Anwar et al v. Fairfield Greenwich Limited et al

Filing 1386

ENDORSED LETTER addressed to Judge Victor Marrero from Walter Rieman dated 5/29/2015 re: all of Plaintiffs' state-law claims against the Citco Defendants are precluded by SLUSA and therefore should be dismissed. 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 Citco Defendants. (Signed by Judge Victor Marrero on 6/4/2015) (spo)

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May 29, 2015

MATTHEW W. ABBOTT
EDWARD T. ACKERMAN
ALLAN J. ARFFA
ROBERT A. ATKINS
DAVID J. BALL
JOHN F. BAUGHMAN
LYNN B. BAYARD
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CRAIG A. BENSON
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JEANETTE K. CHAN
YVONNE Y F. CHAN
LEWIS R. CLAYTON
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XIAOYU GREG LIU
JEFFREY D. MARELL
MARCO V. MASOTTI
EDWIN S. MAYNARD
DAVID W MAYO
ELIZABETH R. McCOLM
MARK F. MENDELSOHN
WILLIAM B. MICHAEL
TOBY S. MYERSON
CATHERINE NYARADY
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BRAD R. OKUN
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VALERIE E. RADWANER
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KAYE N. YOSHINO
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TRACEY A. ZACCONE
TAURIE M. ZEITZER
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*NOT ADMITTED TO THE NEW YORK BAR

By Hand
The Honorable Victor Marrero
United States District Judge
Daniel Patrick Moynihan
United States Courthouse
500 Pearl St.
New York, N.Y. 10007-1312

Anwar, et al. v. Fairfield Greenwich Limited, et al.,
No. 09-cv-118 (S.D.N.Y.) (V.M.) (F.M.)
Dear Judge Marrero:
Pursuant to Your Honor's direction during the telephone conference held
on April 30, 2015, the Citco Defendants respectfully submit that the Court should dismiss
all state-law claims asserted against them on the ground that the Securities Litigation
Uniform Standards Act of 1998 ("SL USA"), as construed in In re Kingate Management
Ltd. Litigation, 784 F.3d 128 (2d Cir. 2015), precludes those claims.
The plaintiff class consists of investors who purchased securities in four
investment funds (the "Funds") created and managed by the Fairfield Greenwich Group
("Fairfield"). Class members allegedly purchased those securities in reliance on
representations that the Funds would place all or almost all of their assets in accounts at
Bernard L. Madoff Investment Securities LLC (the ·'MadoffFirm"). Class members also
allegedly relied on representations that the Funds, acting through the MadoffFirm, would

PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP

The Honorable Victor Marrero

2

invest their assets in accordance with the Madoff Firm's "split-strike conversion
strategy." That strategy allegedly involved purchasing a basket of equity securities that
correlated to the S&P 100 Index and hedging these purchases with put and call options.
(Second Consolidated Am. Compl. ("SCAC") ifif 169, 184.) As everyone now knows, no
such strategy was ever executed. Instead, the Madoff Firm generated fictitious trades in
these securities and false account statements as part of a massive Ponzi scheme. (Id if
167.)
After Madoff confessed his fraud, investors' shares in the Funds became
practically worthless. Plaintiffs then filed this lawsuit against Fairfield, the auditors of
the Funds, and other service providers of the Funds, including the Citco Defendants.
Certain Citco Defendants acted as administrator and custodian for certain Funds at
various times. 1 Plaintiffs assert claims under the federal securities laws and state-law
claims for negligent misrepresentation, negligence, gross negligence, breach of fiduciary
duty, third-party beneficiary breach of contract, aiding and abetting fraud, and aiding and
abetting breach of fiduciary duty against various Citco Defendants. Plaintiffs base all of
these claims on their central allegation, stated prominently at the outset of their
complaint, that the "loss of [class members'] assets in the Madoff Ponzi scheme is a
direct and proximate result of Defendants' false representations and omissions and failure
to fulfill their duties to Plaintiffs." (SCAC if 3.)
After six years of litigation, Plaintiffs characterized their central theory to
the Second Circuit in this way: the Citco Defendants supposedly "directly defrauded"
class members by, among other actions, "repeatedly providing false Net Asset Values
[("NAVs")] and representing to [class members] that [the Citco Defendants were] the
custodian of (non-existent) assets[.]"2 Plaintiffs also contend that the Citco Defendants
were "composed of interrelated entities" and were ''complicit" in each other's "fraud"
and other "wrongdoing. " 3
These allegations are fatal to Plaintiffs' state-law claims under SLUSA.
As the Second Circuit ruled in Kingate, SLUSA precludes state-law class-action claims
that predicate liability on either (i) a defendant's alleged untrue statements or omissions,
or (ii) a defendant's alleged complicity in alleged untrue statements or omissions, if, as
here, the alleged untrue statements or omissions occur in connection with the purchase or
sale of "covered" securities. 784 F.3d at 132.

The Citco Defendants-collectively, "Citco"-are Citco Fund Services (Europe) B.V., Citco (Canada),
Inc. (together, the "Citco Administrators"), Citco Global Custody N.V., Citco Bank Nederland N.V.
Dublin Branch (with Citco Global Custody N.V., the "Citco Custodians"), Citco Fund Services
(Bermuda) Ltd. ("CFSB"), and The Citco Group Ltd.
Pls.-Resp't's Opp'n to Mot. for Leave to File Reply Br. on Citco's Rule 23(f) Pet. 6, Anwar v
Fairfield Greenwich Ltd, No. 15-792 (L) (2d Cir. Apr. 7, 2015), ECF No. 59 (hereinafter "PO").
Ex. 1 at I; Ex. 2 at 5 n. l. Citations to "Ex. _" refer to the exhibits enclosed with this letter.

PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP

The Honorable Victor Marrero

3
Procedural History

On motions to dismiss, the Citco Defendants (and other defendants)
argued that SLUSA precludes Plaintiffs' state-law claims. This Court denied that aspect
of the motions. The Court ruled that class members' purchases of shares in the Funds
(themselves "uncovered" securities) did not satisfy SLUSA's requirement that a plaintiff
allege false conduct "in connection with the purchase or sale of a covered security."
Anwar v. Fairfield Greenwich Ltd (Anwar/), 728 F. Supp. 2d 372, 398 (S.D.N.Y. 2010)
(quoting 15 U.S.C. § 78bb(t)(l)(A)). In the Court's view at that time, class members had
not invested in "covered securities," because they purchased only uncovered securities in
a Fund with an expectation that the Fund would purchase covered securities as part of its
investment strategy. Id at 399. The Court further noted in dicta that, even if the
"covered securities" requirement had been met, "only the fraud and negligent
misrepresentation common law causes of action would be dismissed." Id at 399 n.7
Since this Court's ruling, the Supreme Court and Second Circuit have
issued several significant decisions interpreting SLUSA. Chabourne & Parke LLP v.
Troice, 134 S. Ct. 1058 (2014); Kingate, 784 F.3d 128; In re Herald, Primeo & Thema
Sec. Litig., 730 F.3d 112 (2d Cir. 2013) (Herald/), reh 'g denied, 753 F.3d 110 (2d Cir.
2014) (Herald II), cert. denied, 135 S. Ct. 1701 (2015). These decisions, we respectfully
submit, establish that this Court's SLUSA ruling in Anwar I is no longer correct.
SLUSA, As Construed in Kingate, Precludes Plaintiffs'
State-Law Claims Against the Citco Defendants

Four aspects of Kingate are critical to this case and demonstrate that all of
Plaintiffs' state-law claims against the Citco Defendants are precluded.

First, Kingate, following Herald I, held that SLUSA's "covered
securities" requirement is met where the members of a plaintiff class "purchased the
uncovered shares of the offshore [so-called Madofffeeder] Funds, expecting that the
Funds were investing the proceeds in S&P 100 stock." 784 F.3d at 142.
Second, Kingate held that SLUSA precludes claims "accusing the
defendant of complicity in ... false conduct that gives rise to liability." Id at 147. A
claim alleges "complicity" when it is "predicated on conduct by the defendant that is
specified in SLUSA's operative provisions referencing the anti-falsity proscriptions of
[the Securities Act of 1933 and the Securities Exchange Act of 1934]." Id at 146
(emphasis deleted). "False conduct" includes, among other things, misrepresentations,
untrue statements, and omissions.4
4

In Kingate, the Second Circuit defined "the tenns 'falsity' and 'false conduct' ... [to] encompass all
the types of misleading or deceptive conduct identified in the relevant SLUSA provisions (including a
misrepresentation or omission, an untrue statement, and the use or employment of any manipulative or
deceptive device or contrivance)." 784 F.3d at 132 n. l.

PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP

The Honorable Victor Marrero

4

Third, Kingate held that SLUSA preclusion does not depend on whether
false conduct is a formal element of the allegedly precluded claim~ Instead, if the other
requisites for SLUSA preclusion are met, SLUSA precludes claims that are based on
allegations of false conduct, including allegations of untrue statements or omissions. See
784 F.3d at 140. Under Kingate, a plaintiff may not try to obscure the relationship
between the allegedly false conduct and the plaintiffs claims "by artfully characterizing a
claim as dependent on a theory other than falsity when falsity nonetheless is essential to
the claim, such as by characterizing a claim of falsity as a breach of the contractual duty
of fair dealing." Id This holding reaffirms prior Second Circuit jurisprudence holding
that SLUSA precludes claims for breach of fiduciary duty, breach of contract, and
negligence, among others, where the "realities underlying the claims" demonstrate that
the claims are predicated on false conduct. Herald I, 730 F.3d at 119; see also id at 119
n.7 (holding that SLUSA precludes claims for negligence and breach of fiduciary duty);
Romanov. Kazacos, 609 F.3d 512, 523 (2d Cir. 2010) (holding that SLUSA precludes
claims for negligence, breach of fiduciary duty, negligent misrepresentation, breach of
contract, and unfair and deceptive trade practices).
Finally, Kingate held that a court must assess whether SLUSA precludes
claims on a defendant-by-defendant and claim-by-claim basis. 784 F.3d at 143.
These principles compel the dismissal of each state-law claim brought
against the Citco Defendants. 5 Class members' investments in the Funds qualify as
transactions in "covered securities." Plaintiffs' claims predicate liability on the Citco
Defendants' alleged untrue statements and/or omissions or the Citco Defendants'
complicity in alleged untrue statements and/or omissions by Fairfield.

A.

Class Members' Investments in the Funds Qualify as
Transactions in "Covered Securities"

Under Kingate and Herald II, if class members purchase ownership
interests in a fund with the expectation that the fund will invest in S&P 100 stocks, the
class members' claims satisfy the "covered securities" requirement for SLUSA
preclusion: "[P]laintiffs ... purchased the uncovered shares of the offshore Funds,
expecting that the Funds were investing the proceeds in S&P 100 stocks, which are
covered securities. We therefore rule that the essential element of SLUSA preclusion that
requires an allegation of falsity 'in connection with' a purchase or sale of a covered
security is satisfied in this case." Kingate, 784 F.3d 142; see also Herald II, 753 F.3d at
119.
The same conclusion follows here. Class members purchased shares of
the Funds and expected that the Funds would invest in S&P 100 stocks. (SCAC ifif 169,
As stated in the parties' joint letter to the Court dated May 8, 2015, Plaintiffs concede that SLUSA
precludes their claim for aiding and abetting fraud against all of the Citco Defendants. (Anwar Pl.s'
Ltr. I, May 7, 2015, ECF No. 1376.) That claim must therefore be dismissed.

PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP

The Honorable Victor Marrero

5

184-85.) Indeed, the putative class in Kingate invested in the fraudulent scheme
perpetrated by Bernard Madoff and his co-conspirators in exactly the same way as the
class members in this action. Because the alleged false conduct related to investments in
the Kingate funds occurred "in connection with the purchase or sale of a covered
security," so too did the alleged false conduct underlying Plaintiffs' claims here. 784
F.3d at 132.

B.

SLUSA Precludes Plaintiffs' Claims Against the Citco Administrators

The allegations in the SCAC make plain that all of Plaintiffs' state-law
claims predicate liability on the Citco Defendants' allegedly false conduct. Plaintiffs
have repeatedly and unequivocally confirmed that reality.
In particular, all of Plaintiffs' claims against the Citco Administrators
predicate liability on the Citco Administrators' alleged untrue statements about the NA V
of each Fund. Plaintiffs allege that "[t]he NAV, which was to be independently
calculated and reported by Citco, was fundamental to [class members'] initial investment
decisions, decisions to invest additional funds, and decisions to maintain the investments
over time." (SCAC ~ 335 (emphasis added).) According to Plaintiffs, the "Citco
Administrators blindly and recklessly relied on information provided by Madoff and the
Funds to calculate and disseminate the Funds' NAV, and to perform its other duties, even
though that information was manifestly erroneous and should not have been relied on."
(SCAC ~ 338; see also Pls.' Mem. in Opp. to Mot. to Dismiss 11, Mar. 23, 2010, ECF
No. 420.) Plaintiffs allege that class members sustained injuries because of the allegedly
untrue NA V statements. (E.g., SCAC ~~ 342, 484, 488 500, 504, 508, 513, 514, 534,
537, 539.)
Recently Plaintiffs have emphatically confirmed to the Second Circuit that
their claims predicate the Citco Defendants' liability on alleged untrue statements
concerning the Funds' NA Vs:
[T]he fundamental claims in this case ... are that Citco directly defrauded
Plaintiffs and directly breached duties that it owed to [them] by, among
other things, repeatedly providing false Net Asset Values and representing
to [them] that it was custodian of (non-existent) assets, all in violation of
its own knowledge, representations and internal procedures, as well as
industry norms. (PO at 6 (emphasis added).)
Because all of Plaintiffs' claims, including their state-law claims, against
the Citco Defendants depend on accusations of false conduct, SLUSA precludes each of
those state-law claims, "notwithstanding that the claim[s] assert[] liability on the part of
the defendant under a state law theory that does not include false conduct as an essential
element[.]" Kingate, 784 F.3d at 149. We address each of Plaintiffs' state-law claims
below.

PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP

The Honorable Victor Marrero
1.

6

SLUSA Precludes Plaintiffs' Claims for Negligent
Misrepresentation, Negligence, and Gross Negligence
Against the Citco Administrators

Plaintiffs' negligence-based claims against the Citco Administrators are
precluded because they premise liability on the Citco Administrators' allegedly untrue
NAV statements and on other alleged false conduct. For instance, in explaining how they
intend to prove reliance and causation with respect to these claims, Plaintiffs recently
represented to this Court that: "If Citco had promulgated accurate NA Vs (showing the
Funds were essentially worthless) ... no sane investor would have bought the Funds'
shares. Moreover, Citco's NA Vs determined the number of shares that were purchased
in the initial investment. Accordingly, Plaintiffs' negligence-based claims will be
determined on the basis of common evidence." (Pl.s' Supplemental Mem. in Supp. of
Mot. for Class Cert 13, Aug. 1, 2014 (filed under seal) (emphasis deleted).) Plaintiffs
thus concede that their negligence-based claims predicate liability on the Citco
Administrators' "negligent misrepresentations or misleading omissions [with respect to
the Funds' NA Vs] in connection with transactions in covered securities." Kingate, 784
F.3d at 135 n.6. A claim-by-claim analysis underscores this conclusion:
First, SLUSA precludes Plaintiffs' claim for negligent misrepresentation.
In the context of claims involving Madoff feeder funds, Kingate held that SLUSA
precludes allegations predicating liability on "Defendants' negligent misrepresentations
and misleading omissions in connection with the Funds' investments with Madoff and
with oversight of Madoft" s operations." Id. at 151. This is precisely the sort of false
conduct on which Plaintiffs here base their claim negligent misrepresentation. For
example, Plaintiffs allege:
•

"The Citco Defendants induced Plaintiffs to make their initial investments in
the Funds, to retain their investments in the Funds, and (where applicable) to
make additional investments in the Funds by issuing false NA V and account
balance statements for the Funds that they then disseminated to class
members, or knew would be disseminated to class members." (SCAC if 534.)

•

"Plaintiffs justifiably relied, to their detriment, on the Citco Defendants' false
statements and omissions, in ignorance of their falsity, by making their initial
investments in the Funds, retaining their investments ~n the Funds, and (where
applicable) making additional investments in the Funds. Plaintiffs have
suffered substantial damages as a result of the wrongs alleged herein."
(SCAC if 539.)

These allegations are no different from those that Kingate held are precluded. 6

6

In fact, these allegations are restated almost verbatim to support Plaintiffs' claims under the federal
securities laws against the Citco Administrators. (Compare SCAC ~~ 523-26 with~~ 534-39). In that

PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP

The Honorable Victor Marrero

7

Second, Plaintiffs' claims for negligence and gross negligence similarly
predicate liability on the Citco Administrators' false conduct. (E.g., SCAC ~ 337 ("Citco
failed to take reasonable steps, industry-standard to calculate the Funds' NAV ... or
relay accurate information to investors"); id. ~ 338 ("Rather, Citco blindly and recklessly
relied on information provided by Madoff and the Funds to calculate and disseminate the
Funds' NAV, and to perform its other duties, even though that information was
manifestly erroneous and should not have been relied on.").) Plaintiffs further allege that,
"[i]f Citco had not breached its duties as set forth above," class members would not have
invested in the Funds, would not have retained their existing investments, and would
therefore not have sustained their alleged damages. (See id~ 340.) To prove these
allegations, Plaintiffs would need to show that the Citco Administrators engaged in false
conduct by, among other things, disseminating untrue NAV statements to class members
and making untrue statements about Citco's services. (See, e.g., id.~~ 336-340.)
According to Plaintiffs, the Citco Administrators disseminated these untrue NAV
statements because they had ignored "red flags" concerning the Madoff Firm and the
Funds, and had relied on untrue information from the Madoff Firm and the Funds,
notwithstanding the Citco Administrators' supposedly untrue statements that they
"provid[ed] fully independent services ... to safeguard the interests of investors." (Id~
325.) Because SLUSA precludes claims based on allegations that the defendant engaged
in false conduct in connection with an investment decision, and Plaintiffs directly allege
such false conduct by the Citco Administrators, SLUSA precludes Plaintiffs' claims for
negligence and gross negligence against the Citco Administrators. See Kingate, 784 F.3d
at 134 n.6.
Third, Plaintiffs' theory of injury presupposes that the Citco
Administrators made untrue statements in connection with class members' investment
decisions in covered securities. That is so because Plaintiffs allege that class members
were injured by their decisions to buy or retain shares in the Funds. (E.g., SCAC ~ 340.)
Class members' investment decisions, in tum, were supposedly based on the Citco
Administrators' alleged untrue statements (such as the NAVs) or on what Plaintiffs
characterize as the Citco Administrators' non-disclosure of information (such as the Citco
Administrators' alleged failure adequately to disclose that they did not verify information
supplied by the Madoff Firm). Accordingly, the Citco Administrators' alleged untrue
statements and omissions are an essential part of the alleged causal link between the
Citco Administrators' supposed breaches of duty and the class members' supposed
injuries and damages. See In re US. Foodservice Inc. Pricing Litig., 729 F.3d 108, 119
n.6 (2d Cir. 2013); Laub v. Faessel, 745 N.Y.S.2d 534, 536 (App. Div. 2002); see also
Braddock v. Braddock, 871N.Y.S.2d68, 84 (App. Div. 2009) (Lippman, J., dissenting).
In fact, if Plaintiffs' allegations of misrepresentation-based breaches were
excised from the SCAC, Plaintiffs would not be able to pursue their remaining dutycontext, Plaintiffs employ these allegations to allege the misrepresentations and omissions that are
elements of their federal claims.

PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP

The Honorable Victor Marrero

8

based state-law claims because those claims would then unquestionably be derivative in
nature. That is so because, absent allegations that class members made investment
decisions based on alleged untrue statements or omissions, the supposed breaches
underlying these claims would merely allege mismanagement of the Funds. See, e.g.,
Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031, 1038 (Del. 2004); cf
Anwar I, 728 F. Supp. 2d at 401 n.9 (ruling that Plaintiffs' claims are "direct" because
"[t]he principal wrong asserted by Plaintiffs here is essentially nondisclosure of or failure
to learn facts which should have been disclosed based on duties that were independently
owed to Plaintiffs.").

Finally, Plaintiffs' theory of duty underlying all of their negligence-based
claims presupposes that the Citco Administrators made untrue statements or omissions.
In ruling that Plaintiffs had adequately pleaded the existence of a duty to support their
negligence-based claims against the Citco Administrators, this Court considered whether
Plaintiffs' allegations satisfied the requirements of Credit Alliance Corp. v. Arthur
Andersen & Co., 483 N.E.2d 110, 118 (N.Y. 1985). See Anwar I, 728 F. Supp. 2d at 432.
The Credit Alliance test recognizes that service providers, such as a fund
administrator, generally owe a duty only to their clients (here, the Funds), and not to nonclients, such as the class members here. That is because "a duty of care may arise only
where the parties are in contractual privity or have a relationship so close as to approach
that of privity." Id (internal quotation marks omitted). To show that a defendant "owes
a duty to give ... accurate information" to a plaintiff when the parties are not in
contractual privity, a plaintiff must show "that there is (1) an awareness by the maker of
the statement that is to be used for a particular purpose; (2) reliance by a known party on
the statement in furtherance of that purpose; and (3) some conduct by the maker of the
statement linking it to the relying party and evincing its understanding of that reliance."
Id (internal quotation marks omitted).
This Court ruled that "Plaintiffs allege a relationship between investors
and the Administrators that gives rise to a duty of care under the Credit Alliance
standard." Id at 435. A necessary implication of this ruling is that Plaintiffs'
negligence-based claims depend on alleged untrue statements about covered securities
transactions. In particular, this Court ruled that Plaintiffs satisfied the "known party"
prong of the Credit Alliance test because they allege that "potential investors ... were
known parties to the Administrators, and that the Administrators intended those investors
to rely on the NAV and account balance statements to invest in the Funds." Id at 434.
This ruling demonstrates that Plaintiffs' negligence-based claims predicate liability on the
Citco Administrators' issuance of allegedly untrue NAV statements and class members'
alleged investment decisions based on those statements. So, too, does this Court's ruling
that Plaintiffs sufficiently alleged "linking conduct." "[I]t is reasonable to infer from
Plaintiffs' allegations that the Administrators were aware that Plaintiffs would-and
did-rely on their statements of the Funds' NAV that were sent to investors, thus
satisfying the linking requirement." Id at 435.

PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP

The Honorable Victor Marrero
2.

9

SLUSA Precludes Plaintiffs' Claim for Breach of Fiduciary Duty
Against the Citco Administrators

SLUSA precludes Plaintiffs' claim for breach of fiduciary duty because
that claim, like Plaintiffs' negligence-based claims, predicates liability on the Citco
Administrators' allegedly untrue statements concerning the Funds' NAV and/or other
false conduct. For example, Plaintiffs allege that the Citco Administrators breached
"their fiduciary duties to Plaintiffs, by ... failing to discharge properly their
responsibilities as Administrators and Sub-Administrators, including in calculating the
Funds' NAV and communicating fictitious Fund valuations to Plaintiffs." (SCAC if 495
(emphasis added).) This allegation unmistakably predicates liability on the Citco
Administrators' alleged "misrepresentations and misleading omissions in connection with
the Funds' investments with Madoff and oversight ofMadoffs operations." Kingate,
784 F.3d at 151. These allegations are thus "of the type" that should be dismissed under
SLUSA. Id.; see also Romano, 609 F .3d at 521-24 (holding that SL USA precludes
breach of fiduciary duty claim alleging "uniform misrepresentations" made to plaintiffs).
Further, Plaintiffs' theory of the Citco Administrators' supposedfiduciary
duty, like Plaintiffs' theory of duty under Credit Alliance, presupposes false conduct
connected to class members' investment decisions. According to this Court's ruling
sustaining Plaintiffs' claim for breach of fiduciary duty against a motion to dismiss, the
following key allegations supported Plaintiffs' theory that the Citco Administrators owed
a fiduciary duty to Plaintiffs: the NAV was "fundamental to [class members'] investment
decisions"; the Citco Administrators were "responsible for communicating with
investors"; and the Citco Administrators "sent investment confirmations to [class
members]." Anwar I, 728 F. Supp. 2d at 441-42. Plaintiffs' theory of duty and breach
thus depends directly on Plaintiffs' allegations of false communications from the Citco
Administrators to class members.
In fact, Plaintiffs have contended that the Citco Administrators breached
their supposed fiduciary duties "by making false and misleading statements and
omissions," which class members allegedly relied on "when deciding to invest initially or
subsequently in the Funds ... [and] when deciding to retain their investments in the
Funds[.]" (Ex. 3 at 12, 10-11 (emphasis added); see also id at 13 (contending that the
"principal" evidence supporting their breach of fiduciary duty claim is based on the same
evidence supporting their federal securities claim).) Claims brought based on such
evidence are exactly what SLUSA precludes. See Merrill Lynch, Pierce, Fenner & Smith
v. Dabit, 547 U.S. 71, 85 (2006); Kingate, 784 F.3d at 151; Herald I, 730 F.3d at 119;
Romano, 609 F .3d at 524.
Finally, as with the negligence-based claims, Plaintiffs' theory of injury
for their breach of fiduciary duty claim presupposes that the Citco Administrators made
untrue statements or omissions in connection with class members' investment decisions
in covered securities. (See supra p. 7; see also SCAC iii! 495, 498.)

PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP

The Honorable Victor Marrero
3.

IO

SLUSA Precludes Plaintiffs' Claim for Third-Party Beneficiary
Breach of Contract Against the Citco Administrators

Plaintiffs' claim for third-party beneficiary breach of contract also
predicates the Citco Administrators' liability on allegations of false conduct. For
instance, Plaintiffs allege that "Citco breached the Administration Agreements with the
Funds, by, among other omissions, grossly failing to discharge its responsibility to
calculate accurately the Funds' NA Vs." (SCAC ~ 484 (emphasis added).) Plaintiffs
further allege that class members are the beneficiaries of these agreements because the
agreements "recogniz[e] Citco's obligation to keep Fund shareholders informed of the
status and performance of their investments." (Id ~ 475.) According to Plaintiffs, that
information was "fundamental" to class members' investment decisions. (Id~ 335.)
Plaintiffs thus allege that class members were injured as a result of allegedly untrue
statements concerning the Funds' NAV. Those allegedly untrue statements are the same
statements underlying Plaintiffs' claims under the federal securities laws. (See also Ex. 3
at 20-21 (citing examples of the same conduct supporting their federal securities claim as
"facts" establishing breaches of the Administration Agreements). "Because both the
misconduct complained of, and the harm incurred, rests on and arises from securities
transactions, SLUSA applies." Romano, 609 F.3d at 524.
Further, Plaintiffs' theory as to why class members are beneficiaries of the
administration agreements between the Citco Administrators and the Funds presupposes
an untrue statement or omission directed to class members in connection with their
investment decisions. As this Court previously explained in denying the motion to
dismiss this claim, "the Administration Agreements require the Citco Defendants to
render certain specific performance directly to [class members]." Anwar I, 728 F. Supp.
2d at 430. That alleged performance included "publishing the Net Asset Value per Share
(of each class if appropriate)[.]" (SCAC ,-r 477.) Put another way, this claim alleges that
the Citco Administrators were supposed to provide class members with accurate NAV
statements, but did not do so. This claim therefore concerns the type of misconduct that
falls "within SLUSA's specifications of conduct prohibited by the anti-falsity provisions
of the 1933 and 1934 Acts." Kingate, 784 F.3d at 151.
Finally, much like their other duty-based claims, Plaintiffs' theory of
injury on their contract claim presupposes an untrue statement or omission made to them
in connection with their investment decisions. Plaintiffs allege that class members would
have refrained from investing in the Funds or redeemed their investment in the Funds if
they had known the truth about the Citco Administrators' alleged misconduct. According
to Plaintiffs, class members' injury is a "direct and proximate result of Defendants' false
representations and omissions and failure to fulfill their duties to [class members]."
(SCAC ,-i 3.) Plaintiffs can establish such an injury, if at all, only by proving that the
Citco Administrators' untruthful conduct caused their investment decisions.

PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP

The Honorable Victor Marrero

C.

11

SLUSA Precludes the State-Law Claims Against the Citco Group

Plaintiffs' state-law claims against the Citco Group-negligence, gross
negligence, and negligent misrepresentation-are precluded for the same reasons that
Plaintiffs' state-law claims against the Citco Administrators are precluded. 7 All of
Plaintiffs' state-law negligence-based claims against the Citco Group are based on
allegations that the Citco Group "controlled the Administrators." Anwar I, 728 F. Supp.
2d at 436; see also SCAC ~ 540. The Securities Exchange Act of 1934 expressly
provides for control-person liability, see 28 U.S.C. § 78t, and Plaintiffs assert a federal
claim under that provision against the Citco Group based on the Citco Administrators'
alleged misconduct. (SCAC ~~ 527-30.) The claims against the Citco Group thus allege
"conduct of the defendant specified in SLUSA's operative provisions," and are precluded
under SLUSA. Kingate, 784 F.3d at 149.

D.

SLUSA Precludes Plaintiffs' Claim for Breach of
Fiduciary Duty Against the Citco Custodians

To quote Plaintiffs themselves, "Plaintiffs have made clear" that "the
theory of their case" is that all Citco Defendants, including the Citco Custodians, "were
complicit in Citco 's fraud, breach of duties, and other wrongdoing." (Ex. 4 at 1-2
(emphasis added).) This alleged misconduct includes allegations that the Citco
Custodians misrepresented the activities they had undertaken by, among other things,
"representing to [class members] that [they were the] custodian of (non-existent) assets"
(PO at 6) and by "fail[ing] to relay accurate information to [class members]" about the
Funds and the Madoff Firm in connection with class members' investment decisions.
(SCAC ~ 337.) Kingate speaks unequivocally about the consequences of such
allegations: "claims accusing the defendant of complicity in the false conduct that gives
rise to liability are subject to SLUSA's prohibition." 784 F.3d at 132 (first emphasis
added).
The SCAC contains numerous allegations of false conduct by the Citco
Custodians. For example, Plaintiffs allege that "Citco breached its fiduciary duties by:
... misrepresenting that BMIS was a qualified sub-custodian and misrepresenting the
care Citco Bank had taken with respect to selection and supervision ofBMIS." (SCAC ~
353(p)(iv) (emphasis added).) Plaintiffs also allege that the Citco Custodians "actively
and.fraudulently concealed their failure to perform any material due diligence on or
monitoring of the operations of BMIS and Madoff, and affirmatively misrepresented that
they were performing constant and intensive due diligence on every aspect of the
implementation of the split strike conversion strategy when in fact they were performing
virtually no such due diligence." (Id. ~ 349 (emphasis added).)

Plaintiffs' claim against all Citco Defendants for aiding and abetting breach of fiduciary duty is
discussed further below.

PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP

The Honorable Victor Marrero

12

Similarly, in their brief addressing class certification, Plaintiffs argued that
the presumption ofreliance established in Affiliated Ute Citizens v. Utah, 406 U.S. 128
(1972), applied to all of their claims based on supposed material omissions by the Citco
Defendants. This Court applied the Affiliated Ute presumption to Plaintiffs' claims under
the federal securities laws based on what the Court perceived to be a series of alleged
"material omissions" that Plaintiffs attributed primarily to the Citco Custodians. The
information that the Citco Custodians allegedly omitted to disclose included the
following: "[Citco's] internal auditors had grave doubts about the veracity of the Funds'
financial information and whether the Funds' assets existed"; "[Citco's] attempts to
verify that the Funds' assets existed failed due to Madoff s lack of cooperation in
meetings with Citco"; and "[Citco] was doing nothing to supervise Madoff as Citco's
sub-custodian." Anwar v. Fairfield Greenwich Ltd., 2015 WL 935454, at *13 (S.D.N.Y.
Mar. 3, 2015). In short, Plaintiffs allege that Citco "withheld ... material information
from ... investors." Id. These allegations make plain that "falsity is essential to the
claim" asserted against the Citco Custodians. Kingate, 784 F.3d at 140.
Moreover, as with Plaintiffs' other state-law claims against the Citco
Defendants, Plaintiffs' theory of injury for their breach of fiduciary duty claim
presupposes that the Citco Custodians made an untrue statement or omission in
connection with class members' investment decisions in covered securities. (See supra
pp. 7, 9.) That is because the factual predicate for all of Plaintiffs' claims is that the
Citco Custodians supposedly made untrue statements or omissions about the activities in
which they were engaged on behalf of the Funds or about "numerous red flags
surrounding Madoffs operations[.]" (SCAC if 338.) Plaintiffs expressly advance their
claim against the Citco Custodians on a theory that class members "would not have
invested in the Funds, or retained their investments in the Funds" if they had known the
truth about the alleged false conduct. (Id if 340; see also id. iii! 496-98.) "These
allegations are more than sufficient to satisfy SLUSA's requirement that the complaint
allege a misrepresentation or omission of a material fact in connection with the purchase
or sale of a covered security." Herald I, 730 F.3d at 119 (internal quotation marks
omitted).
E.

SL USA Precludes Plaintiffs' Claims for Aiding and Abetting Breach
of Fiduciary Duty Against the Citco Administrators, the Citco
Custodians, CFSB, and the Citco Group

Under Kingate, allegations that a defendant aided and abetted untruthful
conduct by others clearly allege "complicity in false conduct that gives rise to liability"
and thus "are subject to SLUSA's prohibition." 784 F.3d at 132 (emphasis deleted); see
also id at 151. Here, Plaintiffs allege that the Citco Administrators, the Citco
Custodians, CFSB, and the Citco Group all aided and abetted breaches of fiduciary duty
committed by Fairfield. Fairfield's supposed breaches of duty consisted of extensive
false conduct, including misrepresentations and omissions regarding the Funds'

PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP

The Honorable Victor Marrero

13

investments and Fairfield's oversight of the Funds' investments. (SCAC 11181-216.)
Kingate expressly held that "SLUSA precludes [such] allegations." 784 FJd at 151.
It is obvious from the face of Plaintiffs' complaint that the alleged
misconduct forming the basis for Fairfield's alleged breaches of fiduciary duty consists of
conduct prohibited by the anti-falsity provisions of the federal securities laws. The
section of the complaint addressing this claim is the same section of the complaint
addressing Plaintiffs' fraud claims. That section consists of twenty pages of alleged
misrepresentations and omissions that Fairfield made (or failed to make) to class
members. (SCAC 11181-216.) For instance, Plaintiffs allege:

[T]he Fairfield Defendants misrepresented to [class members] that their
assets were being invested using a split-strike conversion strategy, and that
assets in the Funds were earning substantial, consistent returns over time.
The Fairfield Defendantsfurther misrepresented that they and their
financial services providers and auditors were conducting extensive due
diligence and monitoring of Madoff's operations, which served as the
Funds' investment advisor, as well as their broker, execution agent, and
sub-custodian or custodian, and that they had full transparency to all of
Madoff's operations. The Fairfield Defendants failed to disclose to [class
members] the material facts that in reality no one had conducted [any of
these activities]. (Id. if 182 (emphasis added).)
There can be no serious dispute that these allegations qualify for SLUSA
preclusion in light of Kingate, especially since they are the same set of allegations used to
support Plaintiffs' claims for fraud under the federal securities laws and under state law.
See 784 F.3d at 151. 8
More than that, Plaintiffs' own representations establish that their claim
for aiding and abetting breach of fiduciary duty against the Citco Defendants depends on
a showing of "false conduct conforming to SLUSA's specifications." Id. at 148. In
answers to contention interrogatories, Plaintiffs verified that they contend that Fairfield
breached fiduciary duties to Plaintiffs "because the representations that [Fairfield] made

These are also the exact same allegations that Plaintiffs identify as supporting their aiding and abetting
fraud claim against the Citco Defendants, which Plaintiffs now concede is precluded by SLUSA.
(E.g., SCAC iii! 341-42; Exs. Ex. I at 16; Ex. 2 at 16-17; Ex. 3 at 16-17; Ex. 5 at 16-17; Ex. 7 at 11
(responding to the Citco Defendants' contention interrogatories asking to identify the
misrepresentations supporting Plaintiffs' claim for aiding and abetting fraud claim by incorporating by
reference the alleged the misrepresentations identified in response to the Citco Defendants' contention
interrogatories about Plaintiffs' claim for aiding and abetting breach of fiduciary duty claim).)
Because there is no difference in the type of alleged misconduct supporting each aiding and abetting
claim, dismissal of the claim for aiding and abetting fraud warrants dismissal of the claim for aiding
and abetting breach of fiduciary duty.

PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP

The Honorable Victor Marrero

14

to investors were false and misleading, including those statements set forth in the Funds'
offering materials, and [other] misrepresentations." (Ex. 2 at 13 (emphasis added); see
also Ex. 1 at 13 ("Fairfield ... breached fiduciary duties to Plaintiffs because of the
misrepresentations and omissions that it made to investors, including those statements set
forth in the Funds' offering materials." (emphasis added)); Ex. 3 at 14 (same); Ex. 5 at 14
(same); Ex. 7 at 8 (same); Ex. 6 at 8 ("Fairfield breached fiduciary duties to Plaintiffs ...
because of misrepresentations it made to investors, including those statements set forth in
the Funds' offering materials[.]").) And in describing how the Citco Defendants
allegedly assisted Fairfield's breach of fiduciary duty, Plaintiffs allege that the Citco
Defendants: (1) "reviewed, revised, and approved the PPMs, and signed off on them
knowing that they contained materially false and misleading statements and omissions";
(2) "also knew that the PPMs ... gave the impression that Citco was performing services
in a manner that was materially misleading, yet Citco did nothing to correct these
misrepresentations and omissions, instead participating in them"; and (3) "knew that
Fairfield continued to misstate its transparency to Madoff and its ability to monitor his
operations." (Ex. 2 at 14-15 (emphasis added); see also Ex. 1 at 14-15; Ex. 3 at 15-16;
Ex. 5 at 15; Ex. 6 at 9-10; Ex. 7 at 9-10.)
Finally, "it is obvious that [the Citco Defendants'] liability, under [the
aiding and abetting claim], is premised on their participation in, knowledge of, or, at a
minimum, cognizable disregard of [Fairfield's] securities fraud." Herald I, 730 F.3d at
119 n. 7. For the Citco Administrators, Plaintiffs contend that they aided and abetted
"Fairfield's breaches by continuing to serve as administrator ... , including processing
subscriptions and redemptions, calculating the NA V, publishing NAV statements, and
processing the transfer of funds from [class members] to Fairfield and Madoff, ...
[without which] Fairfield's breaches could not have continued." (Ex. 5 at 14-15; Ex. 3 at
15.) For the Citco Custodians, Plaintiffs make similar contentions. (Ex. 1 at 14; Ex. 2 at
14-15.) So, too, for CFSB and the Citco Group. (Ex. 6 at 9-11; Ex. 7 at 9.) These
allegations of misconduct are used nearly verbatim in support of Plaintiffs' contentions
supporting their claims for aiding and abetting fraud. (Ex. 1 at 16; Ex. 2 at 16-17; Ex. 3
at 16-17; Ex. 5 at 16-17; Ex. 7 at 11.) Accordingly, SLUSA precludes the claim.
Conclusion
For the foregoing reasons, and those set forth in the letters filed
concurrently by the PwC defendants (and the Standard Chartered defendants), all of
Plaintiffs' state-law claims against the Citco Defendants are precluded by SLUSA and
therefore should be dismissed.

1

SOORDERED.

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PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP

The Honorable Victor Marrero
Enclosures
cc:

All counsel in Anwar (by e-mail)

15