Anwar et al v. Fairfield Greenwich Limited et al

Filing 1347

ENDORSED LETTER addressed to Judge Victor Marrero from David A. Barrett dated 12/30/2014 re: We write in response to the Citco Defendants' December 24, 2014 letter regarding the summary order in Elendow Fund, LLC v. Rye Investment Management, 2014 WL 7090618 (2d Cir. Dec. 16, 2014). ENDORSEMENT: The Clerk of Court is directed to enter into the public record of this action the letter above submitted to the Court by Anwar plaintiffs. (Signed by Judge Victor Marrero on 1/6/2015) (lmb)

BOIES,

SCHILLER

&

FLEXNER

LLP

575 LEXINGTON AVENUE• 7th FLOOR• NEW YORK, NY 10022 •PH. 212-446-2300 •FAX [phone]

r~·---~r.3.D.,_2Q14

rCL :inc s[):..; y

BY HAND

I

.
Th: Honorabl e V 1c~or M arrero i DOCl'\1L\T ,
.
.,
: "
)
• .
:
UmtedStatesD1stnctCourt
'ii' LC lh.O\l( .\I L't I IU.O
Southern District of New York.·~)( )C #:
500 Pearl Street
l"!U i-):
J 'J
New York, New York 10007 "~ · . -=.:-·-·--:-::::==:======.I

ll.;)ATE

Re:

Anwar, et al., v. Fabfield Greenwich Limited, et al., 09-CV-00118

Dear Judge Marrero:
We write in response to the Citco Defendants' December 24, 2014 letter regarding the
summary order in Elendow Fund, LLC v. Rye Investment Management, 2014 WL 7090618 (2d
Cir. Dec. 16, 2014). Elendow has no bearing on Plaintiffs' class certification motion. First,
whether investors have standing to assert common-law holder claims is not an issue of class
action superiority; rather, it is a merits issue, common to the class. 1 Second, contrary to Citco's
assertion, Plaintiffs have common law claims involving initial and subsequent investments (the
"inducement claims") that are clearly direct in nature. Third, this Court has held that Plaintiffs'
holder claims are direct claims under New York law because Citco owed direct duties to
shareholders, who suffered injury distinct from the Funds. Nothing in Elendow affects these
issues.

Standing Is a Common Merits Issue. The issue of standing to assert holder claims which are a subset of Plaintiffs' multiple claims against Citco - is a merits issue that should not
be decided on class certification. Amgen, Inc. v. Connecticut Ret. Plans, 133 S. Ct. 1184, 119495 (2013) ("Rule 23 grants courts no license to engage in free-ranging merits inquiries at the
certification stage."). As this Court said in denying reconsideration on this issue: "Given how
far litigation has progressed, the issue of standing at this point [shortly before the fact discovery
cut-oft] would be more appropriately and fairly addressed following the Court's decision
regarding class certification and with the benefit of a full record at summary judgment." Anwar
III, 884 F. Supp. 2d 92, 99 (S.D.N.Y. 2012).
Citco's contention (Letter at 1) that standing is relevant to the issue of whether a class
action is superior under Rule 23(b)(3) is wrong. Either the claims are direct and, therefore, can
1

Citco raised the same standing issue in briefing its Rule 23(f) appeal to the Second Circuit.
Although the Court of Appeals noted Citco's argument, it was conspicuously absent from the
issues that the Court identified for consideration on remand. See St. Stephen 's Sch. v.
PricewaterhouseCoopers Accountants NV, 570 F. App'x 37, 39-40 (2d Cir. 2014).

The Honorable Victor Marrero
December 30, 2014
Page 2
only be brought by the investors, not the Funds, or the claims are derivative and would be
dismissed. In either event, this is a merits issue common to all class members.2
Plaintiffs Have Standing to Assert Inducement Claims. Citco cannot seriously dispute
that Plaintiffs' inducement claims arising from their investments and reinvestments in the Funds
(as opposed to holder claims) are direct claims. 3 Citco's contention, see Letter at 2, that
Plaintiffs' common-law claims are only for mismanagement and not for inducement of initial or
additional investments is simply wrong. See, e.g., Anwar III, 884 F. Supp. 2d at 99.

Plaintiffs' common-law inducement claims, involving more than $1 billion damages,
have been sustained against Citco's motion to dismiss. See Anwar II, 728 F. Supp. 2d 372, 421445 (S.D.N.Y. 2010). Inducement claims are black-letter direct claims under New York and
Delaware law. See, e.g., Anwar III, 884 F. Supp. 2d at 99 ("[O]ther courts in this District have
recognized that New York law considers shareholders' tort claims based on misrepresentation,
rather than mismanagement, to be direct and not derivative."); Pension Comm. v. Banc ofAm.
Sec., LLC, 446 F. Supp. 2d 163, 205 (S.D.N.Y. 2006) (shareholders may bring direct claims
alleging they were "induced to make and/or retain their investments"); Albert v. Alex. Brown
Mgmt. Serv., Inc., 2005 WL 2130607, at *12 (Del. Ch. Aug. 26, 2005) (under Tooley,
"[g]enerally, non-disclosure claims are direct claims," including those styled as breach of
fiduciary duty and breach of contract). Nothing in Elendow changes these black-letter legal
principles.
Plaintiffs Have Standing to Assert Holder Claims. The Elendow decision deals only
with Delaware law. This Court has found, however, that New York law applies to the standing
issue. Anwar II, 728 F. Supp. 2d at 401 and n.8. 4 As this Court has previously held, Plaintiffs'
holder claims against Citco are direct claims: "The SCAC alleges causes of action against what
amount to outsiders to the Funds-Plaintiffs' general theory is that investment managers,
accountants, custodians and administrators had responsibilities to individual investors,
regardless of whatever duties the Defendants owed the Funds themselves." Anwar II, 728 F.
2

Moreover, a derivative action on behalf of the domestic Fairfield Funds against Citco already
has been dismissed on the basis of in pari delicto. Walker, Truesdell, Roth & Associates, Inc. v.
Globeop Fin. Servs. LLC, 993 N.Y.S.2d 647 (N.Y. Sup. Ct. 2013).
3

See Citco's briefs on appeal in Anwar v. Fairfield Greenwich Ltd, Case No. 13-2340 (2d Cir.),
Dkt. No. 131 at 69 ("purchase-based inducement claims ... in principle can be direct claims");
Dkt. No. 265-1 at 28.
4

Similarly, Plaintiffs have shown that the shareholders have direct claims even if BVI law
applies. See, e.g., Dkt. No. 406, Hunte Affidavit~ 20 ("Under BVI law, the shareholders have
direct claims against the defendants for making these representations."); Dkt. No. 408, Miles
Affidavit~ 22 ("[T]he claims brought by the Plaintiffs are their own claims, not those of the
Funds.").

The Honorable Victor Marrero
December 30, 2014
Page3
Supp. 2d at 400 (emphasis added). "Under New York law, a shareholder may sue individually
when the wrongdoer has breached a duty owed to the shareholder independent of any duty owing
to the corporation wronged." Id. (quotation omitted); see Excimer Associates, Inc. v. LCA
Vision, Inc., 292 F.3d 134, 140 (2d Cir. 2002) ("under New York law, a shareholder may bring
an individual suit if the defendant has violated an independent duty to the shareholder, whether
or not the corporation may also bring an action."). Indeed, Citco' s own employees and its
documents expressly recognized that Citco owed duties directly to the investors. See, e.g.,
Plaintiffs' Supp. Memo in Support of Class Certification, dated August 1, 2014 (under seal) at 4,
13. Fund service providers like Citco owe direct duties to fund investors under such
circumstances. See, e.g., Pension Comm., 446 F. Supp. 2d 163, 197 (S.D.N.Y. 2006); Cromer
Fin. Ltd. v. Berger, 2003 WL 21436164, at *12-13 (S.D.N.Y. June 23, 2003).
In addition, the Court has correctly held that held that the claims were direct based on
"the asymmetrical injury alleged in the SCAC." Id. at 402. There is no discussion of this point
in Elendow and no implicit rejection should be gleaned from a summary order. Nor is Elendow
reason for this Court again to consider Stephenson v. PricewaterhouseCoopers, LLP, 482 Fed.
App'x 618 (2d Cir. June 13, 2012) (summary order), as to which it previously denied a request to
reconsider. Both Elendow and Stephenson affirmed dismissal on the pleadings under Delaware
law, in summary orders that "do not have precedential effect" (Second Circuit Rule 32.1.l(a))
and are limited to the allegations and arguments specific to those cases. In denying
reconsideration, this Court found that, contrary to Citco's assertions, "Plaintiffs' principal claim
is not mismanagement, but nondisclosure of or failure to learn facts which should have been
disclosed based on duties that were independently owed to Plaintiffs." Anwar III, 884 F. Supp.
2d at 99 (quotation omitted). The Court further held that "Plaintiffs would have standing even
under Delaware law" and "Stephenson does not change that analysis because its facts are
distinguishable." Anwar III, 884 F. Supp. 2d at 99. The same is true for Elendow, which
involved claims against the manager and related parties of a Madoff feeder fund, whereas here
the claims are against the Citco Defendants, which were supposedly independent from the
Funds' managers and, among other things, calculated false Net Asset Values and misrepresented
the existence of assets, upon which Plaintiffs relied.
The Second Circuit remanded for this Court to explain the basis of its class certification
decision as to Citco and PwC. Elendow sheds no light on the open issues in that regard.
However, given the parties' multiple submissions, Plaintiffs respectfully propose, if it would be
helpful to the Court, that Plaintiffs and Defendants each file proposed findings, of not more than
10 pages, on class certification issues.
Respectfully yours,

~

µ~
David A. Barrett
cc:

All Anwar counsel (by e-mail)
SO ORDERED.

( -- ft; ~/.rDATE

1