Lange et al v. Massachusetts Mutual Life Insurance Company et al

Filing 867

OPINION re: #103575 (63 in 1:10-cv-09061-TPG) MOTION to Dismiss the Second Amended Complaint on behalf of Rye Select Broad Market XL Fund L.P.. filed by Rye Select Broad Market XL Fund, L.P., (55 in 1:10-cv-09061-TPG) MOTION to Dismiss / No tice of Motion by the MassMutual Defendants to Dismiss the Second Amended Complaint. filed by MassMutual Holdings LLC, Massachusetts Mutual Life Insurance Co., (828 in 1:08-cv-11117-TPG) MOTION to Dismiss The Second Amended Complaint. file d by Rupert Allan, Rye Investment Management, Tremont Group Holdings, Inc., Jim Mitchell, Tremont Partners, Inc, Tremont Capital Management Inc., Robert Schulman, (61 in 1:10-cv-09061-TPG) MOTION to Dismiss The Second Amended Complaint. filed by Rupert Allan, Tremont Partners, Inc., Rye Investment Management, Jim Mitchell, Tremont Capital Management Inc., Tremont Group Holdings Inc., Robert Schulman, (826 in 1:08-cv-11117-TPG) MOTION to Dismiss the Second Amended Complaint. filed b y Oppenheimer Acquisition Corporation, (59 in 1:10-cv-09061-TPG) MOTION to Dismiss the Second Amended Complaint. filed by Oppenheimer Acquisition Corporation, (821 in 1:08-cv-11117-TPG) MOTION to Dismiss /Notice of Motion by the MassMutual Defendants to Dismiss the Second Amended Complaint. filed by Massmutual Holding LLC, Massachusetts Mutual Life Insurance Company. Elendow Fund's complaint is dismissed in its entirety. This opinion resolves the motions listed as document numbers 821, 826, and 828 in case number 08 Civ. 11117 and document numbers 55, 59, 61, and 63 in case number 10 Civ. 9061. SO ORDERED.(Signed by Judge Thomas P. Griesa on 9/16/2013) (ama) Modified on 9/16/2013 (sdi).

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK

In Re Tremont Securities Law, State Law, and
Insurance Litigation

Master File No.
08 Civ. 11117

ELENDOW FUND, LLC,
Plaintiff,
v.

10 Civ. 9061

RYE SELECT BROAD MARKET XL FUND,
TREMONT PARTNERS, INC., et al.,

OPINION

Defendants.

This is an action to recover assets lost in the now-infamous Ponzi scheme
perpetrated by Bernard Madoff. Plaintiff Elendow Fund, a small investment fund located
in Bozeman, Montana, alleges that it was induced to invest approximately $12 million in
one of Tremont’s Madoff-managed funds, the Rye Select Broad Market XL Fund, by
certain representations made by Tremont about the XL Fund that proved to be false.
Elendow Funds also alleges that Tremont misrepresented the due diligence that it
performed on its fund managers. Moreover, it alleges that Tremont was aware of so many
abnormalities and red flags in Madoff’s operations that the most natural inference is that
Tremont made these misrepresentations, not merely out of its own ignorance of Madoff’s
scheme, but with fraudulent intent.
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Elendow Fund has had the benefit of limited discovery through which it received
documents referenced and quoted in other lawsuits, in particular the litigation between
Tremont and Irving Picard, the bankruptcy trustee appointed to oversee the liquidation of
Bernard L. Madoff Investment Securities. Elendow Fund’s latest amendment to its
complaint incorporates the fruits of this discovery. The complaint includes counts—against
various defendants—of securities fraud, control-person liability, common-law fraud,
negligent misrepresentation, breach of contract, breach of fiduciary duty, and aiding and
abetting a breach of fiduciary duty.
Defendants moves to dismiss the complaint. The motion is granted.

The Complaint
The Parties
Elendow Fund brings this action against numerous defendants falling into three
groups: Tremont entities, individual Tremont officers, and control defendants.
The defendant Tremont entities are
• The XL Fund;
• Rye Investment Management, the manager of the XL fund;
• Tremont Partners, the general partner of the XL Fund;
• Tremont Group Holdings, the parent holding company of both the XL
Fund and Tremont Partners; and

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• Tremont Capital Management, which manages “Tremont Group Holdings’
family of multi-manager products.”
The individual defendants are presidents and CEOs of Tremont Group Holdings
and Rye Investment Management during the time that Elendow Fund made its investments
with the XL Fund.
The control defendants are:
• Oppenheimer Acquisition Corporation, parent company of Tremont
Holdings;
• MassMutual Holdings, parent company of Oppenheimer; and
• Massachusetts Mutual Life Insurance Company, or simply “MassMutual,”
parent company of MassMutual Holdings.

Madoff and The XL Fund
The majority of the XL Fund’s exposure to Madoff was, in a certain sense, indirect.
The XL Fund operated in such a way that it generated investment returns based upon the
performance of another Tremont fund, the Rye Select Broad Market Fund, the assets of
which were managed by Madoff. While some assets were invested directly with the Broad
Market Fund, and thus with Madoff, the XL Fund’s primary investment strategy was to
achieve a three-times leveraged return based upon the performance of the Broad Market
Fund. This means that the XL Fund entered into derivative contracts with various
counterparties such that when the contract terminated the counterparty agreed, in exchange
for a fixed interest payment, to pay the XL Fund the net increase or decrease in the value
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of a hypothetical direct investment in the Broad Market Fund since the contract’s
inception. Under the contracts, this hypothetical direct investment was set at three times
the value of the XL Fund’s actual investment in the Broad Market Fund, such that the XL
Fund would enjoy three times the gain, or suffer three times the loss, as it would through its
actual direct investment in the Broad Market Fund.

Tremont’s Representations
Elendow Fund alleges that Tremont made two types of representations, both of
which proved to be false. It alleges that Tremont falsely represented the investment
strategy of the XL Fund and falsely represented that Tremont conducted extensive due
diligence on its fund managers.

Investment-Strategy Representations
Broadly speaking, Elendow Fund contends that Tremont induced it to invest in the
XL Fund by disguising Madoff’s fraud. More specifically, Elendow Fund alleges that
Tremont represented that the XL Fund sought to provide “long-term capital growth” and
consistent “positive returns irrespective of stock market volatility or direction, while
focusing on preservation of capital.” The XL Fund would achieve this, Tremont claimed,
by investing its assets with Madoff who supposedly employed a “split-strike conversion”
strategy, a hedging strategy using equities, options trading, and short selling. The fund’s
offering memorandum indicated that the fund’s performance was dependant on Madoff’s
investment expertise and the inherent risk of the market. The XL Fund also issued
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periodic statements that purported to reflect Elendow Fund’s gains, losses, and closing
capital at the end of the statement periods.
Given the truth of Madoff’s operations, it is easy to see that these representations
were false. Madoff employed no investment strategy at all, the value of Elendow’s
investments was not subject to the whims of the market or Madoff investment expertise,
and the account statements reflected investments that did not actually exist.
Elendow Fund alleges that Tremont knew these representations to be false when it
made them. Internal Tremont communications allegedly indicate that Tremont was aware
of many of the red flags that caused others to conclude that Madoff’s operation was not
legitimate. The documents allegedly reveal that Tremont recognized the risks posed by a
number of the warning signs. Tremont allegedly understood
• that it did not know how much money Madoff had under management;
• that Madoff rarely met directly with investors;
• that Madoff did not earn a management fee on top of his commission on
trades;
• that Madoff’s annual report disclosed only investment in U.S. Treasury bills;
• that Madoff was “self clearing,” meaning that there was no third-party to
confirm what trades Madoff was making, though the complaint alleges that,
in Tremont’s view, these concerns were mitigated by its belief that the
National Association of Securities Dealers was verifying Madoff’s trades;
• that Madoff’s returns were exceptionally stable;
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• that Madoff used an outdated system of paper trade confirmations which
meant that Tremont was only able to spot-check a few transactions per
month, instead of engaging in the in-depth monitoring that electronic
confirmations would have allowed; and
• that Madoff’s accounting firm was possibly not sophisticated enough to
effectively audit Madoff’s business.
Numerous internal emails and memoranda acknowledged that these aspects of
Madoff’s business rendered it highly opaque to Tremont’s due-diligence efforts and were
not in accordance with industry best practices. In fact, Tremont allegedly did not even
know who actually made the investment decisions within Madoff’s organization.
Tremont knew that these facts would make it very difficult to attract more
sophisticated institutional investors. While Tremont supposed that the “trust me, let me
show you the numbers”, or “blind faith” approach would satisfy what one employee
referred to as the “Palm Beach crowd,” institutional investors would likely require more
transparency. Tremont was also aware that at least one other hedge fund manager would
not recommend Tremont to investors because its relationship with Madoff was “prone to
blow up” (although a follow-up email characterized this concern as a “misconception”).
Tremont also was also aware that The Royal Bank of Scotland, one of Tremont’s
counterparties, was not comfortable dealing with Madoff. Tremont executives also met
with representatives of another bank, MeesPierson, and discussed many of the warning
signs noted above.

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Tremont executives also were aware of and discussed two of the major articles that
appeared in the financial press in 2001 raising questions about Madoff’s business.
The complaint alleges that several individuals, banks, funds, and investment
advisors, presented with the same red flags as those brought to Tremont’s attention,
concluded that Madoff’s results were too good to be true and made the wise decision to
avoid any exposure to him.

Due-Diligence Representations
Elendow Fund also alleges that Tremont represented that it would subject Madoff,
as one of its investment managers, to a strict, ongoing program of due diligence. The
Tremont Group website claimed that Tremont clients would benefit from its “thorough
manager research, careful due diligence, advanced risk allocation and time tested portfolio
management.” Tremont’s Form ADV, filed in 2006 with the Securities and Exchange
Commission, contained more specific representations. Tremont claimed that it “engaged
on a daily basis with custodians and/or trustees to monitor cash flow and fund compliance,”
that “accounts are monitored in terms of securities holdings, asset mix and adherence to
investment guidelines,” and that it “uses its own proprietary software programs to monitor
the performance of fund managers.”
Elendow alleges that it reviewed the XL Fund’s private placement memoranda. But
Elendow Fund does not specifically allege that it reviewed either of the documents
containing the due-diligence representations alleged in the complaint. Elendow Fund,

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however, alleges more generally that it “relied, to its detriment” on “such misleading
statements” as “described above” in the complaint.
These representations, Elendow Fund alleges, are belied by many of the allegations
described above. Most basically, Elendow Fund contends, because Tremont knew of all
the red flags alleged above and yet still made the decision to invest with Madoff, one must
conclude that, when it came to Madoff, Tremont’s due-diligence practices were all but
suspended in favor of blind reliance on Madoff’s reputation. Specifically, Tremont’s
awareness that Madoff’s operation had “no transparency” in numerous respects means that
Tremont must have known that it was not, in fact, able to do the specific things it said it was
doing in the way of due diligence. Similarly, Elendow alleges that Tremont could not have
used the sophisticated, computerized monitoring techniques it said it would because
Madoff actually submitted his trade confirmations by U.S. Mail on paper, days after the
fact.

Control Allegations
Elendow Fund alleges that Oppenheimer acquired Tremont Group Holdings in
2001 (it was then called “Tremont Advisers”). In so doing, Oppenheimer allegedly had
complete access to Tremont’s files and conducted interviews with Tremont executives.
Oppenheimer allegedly had access to information regarding Tremont’s “strategic
relationships,” including its lucrative relationship with Madoff. Oppenheimer therefore
conditioned its acquisition of Tremont on the continued employment of two Tremont
executives who had personal relationships with Madoff.
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A number of Tremont’s directors, the complaint alleges, are also MassMutual and
Oppenheimer executives. MassMutual, in turn, allegedly controls Oppenheimer, as well as
two intermediary holding companies, through its majority stock ownership and its
installation of its own officers as Oppenheimer executives. MassMutual allegedly holds
itself out as a part of the same integrated financial services firm as Oppenheimer and
Tremont. Thus, Elendow Fund alleges, Oppenheimer controlled Tremont, and
MassMutual, in turn, controlled Oppenheimer.

Discussion
To survive a motion to dismiss under Rule 12(b)(6) of the Federal Rules of Civil
Procedure, a complaint must plead sufficient facts to state a claim for relief that is plausible
on its face. Ashcroft v. Iqbal, 556 U.S. 662, 677–78 (2009); Bell Atl. Corp. v. Twombly,
550 U.S. 544, 570 (2007). In deciding a motion under Rule 12(b)(6), a court must accept
as true the facts alleged in the complaint, drawing all reasonable inferences in the plaintiff’s
favor, and may consider legally required public disclosures as well as documents attached
to the complaint, incorporated by reference into the complaint, or known to and relied on
by the plaintiff in bringing the suit. ATSI Commc’ns, Inc. v. Shaar Fund, Ltd., 493 F.3d
87, 98 (2d Cir. 2007).
Allegations of securities fraud, however, are subject to the heightened pleading
standards of the Private Securities Litigation Reform Act, 15 U.S.C. § 78u-4, and Federal
Rule of Civil Procedure 9(b). A plaintiff alleging securities fraud must identify in its
complaint “each statement alleged to have been misleading, the reason or reasons why the
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statement is misleading, and if an allegation regarding the statement or omission is made on
information and belief, the complaint shall state with particularity all facts on which that
belief is formed.” Id. at § 78u-4(b)(1).
Plaintiffs are also subject to a heightened pleading standard for scienter—that is,
plaintiffs must “state with particularity facts giving rise to a strong inference that the
defendant acted with the required state of mind.” Id. at § 78u-4(b)(2). Plaintiffs must
plead facts giving rise to an inference of fraudulent intent that is “cogent and at least as
compelling as any opposing inference of nonfraudulent intent.” Tellabs, Inc. v. Makor
Issues & Rights, Ltd., 551 U.S. 308, 314 (2007). This requirement has, in turn, been
interpreted by the Second Circuit to require a particularized pleading of “facts: (1) showing
that the defendants had both motive and opportunity to commit the fraud or (2)
constituting strong circumstantial evidence of conscious misbehavior or recklessness.”
ATSI Commc’ns, 493 F.3d at 99. Recklessness is defined “an extreme departure from the
standards of ordinary care . . . to the extent that the danger was either known to the
defendant or so obvious that the defendant must have been aware of it.” ECA, Local 134
IBEW Joint Pension Trust of Chicago v. JP Morgan Chase Co., 553 F.3d 187, 198 (2d Cir.
2009). In other words, plaintiffs must allege that defendants were aware of such major risks
that their state of mind “approximated actual intent.” S. Cherry St., LLC v. Hennessee
Grp. LLC, 573 F.3d 98, 109 (2d Cir. 2009).

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Securities Fraud
As discussed above, Elendow Fund alleges that Tremont made two types of
fraudulent representations in enticing it to invest. It represented that the XL Fund’s assets
would actually be invested according to a particular strategy and with certain goals, and it
represented that it would investigate and monitor the funds in which it invested so as to
achieve some standard of due diligence.

Investment-Strategy Representations
It is clear enough, in light of all that has been alleged and all that is now widely
known about Madoff’s scheme, that Tremont’s representations indicating that the XL
Fund’s assets would be invested at all were false. The issue is not whether these were
misrepresentations but whether they were made with fraudulent intent.
Despite the complaint’s extensive and detailed allegations regarding all the red flags
that Tremont allegedly saw, the strongest inference to be drawn from them is that
Tremont—like so many others—overlooked the red flags or rationalized them. Nowhere
does the complaint specifically and plausibly allege that Tremont actually knew that
Madoff’s operation was a fraud.
In fact, the complaint contains a number of allegations that strongly support the
opposite inference. For example, the complaint quotes a Tremont memorandum that
states that parts of Madoff’s operations do “not represent be industry practices,” but the
memorandum later states that “[t]here are numerous controls put around Madoff
(including numerous audits by administrators, accountants, exchanges and governmental
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entities) to give investors comfort that Madoff is following the operating guidelines and
securities laws.” The complaint also alleges that although Termont was alerted that lack of
transparency might create problems in its relationship with Madoff, Tremont insiders
regarded these concerns as based upon “misconceptions.” The complaint further alleges
that Tremont believed that Madoff’s trades were actually being verified with NASD. And,
indeed, all the allegations of Tremont’s fruitless efforts to seek transparency and answers
from Madoff, suggest a company that, at the time, believed that there existed legitimate
answers to its questions. Put another way, if Tremont had known, or even strongly
suspected, that Madoff was perpetrating a fraud, it would have been peculiar for Tremont
to continue discussing ways of gaining greater transparency into Madoff’s operations and to
continue sending Madoff due-diligence questionnaires.
Plaintiff contends that even if the complaint fails to adequately allege that Tremont
actually knew of Madoff’s fraud, the complaint sufficiently alleges that Tremont was
reckless in disregarding the red flags. But recklessness for purposes of scienter in
securities-fraud actions is “not merely a heightened form of negligence.” Novak v. Kasaks,
216 F.3d 300, 312 (2d Cir. 2000). Rather, recklessness in this context must approximate
actual intent by strongly showing that the red flags were so egregious or “so obvious that the
defendant must have been aware of it.” ECA, 553 F.3d at 198; see also S. Cherry St., 573
F.3d at 109 (repeatedly emphasizing the words “egregious” and “obvious”). And, in
complaints like this one where plaintiffs do not plead motive and opportunity, the strength
of the circumstantial evidence of evidence must be even greater. Id. at 198–99.

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Here, Elendow Fund’s complaint does not sufficiently allege facts showing that the
dangers posed by Madoff were so unmistakable that Tremont must have known that its
representations were false. Rather, the more compelling inference is that Tremont
recognized that an investment with Madoff presented a combination of risks and benefits
and genuinely chose to continue its relationship with Madoff. The allegations in the
complaint are not sufficient to show that Termont “egregiously refus[ed] to see the obvious,
or to investigate the doubtful.” Chill v. Gen. Elec. Co., 101 F.3d 263, 269 (2d Cir. 1996).
Rather, as stated above, the complaint shows that Tremont did investigate the risks through
endeavors like its “Madoff Operations Review.” At bottom, the red flags alleged here, like
those this court has held insufficient in similar cases, do not show that Tremont “must have
been aware” of the fraud. See, e.g., Prickett v. New York Life Ins. Co., 896 F. Supp. 2d
236, 245–48 (S.D.N.Y. 2012). “[T]he more compelling inference as to why Madoff’s fraud
went undetected for two decades was his proficiency in covering up his scheme and
deceiving the SEC and other financial professionals.” Id. at 247 (quoting Meridian
Horizon Fund, LP v. Tremont Group Holdings, Inc., 747 F. Supp. 2d 406, 413 (S.D.N.Y.
2010)).

Due-Diligence Representations
Elendow Fund’s allegations regarding Tremont’s due-diligence representations are
also inadequate to plead securities fraud. To begin, the complaint adequately alleges that
Elendow Fund reviewed and relied upon Tremont’s private placement memorandum, but
the memorandum does not contain any representations about Tremont’s due-diligence
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program. Thus, reliance on the private placement memorandum cannot support Elendow
Fund’s due-diligence allegations.
Instead, the complaint alleges that the false statements forming the basis of the
securities-fraud claim were contained on Tremont’s website and Tremont’s SEC Form
ADV. But Elendow Fund’s claims based on these allegedly false statements also fail.
First, Elendow Fund alleges that Tremont breached its promise to perform “careful”
due diligence, which appeared on Tremont’s website. But the complaint does not
adequately allege that the statements quoted from the Tremont website were actually false.
It is clear from the complaint itself that Tremont did conduct some due diligence upon
Madoff. The complaint alleges that Tremont spot checked Madoff’s paper trade
confirmations several times per month. It alleges that a “Madoff Operations Review” was
conducted to “get a clearer understanding of the policies and procedures in place at
Madoff Securities.” It alleges that Tremont sent a due-diligence questionnaire to Madoff in
an effort to answer the questions raised in that review. Indeed, a striking feature of
Elendow Fund’s complaint is that it presents a picture—quite dramatic, in retrospect—of a
firm continually striving to better understand Madoff’s business, despite Madoff’s
obstructions, starting at the beginning of the Tremont-Madoff relationship and continuing
right up until the Ponzi scheme was unmasked. In short, the allegations in the complaint
tend to show that Tremont did what due diligence it could on Madoff. It may be that a
serious program of due diligence simply should not have tolerated Madoff’s obstructions
and lack of transparency. But this is a criticism of Tremont’s due-diligence practices, not
an allegation that they did not exist.
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Second, Elendow Fund alleges that Tremont’s SEC Form ADV contained specific,
false statements concerning its due-diligence program. In that form Tremont represented
that it engaged with custodians “on a daily basis,” monitored their “securities holdings, asset
mix and adherence to investment guidelines,” and used its own proprietary software to
continually evaluate managers’ performance. Unlike the general representations that
Tremont’s due diligence would be “careful,” these representations are sufficiently specific
that a reasonable investor may have relied upon them. But the only allegation that
Elendow Fund read and relied upon these materials is this:
In ignorance of the false and misleading nature of the statements described
above and the deceptive and manipulative devices and contrivances
employed by [Tremont], Plaintiff relied, to its detriment, on such misleading
statements in purchasing limited partnerships in the XL Fund.
This allegation might have been sufficient if, in context, it clearly referred to any specific
representations. But this allegation appears, not alongside any allegations of actual
representations, but in the formulaic recitation of the elements of count I of the complaint.
In that context it is not clear what “statements described above” the allegation refers to.
When an allegation couched in such generic language is completely separated from the
substantive, factual allegations of the complaint, it is simply too vague to support an action
for securities fraud under the applicable heightened pleading standards. Elendow Fund’s
generic allegation that it relied upon such representations as those described in the
complaint is simply not adequate to push its reliance allegation over the line from
conceivable to plausible. See Twombly, 550 U.S. at 570.
Accordingly, count I of Elendow Fund’s complaint is dismissed.
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Exchange Act § 20 Control-Person Liability
Because the complaint does not allege a primary violation of the Exchange Act,
count II of the complaint, for control-person liability under § 20(a) is also dismissed.
Though the issue is not, therefore, presently before the court, it is also dubious whether the
complaint adequately alleges that the control defendants’ “culpable participation” in the
alleged violations. See Boguslavsky v. Kaplan, 159 F.3d 715, 720 (2d Cir. 1998); Meridian
Horizon Fund, L.P. v. Tremont Grp. Holdings, Inc., 09 CIV. 3708, 2012 WL 6168151
(S.D.N.Y. Dec. 11, 2012).

Common-Law Fraud
The elements of common-law fraud are “essentially the same” as those that must be
pleaded to establish a claim under § 10(b) and Rule 10b–5. See Meridian Horizon Fund,
LP v. Tremont Grp. Holdings, Inc., 747 F. Supp. 2d 406, 414 (S.D.N.Y. 2010); Fezzani v.
Bear, Stearns & Co., 592 F. Supp. 2d 410, 423 (S.D.N.Y. 2008). Elendow Fund’s
common-law fraud claim is based on the same allegations of fact as its § 10(b) claim, and
the § 10(b) claim is dismissed. Therefore, plaintiffs’ common-law fraud claim must be
dismissed as well.

Negligent Misrepresentation
Elendow Fund also brings a claim for negligent misrepresentation against the
Tremont defendants, but such a claim is barred by the XL Fund’s limited partnership
agreement. Elendow Fund argues that the agreement does not bar negligence suits “clearly
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and unequivocally.” But it does. Section 2.6 of the limited partnership agreement says,
“Neither the general partner nor any affiliate shall be liable to any Limited Partner or the
Partnership for errors of judgment or for action or inaction, whether or not disclosed,
which said party reasonably believed to be in the best interests of the partnership.” This
clearly exculpates Tremont Partner (the general partner) and the other Tremont
defendants (affiliates) for any action, so long as that party believed the action was in the best
interest of the partnership and so long as the wrongdoing was not intentional, as limited by
state or federal law. The category “any action” clearly covers negligent misrepresentations.
Because New York follows the “internal affairs doctrine,” N.Y. P’Ship L. § 121-901,
and the XL Fund was organized in Delaware, Delaware law governs the interpretation of
this clause. Delaware law permits exculpation clauses to bar suits only for conduct taken in
good faith, but “good faith” under Delaware law encompasses both negligence and gross
negligence. In re Walt Disney Co. Derivative Litig., 906 A.2d 27, 64–65 (Del. 2006)
(“[W]e address the issue of whether gross negligence . . . without more, can also constitute
bad faith. The answer is clearly no.”).
When, as here, an exculpation clause clearly bars a claim, it is entirely appropriate
to enforce the clause at the pleading stage. Accordingly, Elendow Fund’s negligent
misrepresentation claim is dismissed.

Breach of Contract
Elendow Fund also alleges that Tremont Partners breached a number of provisions
of the XL Fund limited partnership agreement. But under any fair reading of the
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agreement, Elendow Fund has not alleged any breach of Tremont Partner’s obligations
under it.
Elendow Fund contends that Tremont Partners was obligated to “utilize the
strategies discussed” in the XL Fund offering memorandum for the purpose of generating
and preserving capital. The strategy discussed in the offering memorandum is the
leveraged investment in the Broad Market Fund detailed in the section of the offering
memorandum entitled “Investment Objective and Strategies.” There is no allegation that
Tremont Partners did not employ the strategies discussed in that section. Similarly, there
is no plausible allegation that Tremont Partners did not seek to achieve the goals of capital
appreciation and preservation. To be sure, there are ample allegations that Tremont
Partners did not in fact achieve those goals, but the XL Fund offering memorandum
explicitly warns that these goals might not be achieved.
Elendow Fund also contends that Tremont Partners delegated its responsibilities to
a party who was not suitable, in violation of § 2.1 of the agreement (“The General Partner
has the right to delegate its responsibilities . . . to suitable parties.”). But that is not the only
provision of the agreement that granted Tremont Partners the ability to delegate its
responsibilities. In fact, the very next sentence provides that “the General Partner may also
retain other parties” and § 2.2 provides that the general partner had the power to
“designate such other agents . . . to carry out, any and all of the objects and purposes of the
Partnership.” In neither of these provisions is there any reference to the “suitability” of
Tremont Partner’s chosen agent. Because the sentence quoted by Elendow Fund clearly
confers a right upon Tremont—rather than imposes a restriction—it is no breach of contract
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for Tremont Partners to delegate its responsibilities under one of these other provisions
that do not impose an open-ended suitability requirement.
Elendow Fund also contends that Tremont Partners breached its obligation to
manage the day-to-day business of the fund and to devote as much time to the fund’s
investment activities as the general partner deemed reasonable. There is no allegation in
the complaint that Tremont Partners did not manage the day-to-day operation of the fund.
In fact, the complaint is replete with examples of Tremont Partners doing just that. There
is also no allegation that Tremont Partners believed that it ought to have been devoting
more time to the XL Fund than it was.
Finally, Elendow Fund contends that Tremont Partners breached its obligation to
calculate the net asset value of the XL Fund and the capital accounts of its limited partners.
The agreement also provides, however, that the value of the fund’s assets would be based
upon the calculations provided by the fund’s counterparties and that the fund was entitled
to rely on valuations provided by its counterparties’ affiliates. The agreement explicitly
provides that these amounts would not be verified or reviewed. The complaint does not
allege that Tremont Partners did anything other than calculate the value of the XL Fund’s
assets and maintain the limited partners’ capital accounts in reliance on this information
from the fund’s counterparties, as provided in the agreement.
Accordingly, count V of the complaint is dismissed.

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Breach of Fiduciary Duty
Elendow Fund contends that the Tremont and Rye defendants breached their
fiduciary duties to it by failing to provide accurate and complete information about the XL
Fund’s investments. Elendow Fund argues that its injury was separate from its pro rata
share of the injury to the XL Fund because defendants breached their fiduciary duties to it
while inducing it to invest. In this way, Elendow Fund evidently seeks to avoid dismissal of
its complaint for lack of standing, since a mismanagement claim could only be brought
derivatively, while also avoiding the scienter requirements of a fraud allegation or the
exculpation clause’s preclusive effect on a negligence claim. But Elendow Fund cannot
thread this needle because defendants were not its fiduciaries when it was induced to invest.
That relationship arose later as an incident of its membership in the XL Fund as a limited
partner.
Thus, in the absence of any allegations to suggest that defendants were Elendow
Fund’s fiduciaries before it actually joined the partnership, Elendow Fund’s claim for
breach of fiduciary duty claim is dismissed to the extent it alleges breaches of obligations
owed to it when it was still merely a prospective investor, while defendants were inducing
Elendow Fund to join the partnership. To the extent the complaint claims that defendants
breached their fiduciary duties to Elendow Fund in their management of the XL Fund after
Elendow Fund joined as a limited partner, the claim is dismissed for lack of standing. Such
claims must be brought derivatively. See Feldman v. Cutaia, 951 A.2d 727, 733 (Del.
2008). Thus, count VI is dismissed. Count VII’s claim for aiding and abetting breach of

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fiduciary duty is also dismissed as the complaint does not sufficiently plead a primary
breach.

Conclusion

Elendow Fund's complaint is dismissed in its entirety. This opinion resolves the
motions listed as document numbers 821, 826, and 828 in case number 08 Civ. 11117 and
documer t numbers 55, 59, 61, and 63 in case number 10 Civ. 9061.

So order~d.
Dated: l\ewYork, New York
Septemb~r 16, 2013
Thomas P. Griesa
United States DistrictJudge

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