Anwar et al v. Fairfield Greenwich Limited et al

Filing 1384

ENDORSED LETTER addressed to Judge Victor Marrero from Sharon L. Nelles dated 5/29/2015 re: Request to dismiss the Standard Chartered Cases pursuant to SLUSA. ENDORSEMENT: The Clerk of Court is directed to enter into the public record of this action the letter above submitted to the Court by the Standard Chartered Defendants. (Signed by Judge Victor Marrero on 6/4/2015) (spo)

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SULLIVAN 8t CROMWELL LLP

May 29, 2015
By Facsimile
Honorable Victor Marrero,
United States District Judge,
Southern District of New York,
Daniel Patrick Moynihan U.S. Colll'thouse,
500 Pearl Street,
New York, New York 10007.
Re:

Anwar v. Fair.field Greenwich Ltd-Standard Chartered Cases,
No. 09-CV-118 CS.D.N.Y.) CVM) (FM)

Dear Judge Marrero:
As requested, we write on behalf of the Standard Chartered Defendants ("SCB" or
the "Bank") regarding the application of the Second Circuit's recent decision in Jn re Kingate
Management Limited Litigation, 784 F.3d 128 (2d Cir. 2015) to the claims asserted in the
Standard Chartered Cases.

The Kingate decision further underscores, indeed compels, the conclusion, set
forth in the Bank's letter of October 31, 2014 (Dkt #1333), that all of the Standard Chartered
Plaintiffs' claims against SCB are precluded by the Securities Litigation Unifonn Standards Act
of 1998 C'S LUSA"), because they are based on allegations that the Bank provided unsupported
or misleading investment advice that induced investments in covered securities. As explained in
the October 31 submission, in Romano v. Kazacos, the Second Circuit established that SLUSA
precludes all claims (i) predicated on misleading investment advice that "induced" plaintiffs to
invest in covered securities, or (ii) that "tum on injuries caused by acting on misleading
investment advice--that is, where plaintiffs' claims necessarily allege, necessarily involve, or
rest on the purchase or sale of[coveredl securities." 609 F.3d 512, 521-23 (2d Cir. 2010)
(internal quotations omitted). In Kingare, the Second Circuit was explicit that SLUSA precludes
any state law claim that requires a plaintiff to show the type of conduct proscribed by
Section l 7(a) of the Securities Act of 1933 and Section lO(b) of the Securities Exchange Act of
1934, the "anti-falsity provisions" of the federal securities laws. 784 F.3d at 146. Here,
plaintiffs' fnndamental allegation is that the Bank induced them to invest in covered securities
through Fairfield Sentry Ltd. and Fairfield Sigma Ltd. (the "Fairfield Funds") by making
recommendations that the Bank knew or should have kno"WD. were false-conduct plainly

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implicating the anti-falsity provisions of the federal securities laws-and plaintiffs' claims tum
on purported injuries caused by those investments. Plaintiffs' claims thus fall squarely within
the SLUSA tests of Romano and Kingate, and should be dismissed.

A.

Kingate Confirms That Plaintiffs' Purchases of Madoff Feeder Funds
Constitute Purchases of Covered Securities.

As described in the Anwar defendants' submissions, Kingare, like the Second
Circuit's earlier decision in In re Herald, 753 F.3d 110, 113 (2d Cir. 2014), holds that investors
in Mad.off feeder funds purchased those shares ''expecting that the Funds were investing the
proceeds in S&P 100 stocks, which are covered securities," and thus any claim by investors that
they were wrongfully induced to invest in feeder funds like the Fairfield Funds is "in connection
with the purchase or sale of a covered security" under SLUSA. Kingate, 784 F .3d at 142. There
should thus be no dispute, and we believe there is none, that plaintiffs' investments in the
Fairfield Funds are properly viewed as investments in "covered securities" under SLUSA.

B.

Kingate Dictates Dismissal of All Remaining Claims in
the Standard Chartered Cases Pursuant to SLUSA.

Kingate also resolves any lingering ambiguity that the state law claims that
remain pending in the Standard Chartered Cases fall within the ambit of SLUSA. Under
Kingate, SLUSA precludes any state law claim that requires a plaintiff to show the type of false
"conduct by the defendant that is specified in SLUSA's operative provisions," namely, the antifalsity provisions of the federal securities laws. 784 F.3d at 146. As set forth in the Anwar
defendants' submissions, Kingate provides extensive guidance regarding the type of alleged
wrongdoing that meets this standard. Of particular importance to the Standard Chartered Cases,
Kingate identifies the following two categories of wrongdoing that trigger SL USA preclusion:
( 1) allegations of a defendant's negligent or fraudulent "misrepresentations and misleading
omissions ... made in connection with the Funds' investments with Madoff in covered securities
and with their oversight of these investments," 784 F.3d at 134-35,151; and (2) any other
allegations of "conduct by the defendant that would be actionable under the anti-falsity
provisions" of Sections 17(a) or lO(b) either as a private claim or through an enforcement action
by the U.S. Securities and Exchange Commission, id. at 147, 149. In determining whether a
state law claim depends on the type of conduct that triggers SLUSA, Kingare requires the Court
to consider each "claim's theory of the defendant's liability," rather than merely whether "false
conduct" is ''an essential element" of the claim. Id. at 149, 153 n.25.

1.

Plaintiff! Concede That Their Omissions-Based Claims
Are Barred Under Kingate's SLUSA Test

As explained more fully in SCB's prior submissions, plaintiffs' remaining claims
all are based on two theories of why SCB should be held liable for losses associated with their
investments in the Fairfield Funds:
•

The Bank allegedly omitted material facts regarding Bernard Madoff when it
recommended the Fairfield Funds to plaintiffs-namely, "that Madoffwas
actually executing the split-strike conversion strategy'' for the Funds (the

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"Omission Theory' 1), Anwar v. Fairfield Greenwich Ltd, 745 F. Supp. 2d 360,
371-73 & n.7 (S.D.N.Y. 2010) ("SCB r); and
•

The Bank allegedly misled plaintiffs by recommending the Fairfield FW1ds as
a sound investment without conducting adequate due diligence to support that
recommendation (the "Due Diligence Theory"), id. at 376; Anwar, 826 F.
Supp. 2d 578, 555, 557-58 (S.D.N.Y. 201 l); Anwar, 891 F. Supp. 2d 548, 557
(S.D.N.Y. 2012).

Plaintiffs concede that if the Standard Chartered Cases are a "covered class action," then all
claims based on their Omission Theory are precluded under Kingate. (See May 27, 2015 Joint
Letter from Sharon L. Nelles and Richard E. Brodsky at 2 (Dkt. #1381 ).) For the reasons set
forth below, the remaining claims, all based on the Due Diligence Theory, likewise fail as they
are in fact claims that clearly require proof of conduct by the Bank that, under Kingate, is the
type of wrongdoing that triggers SL USA preclusion

2.

The Due Diligence Theory Claims Fall Within Kingale's SL USA Test
Because They Require Proof of the Bank's Alleged False or
Misleading Conduct, Including Misrepresentations or Omissions.

Plaintiffs' Due Diligence Theory claims rest on allegations that SCB
recommended the Fairfield Funds as a sound and appropriate investment for plaintiffs even
though SCB either (i) "believed" the Funds were "going to explode one of these days" (Pls' Nov.
17, 2014 Letter at 4 (Dkt. #1349)), or, (ii) through .proper due diligence, should have
"recogniz[ed] from the numerous red flags that flew all around Madoff that an investment with
Madoff was overly risky" (id. at 12). See also SCB I, 745 F. Supp. 2d at 3 78 (characterizing one
plaintiffs gross negligence and fiduciary duty claims as "recommending that an investor place
hWldreds of thousands of dollars in an investment without the financial institution doing
anything to ensure the investment was sound"). The claims meet Kingate' s test for SLUSA
preclusion for at least three reasons:

First, the Due Diligence Theory claims require proof that the Bank engaged in the
type of conduct that is proscribed by the anti-falsity provisions of Sections 1O(b) and 17(a).
Kingate, 748 F.3d at 147. Since as far back as 1969, courts have recognized that recommending
an investment without conducting adequate due diligence necessarily involves false or
misleading conduct proscribed by the anti-falsity provisions, when, in Hanley v. SEC, the
Second Circuit held that investment professionals make an implicit representation that they have
an adequate basis for their investment recommendations. 415 F.2d 589, 595-97 (2d Cir. 1969).
Thus, where an investment professional has not conducted adequate due diligence, the very act
of making an investment recommendation constitutes a misrepresentation that implicates the
anti-falsity provisions of the federal securities laws. Id. (affirming penalties under Sections l 7(a)
and IO(b) against "securities salesmen'' for failure to conduct adequate due diligence prior to
making an investment recommendation).
Since Hanley, the SEC and private plaintiffs have routinely asserted claims under
the anti-falsity provisions based on conduct that is identical to the Bank's conduct challenged
here-namely, recommending an investment without conducting adequate due diligence. See,

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e.g., South Cherry St., LLC v. Hennessee Grp. LLC, 573 F.3d 98 (2d Cir. 2009) (dismissing
Section l O(b) claim based on defendant's failure to conduct due diligence before recommending
a hedge fund that turned out to be a Ponzi scheme for failure to adequately plead scienter); In re
Capital Fin. Servs., Inc., 102 S.E.C. Docket 2435 (Dec. 16, 2011) (finding investment advisor
violated Sections 17(a) and lO(b) by "fail[ing] to perform reasonable due diligence on numerous
private placement offerings prior to recommending them to customers where the offerings turned
out to be a classic Ponzi scheme and offering fraud"); Jn re Wells Fargo Brokerage Servs. LLC,
et al., Release No. 33-9349 at 9 (Aug. 14, 2012) ("A broker or salesperson who fails to
investigate facts surrounding a security and who subsequently recommends that security to
customers without having an adequate and reasonable basis for that recommendation may be in
violation of the antifraud provisions of the federal securities laws, including Sections l 7(a)(2)
and l 7(a)(3) of the Securities Act." (quoting SEC v. Grear Lakes Equities, 1990 WL 260587 at
*6 (E.D. Mich. Sept. 4, 1990))); In re Donald J Anthony, Jr., et al., Release No. 33-9454 at 5
(Sept. 23, 2013) (alleging violations of Sections l 7(a) and lO(b) for "failure to perform
reasonable due diligence to fonn a reasonable basis for their recommendations to customers" and
making misrepresentations and omissions in recommending investments). Indeed, 23 of the
initial 28 plaintiffs who filed claims against SCB in this multidistrict litigation attempted to
assert claims under Section lO(b) based on the Due Diligence Theory, confirming that plaintiffs
themselves understood their Due Diligence Theory necessarily involved allegations of conduct
proscribed by the anti-falsity provisions. (SCB Oct. 31, 2014 Letter at 3-4; SCB I, 745 F. Supp.
2d at 369-71.)

Second, plaintiffs' Due Diligence Theory claims depend on allegations that SCB
falsely recommended the Fairfield Funds as a sound investment. The investment
recommendation is an essential component of plaintiffs' claims because the duty to conduct due
diligence, whatever its scope, arises only as a result of the recommendation or advice. 1 And,
under plaintiffs' theory of liability, the Bank's recommendation itself allegedly constituted a
misrepresentation because the Bank either did not honestly believe that the Fairfield Funds were
a sound investment or did not conduct adequate due diligence t6 make an informed
recommendation in the first place. Statements of opinion that are not honestly held, or lack a
good faith basis of fact, constitute an actionable misrepresentation or omission under the federal
securities laws. See, e.~., Omnicare, Inc. v. Laborers Dist. Council Cons/. Indus. Pension Fund,
135 S. Ct. 1318, 1329-32 (2015) (recognizing in Section 11 context that opinion is actionable if
This Court previously dismissed breach of fiduciary duty and gross negligence claims
based on a failure to conduct adequate due diligence where the plaintiffs did not allege that SCB
recommended plaintiffs investment in Fairfield Sentry or otherwise provided investment advice.
Anwar, 826 F. Supp. 2d at 591-92 ("It ... defies logic to assume that SCBI breached its fiduciary
duty or was grossly negligent in recommending Fairfield Sentry without conducting due
diligence when the [plaintiffs] have not even alleged that SCBI recommended the securities or
advised them in the first place."); see also Maridom Am. Compl. ~ 4 (alleging that "when
advising a client to make a particular investment, the advisor must have a reasonable basis, as a
result of such investigation as is necessary under the circumstances, for that recommendation").

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Honorable Victor Marrero

speaker lacked a good faith basis for the opinion); City of Omaha, Neb. Civilian Employees· Ret.
Sys. v. CBS Corp., 679 F.3d 64, 67-68 (2d Cir. 2012) (holding that misstatements regarding
opinions are actionable under Sections 1O(b) and 20(a) if plaintiffs "plausibly allege that
defendants did not believe the statements ... at the time they made them" (citations omitted)).
Because plaintiffs' Due Diligence Theory claims are premised on the Bank's allegedly false or
misleading recommendation that the Fairfield Funds were sound investments, Kingate's test for
SLUSA preclusion is met. 784 F.3d at 134-35, 151.
Third, lest there be any doubt that plaintiffs' Due Diligence The-0ry claims are
based on alleged misrepresentations and omissions, plaintiffs' complaints are replete with
allegations that the Bank made faJse representations about the nature, price and financial
prognosis of the Fairfield Funds, which plaintiffs contend SCB knew, or should have known
through adequate due diligence, were false or misleading. See SCB /, 745 F. Supp. 2d at 376-77.
For example, plaintiffs allege:

•

"In recommending the purchases of FSF Shares, SCBI told Plaintiffs that these would
be safe investments with a steady return .... Each of Plaintiffs justifiably accepted
these statements and relied on them .... " (Maridom Am. Compl. ~ 27.)

•

"American Express Bank represented to Headway that the Sentry Fund was a selfstanding fund of funds with assets in bona fide investment vehicles .... Headway
relied upon [the Bank's relationship managers] to ensure the Funds were, at a
minimum, bona fide investment vehicles." (Headway Compl. ii, 38, 77.)

•

"SCBI promoted investments in the Fairfield Sentry Fund to Plaintiff as generating
stable and steady returns with low volatility." (Skyworth Products Compl. ~ 4.)

•

"[The Bank's relationship manager] recommended the Fairfield Funds to Plaintiffs,
advising Plaintiffs that American Express Bank Ltd. and/or Standard [Chartered] had
conducted extensive due diligence on the fund before recommending it .... [and]
represented the Fairfield Funds as being safe, secure and as close to an equivalent of
cash as an investment could be." (Gerico, Inc. Compl. iii! 17, 18.)

(See Ex. A to Oct. 31, 2014 Letter for listing of similar allegations made by plaintiffs in other
Standard Chartered Cases.) These allegations, which are a predicate to plaintiffs' Due Diligence
Theory claims, clearly meet Kingate's test for SLUSA preclusion because they require proof that
the Bank's alleged misTepresentations and misleading omissions led plaintiffs to purchase the
Fairfield Funds, which constituted an attempted investment in covered securities. 784 F.Jd at
134-35, 151.

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Honorable Victor Marrero

For all the foregoing reasons, the Court should dismiss the Standard Chartered

Cases pursuant to SLUSA.
Respectfully submitted,

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cc:

Standard Chartered Plaintiffs' Steering Committee (by E-mail)

SO ORDERED.