNY Mellon dismissed. |
Key Cases Cited
- Picard v. Ida Fishman Revocable Tr. (In re Bernard L. Madoff Inv. Sec. LLC), 773 F.3d 411 (2d Cir. 2014) (fraudulent transfers in Madoff Ponzi scheme cannot be treated as legitimate customer gains)
- In re Bernard L. Madoff Inv. Sec. LLC, 654 F.3d 229 (2d Cir. 2011) (paper profits from BLMIS statements are constructs that cannot be treated as real gains)
- Donovan v. Bierwirth, 754 F.2d 1049 (2d Cir. 1985) (measure loss by comparing actual performance to plausible prudent alternatives; choose most profitable plausible alternative)
- Dardaganis v. Grace Capital Inc., 889 F.2d 1237 (2d Cir. 1989) (ERISA fiduciary liable for loss if but for breach plan would have earned more)
- Diduck v. Kaszycki & Sons Contractors, Inc., 974 F.2d 270 (2d Cir. 1992) (elements of participation in breach of fiduciary duty: breach, knowing participation, damages)
- Kendall v. Emps. Ret. Plan of Avon Prods., 561 F.3d 112 (2d Cir. 2009) (ERISA plaintiff must allege injury or deprivation of a specific right to satisfy Article III injury-in-fact)
- Ashcroft v. Iqbal, 556 U.S. 662 (2009) (complaint must plead factual matter sufficient to state a plausible claim for relief)