195 F. Supp. 3d 499
S.D.N.Y.2016Background
- F-Squared marketed an “AlphaSector” strategy (claimed inception April 1, 2001) whose pre‑2008 returns were actually back‑tested; Virtus Advisers retained F‑Squared as sub‑adviser and Virtus Trust offered multiple AlphaSector funds.
- Registration statement appendices compared AlphaSector Indices to the S&P 500 and included a footnote referencing an ‘‘index inception date’’ of April 1, 2001 while noting NASDAQ began disseminating calculations in 2008/2011. Plaintiffs allege this was misleading because pre‑2008 results were hypothetical.
- FINRA and others warned Virtus Partners about back‑testing; Virtus received additional warnings and the SEC investigated F‑Squared in 2013; Virtus later removed pre‑2008 index data from filings and Virtus Advisers settled with the SEC.
- Plaintiffs (investors in the funds) sued asserting Exchange Act (§10(b)/Rule 10b‑5, §20(a)) and Securities Act (§11, §12(a)(2), §15) claims and Delaware derivative claims; defendants moved to dismiss.
- Court treated complaint allegations as true for the motion to dismiss and evaluated standing, loss causation, misleadingness/materiality, scienter, statutory seller and control person theories, and demand futility for derivative claims.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Standing for all five funds (class standing) | Youngers et al.: registration statement common to all funds, AlphaSector brand/performance was the crucial selling point, so injuries implicate same concerns | Defs: only two funds tracked the indices; other funds differ in strategy so plaintiffs lack standing for funds they did not buy | Court: Plaintiffs have class standing; the common registration statements and brand made the concerns shared across funds |
| Loss causation for §10(b) claims | Plaintiffs: misrepresented performance inflated investors’ valuation and caused losses; also alleged fee overcharges reduced NAV | Defs: mutual fund NAV is statutorily computed from underlying assets; executives’ statements cannot change NAV or underlying asset values, so no loss causation | Court: Complaint plausibly alleged loss causation — both inflated valuation theory and fee/NAV diminution theory survive motion to dismiss |
| Misleadingness/materiality of index disclosures | Plaintiffs: appendix and footnote were misleading for failing to disclose indices’ back‑tested nature; material because performance history was a key selling point for all AlphaSector funds | Defs: footnote (disclosing NASDAQ calculation date) and other statements made clear funds/inception dates; not material to funds that did not track the indices | Court: Statements taken in context were plausibly misleading; materiality adequately alleged for all funds given the AlphaSector branding and centrality of track record |
| Scienter and control/§20(a), §15 claims; Section 11/12 timeliness and §12 seller status; derivative demand futility | Plaintiffs: defendants had notice (FINRA, internal remarks, destruction of materials, SEC investigation) and failed to investigate; control defendants supervised or signed filings | Defs: warnings/newspapers/public investigations do not prove defendants knew falsity; many allegations insufficiently tie specific defendants to knowledge or active solicitation; Section 11/12 claims time‑barred | Court: Scienter adequately pled as to Aylward (telephone attendance at Boca Raton, conference call to destroy materials) but not as to Bradley or Independent Trustees; §11 claims time‑barred (triggered by Dec. 2013 press); §12(a)(2) claims time‑barred as to sales before May 8, 2012; Virtus Partners and Aylward not adequately pleaded as §12 statutory sellers; derivative claims dismissed for failure to plead demand futility |
Key Cases Cited
- Ashcroft v. Iqbal, 556 U.S. 662 (legal standard for plausible pleading)
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (plausibility standard for complaints)
- NECA-IBEW Health & Welfare Fund v. Goldman Sachs & Co., 693 F.3d 145 (2d Cir.) (class‑standing principles for unpurchased securities)
- Lentell v. Merrill Lynch & Co., 396 F.3d 161 (2d Cir.) (loss causation requires misstatement concealed market‑moving facts)
- Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (scienter inference standard under PSLRA)
- Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336 (loss causation concept)
- Rombach v. Chang, 355 F.3d 164 (2d Cir.) (pleading particularity for securities fraud under PSLRA and Rule 9(b))
- In re ProShares Trust Sec. Litig., 728 F.3d 96 (2d Cir.) (contextual reading of disclosures for misleadingness)
- Novak v. Kasaks, 216 F.3d 300 (2d Cir.) (pleading access to contrary facts; particularity requirement)
- Pinter v. Dahl, 486 U.S. 622 (statutory seller test under §12)
- Aronson v. Lewis, 473 A.2d 805 (Del.) (demand futility standard for derivative suits)