Anwar et al v. Fairfield Greenwich Limited et al

Filing 1348

ENDORSED LETTER addressed to Judge Victor Marrero from Walter Rieman dated 12/24/2014 re: We represent the Citco Defendants in the action referenced above. A recent summary order of the Second Circuit, Elendow Fund, LLC v. Rye Investment Management, No. 13-3642-cv, 2014 WL 7090618 (2d. Cir. Dec. 16, 2014) (copy enclosed as Exhibit A), aff'g No. 10 Civ. 9061, 2013 WL 5179064 (S.D.N.Y. Sept. 16, 2013) (copy enclosed as Exhibit B), further demonstrates that plaintiffs' pending motion for class certification should be denied. ENDORSEMENT: The Clerk of Court is directed to enter into the public record of this action the letter above submitted to the Court by Citgo defendants. (Signed by Judge Victor Marrero on 1/6/2015) (lmb)

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The Honorable Victor Marrero
United States District Judge
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United States Courthouse
500 Pearl Street, Room 1040
New York, New York 10007-1312

MATTHEW W. ABBOTT
ALLAN J. ARFFA
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Anwar, et al. v. Fairfield Greenwich Limited,' ~'t~J.~C. l l~ ( )\. :c. \ [ _L'i' 1·! I.t~D
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No. 09-cv-118 (S.D.N.Y.) (VM) (FM)i I
Dear Judge Marrero:

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We represent the Citco Defendants in the action referenced above. A
recent summary order of the Second Circuit, Elendow Fund, LLC v. Rye Investment
Management, No. 13-3642-cv, 2014 WL 7090618 (2d. Cir. Dec. 16, 2014) (copy
enclosed as Exhibit A), aff'g No. 10 Civ. 9061, 2013 WL 5179064 (S.D.N.Y. Sept. 16,
2013) (copy enclosed as Exhibit B), further demonstrates that plaintiffs' pending motion
for class certification should be denied. In particular, Elendow further supports the Citco
Defendants' argument that plaintiffs' common-law holder claims do not satisfy
Rule 23(b)(3)'s superiority requirement because those claims are derivative, not direct, in
nature. (See the Citco Defendants' Memorandum of Law in Opposition to Plaintiffs'
Motion for Class Certification ("Citco Opp. Br."), filed under seal on Sept. 15, 2014, at
18-22, ECF No. 1323.).
In Elendow, the plaintiff investor (Elendow) invested money in the Rye
Select Broad Market XL Fund (the "XL Fund"), a Madofffeeder fund. Like Anwar,
Elendow involved, among other claims, a claim for breach of fiduciary duty based on the
allegation that a plaintiff investor "purchased and/or held interests" in an investment fund
as a result of the fund's failure to provide complete and accurate disclosures. (Elendow
Compl. irir 156-58, No. 10 Civ. 9061 (TPG) (S.D.N.Y.), ECF No. 21.) The fund, in turn,

PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP

The Honorable Victor Marrero
United States District Judge

2

had exposure to assets managed by Bernard Madoff and collapsed when his frauds were
revealed. 1
In dismissing the claim for breach of fiduciary duty, the district court held
that the "holder" claim for breach of fiduciary duty was derivative in nature. Elendow,
2013 WL 5179064, at *9. Significantly, the district court rejected Elendow's argument
"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." Id. The
district court reasoned that any fiduciary duty arose only after Elendow had invested in
the XL Fund and that Elendow therefore could not predicate this claim on alleged
breaches "when it was still merely a prospective investor." Id. The district court further
reasoned that Elendow had no standing to assert the holder claim "[t]o the extent the
complaint claims that defendants breached their fiduciary duties ... in their management
of the XL Fund after Elendow ... joined as a limited partner" because such a claim could
be brought only derivatively under Delaware law.2 Id.
In affirming the district court's ruling that the "holder" claim for breach of
fiduciary duty was derivative under Delaware law, the Second Circuit explained:
Elendow' s damages would be measured by the difference between the
values of its investments before and after the XL Fund suffered losses in
its Madoff investments. As Elendow's injury is intertwined with the
XL Fund's injury, Elendow's action may be brought only as a derivative
action. See Feldman v. Cutaia, 951 A.2d 727, 733 (Del. 2008).
Elendow, 2014 WL 7090618, at *2.
Like the Elendow plaintiff, the Anwar plaintiffs seek damages based on
alleged mismanagement that purportedly caused the dissipation of fund assets. (Citco
Opp. Br. 20-21.) Accordingly, as in Elendow, the Anwar plaintiffs' alleged injury is

2

Although the Elendow plaintiff asserted other common-law claims, including fraud and negligentmisrepresentation claims, those claims were purchase-based inducement claims, not holder claims, and
were dismissed on other grounds. See Elendow, 2014 WL 7090618, at *1-2; Elendow, 2013
WL 5179064, at *7-9; Elendow Compl. ~~ 134, 136-38, 143. In contrast, here, all of the Anwar
plaintiffs' common-law claims are holder claims based on allegations of fund mismanagement while
plaintiffs were fund investors. (See Citco Opp. Br. 20-21.)
The Elendow parties did not dispute that the breach of fiduciary duty claim was governed by Delaware
law because, under New York Partnership Law§ 121-901, "the laws of the jurisdiction under which a
foreign limited partnership is organized govern its organization and internal affairs." (See Citco Opp.
Br. 19.) Although this Court previously concluded that New York law applied to plaintiffs' holder
claims, it did not consider New York Partnership Law§ 121-901. Under applicable choice-of-law
rules, Delaware and British Virgin Islands law govern whether plaintiffs' common-law holder claims
for the funds at issue are direct or derivative in nature. (Citco Opp. Br. 18-20.) In all events,
plaintiffs' holder claims are derivative under New York law. (Id. at 20 n.29.)

PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP

3

The Honorable Victor Marrero
United States District Judge
intertwined with the funds' alleged injuries, and the holder claims should be dismissed
for the same reason-namely, because they are derivative.

We also note that in both the district court and the Second Circuit, the
Elendow plaintiff relied on this Court's prior ruling on the motions to dismiss to argue
that its claim for breach of fiduciary duty in Elendow was direct in nature. (See
Plaintiffs Memorandum of Law in Opposition to the XL Fund's Motion to Dismiss the
Second Amended Complaint at 2, No. 10 Civ. 09061 (S.D.N.Y.), ECF No. 70 (citing
Anwar v. Fairfield Greenwich Ltd., 728 F. Supp. 2d 372, 402 (S.D.N.Y. 2010)); Reply
Br. for Plaintiff-Appellant at 14, No. 13-3642-cv (2d Cir.), ECF No. 135.) Specifically,
Elendow argued that its allegations were the same as the Anwar plaintiffs' allegations, as
Elendow had alleged that the defendants "breached their fiduciary duties by
disseminating false and misleading materials about the [XL] Fund that induced Plaintiff
to invest." (Reply Br. for Plaintiff-Appellant 14, No. 13-3642-cv (2d Cir.).) The Second
Circuit implicitly rejected that argument by holding that the relevant inquiry was whether
Elendow's injury was intertwined with the fund's injury. We respectfully submit that
there is no distinction between Elendow's and the Anwar plaintiffs' alleged injuries.
Finally, Elendow also supports the Citco Defendants' reliance on
Stephenson v. PricewaterhouseCoopers, LLP, 482 F. App'x 618 (2d Cir. 2012), forthe
proposition that plaintiffs' common-law holder claims are derivative in nature. (Citco
Opp. Br. 22 & n.33.) This Court previously distinguished Stephenson based on what it
perceived as the "asymmetrical injury alleged in the [Second Consolidated Amended
Complaint]-the fact that some investors lost money, while others did not." Anwar v.
Fairfield Greenwich Ltd., 884 F. Supp. 2d 92, 99 (S.D.N.Y. 2012) (internal quotation
marks omitted). The Elendow plaintiff similarly alleged that it had "sustained injuries
that were not sustained by other investors in the XL Fund." (Elendow Compl. ir 159.)
The Elendow court nevertheless concluded that Elendow's holder claim for breach of
fiduciary duty was derivative in nature. Elendow, 2014 WL 7090618, at *2; see
Elendow, 2013 WL 5179064, at *9. Indeed, in virtually any case in which defendants are
alleged to have directly harmed a business entity (such as the funds at issue in Anwar)
over time, and thus to have indirectly harmed investors in the entity, investors will sustain
different amounts of losses depending on when those investors purchased and sold their
ownership interests. If such a difference were enough to prevent a court from
determining that a claim was derivative, claims would almost never be dismissed as
derivative. As the Elendow court recognized, that is not the law.
Respectfully submitted,

[Jµl0 ;L~/<B
Walter Rieman
cc:

All counsel in Anwar (by e-mail)

SO ORDERED •
.
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DATE

JCTOR \.1ARRERO. U.S.D.J.

Exhibit A

westlaw.
Page 1
--- Fed.Appx. ----, 2014 WL 7090618 (C.A.2 (N.Y.))
(Cite as: 2014 WL 7090618 (C.A.2 (N.Y.)))

H
Only the Westlaw citation is currently available.This case was not selected for publication in
West's Federal Reporter.
RULINGS BY SUMMARY ORDER DO NOT
HAVE PRECEDENTIAL EFFECT. CITATION
TO A SUMMARY ORDER FILED ON OR
AFTER JANUARY 1, 2007, IS PERMITTED AND
IS GOVERNED BY FEDERAL RULE OF APPELLATE PROCEDURE 32.1 AND THIS COURT'S
LOCAL RULE 32.1.1. WHEN CITING A SUMMARY ORDER IN A DOCUMENT FILED WITH
THIS COURT, A PARTY MUST CITE EITHER
THE FEDERAL APPENDIX OR AN ELECTRONIC DATABASE (WITH THE NOTATION
"SUMMARY ORDER"). A PARTY CITING A
SUMMARY ORDER MUST SERVE A COPY OF
IT ON ANY PARTY NOT REPRESENTED BY
COUNSEL.
United States Court of Appeals,
Second Circuit.
ELENDOW FUND, LLC, Plaintiff-Appellant,
v.
RYE INVESTMENT MANAGEMENT, Tremont
Capital Management Inc., Tremont Group Holdings, Inc., Tremont Partners, Inc., Massachusetts
Mutual Life Insurance Co., Massmutual Holdings
Lie, Oppenheimer Acquisition Corporation, Rupert
Allan, Jim Mitchell, Robert Schulman, Rye Select
Broad Market XL Fund, L.P., Defendants-Appellees,
KPMG LLP, Defendant.
No. 13-3642-cv.
Dec. 16, 2014.
Appeal from the United States District Court for the
Southern District of New York (Griesa, J.).
Lee S. Shalov, McLaughlin & Stern, LLP, New
York, NY, for Plaintiff-Appellant.
Seth M. Schwartz (Jason C. Vigna, on the brief),

Skadden, Arps, Slate, Meagher & Flom LLP, New
York, NY, Carol E. Head (Joseph L. Kociubes, on
the brief), Bingham McCutchen LLP, Boston, MA,
for Defendants-Appellees.
David A. Kotler, Dechert LLP, Ralph A. Siciliano,
Jamie B.W. Stecher, and David J. Kanfer, Tannenbaum Helpern Syracuse & Hirschtritt LLP, New
York, NY, for Defendant-Appellee.

Present PIERRE N. LEV AL, DENNY CHIN and
SUSAN L. CARNEY, Circuit Judges.

SUMMARY ORDER
*1 UPON DUE CONSIDERATION, IT IS
HEREBY ORDERED, ADJUDGED, AND DECREED that the judgment of the district court is
AFFIRMED.
Plaintiff-appellant
Elendow
Fund,
LLC
("Elendow") appeals from the district court's
September
17, 2013 judgment dismissing
Elendow's complaint alleging securities fraud, common-law fraud, negligent misrepresentation, breach
of contract, and breach of fiduciary duty. We assume the parties' familiarity with the facts, procedural history, and issues for review, which we summarize briefly below.
Elendow is an investment fund that invested in
the Rye Select Broad Market XL Fund, L.P. (the
"XL Fund"), which acted as a Bernard Madoff
feeder fund, and which also sought to achieve a
highly leveraged return tied to the Madoff fund's
performance by entering into derivative contracts
with various counterparties. Elendow suffered significant losses as a result of the impacts, both direct
and indirect, on the XL Fund of Madoffs fraud. In
its complaint, Elendow alleged, inter alia, that defendant-appellee
Tremont
Partners,
Inc.
("Tremont"), the general partner of the XL Fund,
fraudulently induced it to invest in and become a
limited partner with the XL Fund, and that Tremont

© 2014 Thomson Reuters. No Claim to Orig. US Gov. Works.

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--- Fed.Appx. ----, 2014 WL 7090618 (C.A.2 (N.Y.))
(Cite as: 2014 WL 7090618 (C.A.2 (N.Y.)))

knew or should have known of the fraudulent aspects of Madoff's operation because Tremont was
aware of certain "red flag" warning signs. The district court below dismissed Elendow's complaint in
its entirety under Fcd.R.Civ.P. 12(b)(6) and 9(b).
We review the district court's dismissal of
Elendow's complaint for failure to state a claim de
novo. Chambers v. Time Warner, Inc ., 282 F.3d
147, 152 (2d Cir.2002). To survive a Rule 12(b)(6)
motion to dismiss, a complaint must plead "enough
facts to state a claim to relief that is plausible on its
face." Bell At!. Corp. v.. Twombly, 550 U.S. 544,
570 (2007). "Any complaint alleging securities
fraud must satisfy the heightened pleading requirements of the [Private Securities Litigation Reform
Act, 15 U.S.C. § 78u-4(b),] and Fed.R.Civ.P. 9(b)
by stating with particularity the circumstances constituting fraud." ECA & Local 134 !BEW Joint Pension Trust of Chi. v. JP Morgan Chase Co., 553
F.3d 187, 196 (2d Cir.2009).
For substantially the reasons articulated by the
district court in its opinion, we affirm. We add only
the following:
With respect to Elendow's fraud claims, we
agree with the district court that the complaint
failed to adequately plead scienter, as similar cases
in this Circuit have held. Elendow fails to plead
sufficient red flags to show that the inference that
Tremont must have been aware of fraud is "at least
as compelling as any opposing inference of nonfraudulent intent." Tellabs, Inc. v. Makor Issues &
Rights, Ltd., 551 U.S. 308, 314 (2007); see, e.g.,
Saltz v. First Frontier, LP, 782 F.Supp.2d 61,
71-72 (S.D.N.Y.2010) (rejecting red flag theory as
insufficient to support strong inference of scienter),
aff'd, 485 F. App'x 461, 464-65 (2d Cir.2012);
Newman v. Family Mgmt. Corp., 748 F.Supp.2d
299, 310 (S.D.N.Y.2010) (rejecting red flag theory
as less compelling inference compared to nonfraudulent intent), afj'd, 530 F. App'x 21, 24 (2d
Cir.2013 ); Meridian Horizon Fund, LP v. Tremont
Grp. Holdings, Inc., 747 F.Supp.2d 406, 413
(S.D.N.Y.2010) (rejecting red flag theory as insuf-

ficient to support strong inference of scienter),
afj'd, 487 F. App'x 636, 640 (2d Cir.2012). As we
have previously observed in a similar context, "the
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." Meridian, 487 F. App'x at 641 (internal quotation marks
omitted).
*2 We similarly agree with the district court's
dismissal of Elendow's breach of fiduciary duty
claim, which was asserted under Delaware law. The
district court held, inter alia, that Elendow's claim
for breach of fiduciary duty was derivative, and
could therefore be brought only by the XL Fund. To
determine whether Elendow's claim is derivative or
direct, we consider the following questions: "(l)
who suffered the alleged harm ... ; and (2) who
would receive the benefit of any recovery or other
remedy ... ?" Tooley v. Donaldwn, Lufkin & Jenrette, Inc., 845 A.2d 1031, 1033 (Del.2004); Albert
v. Alex. Brown Mgmt. Servs., Inc., No. Civ .A.
762-N, Civ.A. 763-N, 2005 WL 2130607, at *12
(Del. Ch. Aug. 26, 2005). The Delaware Supreme
Court has explained that "[t]he stockholder's
claimed direct injury must be independent of any
alleged injury to the corporation. The stockholder
must demonstrate that the duty breached was owed
to the stockholder and that he or she can prevail
without showing an injury to the corporation."
Tooley, 845 A.2d at 1039. Here, Elendow's damages would be measured by the difference between
the values of its investments before and after the
XL Fund suffered losses in its Madoff investments.
As Elendow's injury is intertwined with the XL
Fund's injury, Elendow's action may be brought
only as a derivative action. See Feldman v. Cutaia,
951 A.2d 727, 733 (Del.2008) (concluding that
claims are derivative in nature when harm arises
solely out of stock ownership).

***
We have considered Elendow's remaining arguments and conclude they are without merit. Accord-

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--- Fed.Appx. ----, 2014 WL 7090618 (C.A.2 (N.Y.))
(Cite as: 2014 WL 7090618 (C.A.2 (N.Y.)))

ingly, we AFFIRM the judgment of the district
court.
C.A.2 (N.Y.),2014.
Elendow Fund, LLC v. Rye Inv. Management
--- Fed.Appx. ----, 2014 WL 7090618 (C.A.2
(N.Y.))
END OF DOCUMENT

© 2014 Thomson Reuters. No Claim to Orig. US Gov. Works.

Exhibit B

Westlaw.
Page 1
Slip Copy, 2013 WL 5179064 (S.D.N.Y.), Fed. Sec. L. Rep. P 97,643
(Cite as: 2013 WL 5179064 (S.D.N.Y.))

H
United States District Court,
S.D. New York.
In re TREMONT SECURITIES LAW, ST ATE
LAW, AND INSURANCE LITIGATION.
Elendow Fund, LLC, Plaintiff,
v.

Rye Select Broad Market XL Fund, Tremont Partners, Inc., et al., Defendants.
Master File No. 08 Civ. 11117.
No. 10 Civ. 9061.
Sept. 16, 2013.
OPINION
THOMAS P. GRIESA, District Judge.
*1 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 Madoffs operations that the most natural inference is that
Tremont made these misrepresentations, not merely
out of its own ignorance of Madoffs scheme, but
with fraudulent intent.
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 defend-

ants-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
• Tremont Capital Management, which manages
"Tremont Group Holdings' family of multimanager 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

© 2014 Thomson Reuters. No Claim to Orig. US Gov. Works.

Page 2
Slip Copy, 2013 WL 5179064 (S.D.N.Y.), Fed. Sec. L. Rep. P 97,643
(Cite as: 2013 WL 5179064 (S.D.N.Y.))

• 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 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
*2 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 Madoffs 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
"splitstrike 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 Madoffs investment expertise and the inherent risk of the market. The XL Fund also issued 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 Madoffs 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 Madoffs 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 Madoffs 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

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were mitigated by its belief that the National Association of Securities Dealers was verifying
Madoffs trades;

cussed two of the major articles that appeared in the
financial press in 2001 raising questions about
Madoffs business.

• that Madoffs returns were exceptionally stable;

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 Madoffs results
were too good to be true and made the wise decision to avoid any exposure to him.

• 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 Madoffs accounting firm was possibly not
sophisticated enough to effectively audit
Madoffs business.
*3 Numerous internal emails and memoranda
acknowledged that these aspects of Madoffs business rendered it highly opaque to Tremont's duediligence 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 Madoffs 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
Madoffwas "prone to blow up" (although a followup 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.
Tremont executives also were aware of and dis-

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, 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

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but suspended in favor of blind reliance on
Madoffs reputation. Specifically, Tremont's aware-·
ness that Madoffs 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
*4 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.
A number of Tremont's directors, the complaint
alleges, are also MassMutual and Oppenheimer executives. MassMutual, in tum, 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 tum, 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 At/.
Corp. v. Twombly, 550 U.S. 544, 570 (2007). In de-

ciding 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 plaintiffs
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. ATS! 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 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 tum, 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

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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, l 09 (2d Cir.2009).
Securities Fraud
*5 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 othersoverlooked 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 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 ofit." EGA, 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.
*6 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

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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 Madoffs 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
El endow
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 duediligence 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 Madoffs 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 Madoffs business, despite Madoffs
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 Madoffs obstructions and lack of transparency. But this is a criticism of Tremont's due-diligence practices, not an
allegation that they did not exist.
*7 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

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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.
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§ lO(b) and Rule lOb-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 § 1O(b) claim, and the
§ 1O(b) claim is dismissed. Therefore, plaintiffs'
common-law fraud claim must be dismissed as
well.

Negligent Misrepresentation
*8 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 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. Jn 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 agreement, Elendow Fund has

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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 for Tremont Partners to delegate its responsibilities under one of
these other provisions that do not impose an openended suitability requirement.
*9 Elendow Fund also contends that Tremont
Partners breached its obligation to manage the dayto-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.

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

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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 (Dcl.2008). Thus, count VI is dismissed. Count VII's claim for aiding and abetting
breach of fiduciary duty is also dismissed as the
complaint does not sufficiently plead a primary
breach.

Conclusion
*10 Elendow Fund's complaint is dismissed in
its entiretly. 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.
S.D.N.Y.,2013.
In re Tremont Securities Law, State Law, and Ins.
Litigation
Slip Copy, 2013 WL 5179064 (S.D.N.Y.), Fed. Sec.
L. Rep. P 97,643
END OF DOCUMENT

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