Anwar et al v. Fairfield Greenwich Limited et al

Filing 1390

ENDORSED LETTER addressed to Judge Victor Marrero from Sharon L. Nelles dated 6/8/2015 re: For all the foregoing reasons and those set out in the Bank's May 29 Letter and prior submissions concerning SLUSA, the Court should dismiss the SC Cases in their entirety and with prejudice. 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 Bank defendants. (Signed by Judge Victor Marrero on 6/9/2015) (lmb)

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June 8, 2015
By Facsimile
Honorable Victor Marrero,
United States District Judge,
Southern District of New York,
Daniel Patrick Moynihan U.S. Courthouse,
500 Pearl Street,
New York, New York 10007.
Re:

Anwar v. Fairfield Greenwich Ltd, No. 09-CV-118 (VM) (FM) -Standard Chartered Cases

Dear Judge Marrero:
We write on behalf of the Standard Chartered Defendants (the "Bank") in reply to
the Standard Chartered Plaintiffs' May 29, 2015 letter regarding application of the Kingate
decision to the Standard Chartered Cases ("SC Cases"). (Dkt. No. 1385.) As noted in the
Bank's opening submission., all remaining ~laims in the SC Cases are predicated on allegations
that the Bank made false and misleading recommendations that induced plaintiffs to try to invest
in "covered securities" through the Fairfield Funds. As such, under Kingate and other Second
Circuit precedent, those claims are squarely precluded by SLUSA. Plaintiffs argue nonetheless
that their claims should not be dismissed because: ( 1) the SC Cases are not a "covered class
action" under SLUSA; (2) SLUSA's "false conduct" requirement is not met with respect to the
"Due Diligence Theory" claims; and (3) SLUSA's "in connection with" requirement is not met
with respect to certain claims that plaintiffs contend may exist but fail to specify.
Each of plaintiffs' arguments fail and the SC Cases should be dismissed. First,
the 57 SC Cases brought by 75 separate plaintiffs are a "group of lawsuits" that qualify as a
"covered class action" under SLUSA's plain text. See 15 U.S.C. § 78bb(f)(5)(B)(ii). Second,
plaintiffs' remaining claims all depend on alleged "false conduct" covered by SLUSA because
each requires plaintiffs to show that the Bank engaged in the type of false or misleading conduct
that is proscribed by the anti-falsity provisions of the federal securities laws. Third, all of the
Bank's alleged "false conduct" was "in connection with" the purchase and sale of covered
securities under SLUSA because here the "false conduct" at issue is allegedly false and
misleading investment advice that induced plaintiffs to purchase the Fairfield Funds.

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The Standard Chartered Cases Are a Covered Class Action.

Plaintiffs argue that the SC Cases do not fall within SLUSA' s definition of a
"covered class action." This is wrong. As set forth in the Bank's October 31, 2014 submission,
a "covered class action" includes "any group of lawsuits filed in or pending in the same court
and involving common questions of law or fact" where "(I) damages are sought on behalf of
more than 50 persons; and (II) the lawsuits are joined, consolidated, or otherwise procee<l as a
single action for any purpose." 15 U.S.C. § 78bb(f)(5)(B)(ii) (emphasis added); see also
Dkt. No. 1340 at 9. Every court in this District that has interpreted this provision in the context
of an MDL proceeding has held that a group of separately filed individual cases that are
coordinated or consolidated in an MDL for pretrial purposes constitutes a "covered class action.''
E.g.. Amorosa v. ErnsT & Young I.LP, 672 F. Supp. 2d 493, 514-18 (S.D.N.Y. 2009), aff"d sub
nom.,Amorosa v. AOL Time Warner Inc., 409 F. App'x 412 (2d Cir. 2011); In re Meridian
Funds Grp. Sec. & Employee Ret. Income Sec. Act (Erisa) Litig., 2015 WL 1258380, at •9
(S.D.N.Y. Mar. 13, 2015); see also lnstituto de Prevision Militar v. Merrill lynch, 546 F.3d
1340 (11th Cir. 2008). The SC Cases involve 75 plaintiffs whose 57 actions, including a
putative class action, are consolidated with each other and with the Anwar class proceedings for
pretrial purposes; they thus qualify as a "covered class action." 1
Contrary to plaintiffs' contentions, Kingate does not support their argument that
SLUSA's "covered class action" provision is ambiguous, let alone that the statute could be read
to exclude the SC Cases. (Pls. Ltr. at 2.) Kingate does not address any ambiguity with respect to
the "covered class action" provision at all. Rather, in Kingate, the Second Circuit considered
SLUSA's use of the word "alleging" to be ambiguous in the context of the statute's "in
connection with" provision. 784 F.3d 128, 143 (2d Cir. 2015). Finding one provision of SLUSA
ambiguous does not render an entirely different provision of the statute ambiguous. The Second
Circuit has identified no ambiguity in SLUSA's definition of "group of lawsuits," it has been
consistently applied without controversy, and there is no need to resort to legislative history to
interpret the clear provision.

Kingare also does not hold, as plaintiffs assert, that for a claim to be precluded by
SLUSA, there must be a way for a plaintiff to replead it as a non-covered action. (Pls. Ltr. at 2.)
Plaintiffs rely entirely on dicta found in a footnote where the Kingate Court questioned an issue
"not presented"-namely, whether a defendant seeking to dismiss a putative class action under
SLUSA should move under Rule 12(b)(l) of the Federal Rules of Civil Procedure rather than
Rule 12(b)(6). 784 F.3d at 135 n.9. The Kingate Court observed that a plaintiff in a putative
class action could replead in a "non-covered action"-i.e., one that is neither a putative class
action nor a "group of lawsuits" on behalf of more than 50 persons. Jd. 2 In doing so, the Court
Among the SC Cases is a putative class action styled Caso v. Standard Chartered Bank

lntemarional (Americas) Ltd., No. lO-CV-9196, which this Court stayed after compelling the
named plaintiff to individual arbitration in May 2012 (Dkt. Nos. 882, 1151 ). The Caso action
alone constitutes a covered class action llllder 15 U.S.C. § 78bb(f)(5)(B)(i).
2

lt is not difficult to imagine the circumstance that the Kingate Court was contemplating:

A class action lawsuit is dismissed under SLUSA and a named plaintiff seeks to press claims on

an individual basis. Such an action might still be viable. If 50 or more members of the class,

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did not suggest-much less hold-that, contrary to SLVSA's explicit provisions, a "group of
lawsuits" brought on behalf of 50 or more persons in a consolidated MDL proceeding can be
exempt from SLUSA.

B.

Plaintiffs' Due Diligence Theory Claims Are Premised on
False Conduct by the Bank and Thus Precluded by SLUSA.

Plaintiffs next argue that their Due Diligence Theory claims are not precluded by
SL USA because they are premised on a "common law duty SC owed to the SC Plaintiffs" that
"is not dependent on an allegation of false conduct" and does not require a showing of
complicity in Madoff's fraud. (Pls. Ltr. at 6-7.) Plaintiffs' argument is both legally and factually
incorrect.
Under Kingate, a state law claim need not include false conduct as an essential
element to trigger SLUSA preclusion. 784 F.3d at 149. What is required is that plaintiffs'
claims be predicated on conduct by the defendant that is proscribed by the anti-falsity provisions
of the federal securities laws. Id at 146, 149. The law is well-settled in the Second Circuit that
claims such as plaintiffs' Due Diligence Theory claims rest on conduct covered by those antifalsity provisions-i. e., making investment recommendations without conducting adequate due
diligence. Hanly v. SEC, 415 F.2d 589, 595-97 (2d Cir. 1969) (holding that investment
professionals who recommend investments without conducting adequate due diligence
necessarily make misrepresentations that implicate anti-falsity provisions). Indeed, as set forth
in the Bank's May 29, 2015 letter, for more than 40 years, the SEC and private litigants have
routinely brought enforcement actions and private claims under the anti-falsity provisions where
investment professionals recommend investments without conducting adequate due diligence.
(SCB Ltr. at 3-4.) Under Kingate, that is the end of the inquiry and SLUSA applies.
Plaintiffs cannot evade SL USA by arguing that the Bank owed a duty to conduct
due diligence that arose solely from "either [the Bank's] fiduciary relationship with its private
banking clients-or from a non-fiduciary standard of due care. " 3 (Pis. Ltr. at 6.) Regardless of
how the Bank's duty to conduct due diligence arose, to prevail on their Due Diligence Theory
claims, plaintiffs still must show that they were injured because the Bank recommended the
Fairfield Funds to them without conducting due diligence. That conduct falls within the antifalsity provisions and thus triggers SLUSA preclusion under Kingate. 4

however, sought to press those same claims, and the actions were consolidated, the actions
would be a covered class action subject to dismissal under SLUSA.
3
In addition, Kingate does not hold that SLUSA applies only where a defendant was
complicit in Madoff s fraud. (Pls. Ltr. at 6.) The operative inquiry is, unremarkably, whether
plaintiffs' claims are "predicated on conduct of 1he defendanJ'' of the type proscribed by the antifalsity provisions. Kingate, 784 F.3d at 149 (emphasis in original). Plaintiffs' Due Diligence
Theory claims rest on such conduct.
4
Moreover, the only duty to conduct due diligence before making investment
recommendations recognized under Florida law is identical to the duty that arises under the antifalsity provisions in the same circumstances. In Leib v. Merrill Lynch, Pierce, Fenner & Smith.

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In short, plaintiffs cannot escape that the Due Diligence Theory claims depend on
plaintiffs showing conduct by the Bank that is the type proscribed by the anti-falsity provisions
of the federal securities laws-namely, recommending an investment without conducting
adequate due diligence-and thus involve "false conduct'' under SLUSA. 5

C.

All of Plaintiffs' Claims That the Bank Made Misrepresentations or
Omissions When Recommending the Fairfield Funds Are "in
Connection with" Plaintiffs' Investments in Covered Securities.

Plaintiffs concede that SLUSA precludes alleged misrepresentation and omission
claims concerning "material facts in connection with Sentry's investments with Madoff in
covered securities," but argue that SLUSA does not preclude claims based on the Bank's alleged
misrepresentations and omissions that were not "in connection with" the Fairfield Funds'
investments in covered securities. (Pis. Ltr. at 5-8.) There are no such claims pending here.
Plaintiffs provide a single "example" of a purportedly allowable claim, namely, a claim that the
Bank allegedly "did not disclose that it received remuneration from Fairfield whenever an SC[B]
private banking client [acted on the Ban.k's advice and] invested in Sentry." (Id. at 5-6, 8.) But
only one plaintiff asserted such a claim, and this Court already considered its merits and
dismissed it. Anwar v_ Fairfield Greenwich Ltd, 286 F.R.D. 258, 260 (S.D.N.Y. 2012).

In any event, even if there were pending claims that the Bank misrepresented or
failed to disclose its fees or any other fact when recommending the Fairfield Funds, such claims
easily would satisfy SLUSA's "in connection with" requirement. The Supreme Court has
"espoused a broad interpretation" of this requirement that reaches any alleged false conduct that
"coincides" with a covered security transaction. Merrill Lynch. Pierce, Fenner & Smith Inc. v.
Dabit, 547 U.S. 71, 84-85 (2006). The Second Circuit's decision in Romanov. Kazacos
illustrates the breadth of the "coincides" test where, as here, a broker or advisor provides advice
that leads to an investment in covered securities. (SCB Oct. 31, 2014 Ltr. at 13-16.) In Romano,
plaintiffs brought various state common law claims to recover lost wages after they decided to
retire based on allegedly negligent advice from Morgan Stanley & Co. that plaintiffs "had
sufficient savings to retire early and comfortably." 609 F.3d 512, 515, 522-23 (2d Cir. 2010).
To avoid SLUSA, plaintiffs argued that Morgan Stanley's advice "did not mention or
recommend specific investment vehicles or asset allocation strategies," and emphasized that,
although plaintiffs eventually invested in covered securities after they retired, those investments
Inc., the court explained that the anti-falsity provisions impose a "duty to recommend a stock
only after studying it sufficiently to become informed as to its nature, price and financial
prognosis." 461 F. Supp. 951, 953 (E.D. Mich. 1978). Plaintiffs' Due Diligence Theory claims
survived motions to dismiss because the Bank owed the same duty under Florida law. Anwar v.
Fairfield Greenwich, Ltd., 745 F. Supp. 2d 360, 376 (S.D.N.Y. 2010).
s
Plaintiffs do not dispute that the Bank's "false conduct" was "in connection with" their
investments in covered securities. Nor could they. The Bank's recommendations allegedly
induced plaintiffs to invest in the Fairfield Funds (Section C, infra), and one of plaintiffs' core
contentions is that proper due diligence would have revealed Madoffs reported trading in
covered securities was too good to be true (Pls. Sept. 12, 2014 Ltr. at 4-5).

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took place up to 18 months after the challenged advice. Id at 516, 524. The Second Circuit
rejected plaintiffs' arguments and held that Morgan Stanley's alleged wrongdoing was "in
connection with" plaintiffs' investments in covered securities because it "somehow induced"
those investments, and because plaintiffs' claims "tum[ed) on injuries caused by acting on
misleading investment advice." Id. at 521-24.
In the SC Cases, the connection between investments in covered securities and
any misrepresentations or omissions that the Bank may have made in its investment
recommendations is far more direct than it was in Romano. Plaintiffs' case is that the Bank's
recommendations directly caused and induced plaintiffs to invest in covered securities through
the Fairfield Funds. (SCB Oct. 31, 2014 Ltr., Ex. A (chart of allegations).) And with respect to
plaintiffs' non-disclosure of fees theory in particular, courts routinely dismiss similar claims
under SLUSA. See, e.g., Behlen v. Merrill Lynch, 311 F.3d 1087, 1094-95 (11th Cir. 2002)
(applying SLUSA to state-law claims alleging defendant sold investments to receive excess fees
and commissions); Spencer v. Wachovia Bank, NA., 2006 WL 3408043, at *2-*5 (S.D. Fla. May
10, 2006) (applying SL USA to dismiss breach of fiduciary duty claim where defendant collected
undisclosed fees). 6
For all the foregoing reasons and those set out in the Bank's May 29 Letter and
prior submissions concerning SLUSA, the Court should dismiss the SC Cases in their entirety
7
and with prejudice.

Sharon L. Nelles

cc:

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

Plaintiffs are not aided by the Anwar plaintiffs' argument that "SLUSA must be
interpreted narrowly." (Anwar Pls. May 29 Ltr. at 3.) As the Anwar plaintiffs acknowledge,
Chadbourne & Parke LLP v. Troice held only that SLUSA "defines 'covered security'
narrowly." (Id. at 4.) Chadbourne did not disturb the Supreme Court's holding in Dabit that
courts should use a "broad interpretation" of the "in connection with" requirement. 134 S. Ct.
1058, 1066 (2014). Kingate confinns that investments in Madofffeeder funds like the Fairfield
Funds constitute investments in covered securities, and thus the only question is whether the
Ban.k's alleged wrongdoing was ''in connection with" those investments. Chadbourne does not
narrow the Second Circuit's holding in Romano concerning the application of SLUSA's "in
connection with" requirement to claims based on allegedly misleading investment advice like
those at issue in the SC Cases.
7
There is no need for further submissions about the in di vi dual allegations each plaintiff in
the SC Cases has made, as plaintiffs propose. Plaintiffs have long recognized, and do again in
their latest submission, that all of their claims fall within the Due Diligence or Omission
Theories. Plaintiffs had ample opportunity to identify any other plausible theories of liability.
They failed to do so, and the time to assert new claims is long past