Anwar et al v. Fairfield Greenwich Limited et al

Filing 1391

ENDORSED LETTER addressed to Judge Victor Marrero from Richard E. Brodsky dated 6/8/2015 re: This letter brief responds to the SC Defendants' May 29, 2015 letter brief, docketed at DE 1384 (June 4, 2015). 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 plaintiffs. (Signed by Judge Victor Marrero on 6/9/2015) (lmb)

From: Richard E. Brodsky

Fax: [phone]

To: Hon. Vietor Marrero

Fax: [phone]

THE BRODSKY LAW FIRM,
RICHARD

Page 2 of 6 06/08/2015 6:46 PM

PL

E. BRODSKY,

AITORNEY AT LAW

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June 8, 2015

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BY FACSIMILE TRANSMISSION
Honorable Victor Marrero
United States District Judge
500 Pearl Street-Moynihan U.S. Courthouse
New York, New York 10007-1312
Re:

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No. 09-cv-118 (VM)
Standard Chartered Cases

Dear Judge Marrero:
This letter brief responds to the
docketed at DE 1384 (June 4, 2015).1

SC Defendants' May 29,

2015 letter brief,

The SC Defendants argue that the SC Plaintiffs' Due Diligence Claims would
be precluded by SLUSA. They persist in erroneously characterizing the Due
Diligence Claims as being "dependent" on allegations of false conduct, which are "a
predicate" to these claims. These are empty rhetorical flourishes. They ignore that
the bank's duty not to engage in false conduct is separate and distinct from its duty
to conduct proper "diligence" before recommending an investment.

In re Kingate Mgmt. Ltd. Litig., 784 F.3d 128, 153, 154 (2d Cir. 2015) requires
the Court to engage in a careful allegation-level analysis, but the SC Defendants
would lead the Court in the opposite direction: they paint with a broad brush and
restate the allegations to their liking. The SC Defendants' approach is an
unsuccessful attempt to force square pegs into round holes, an impossible task if
In determining the applicability of SLUSA to the SC Cases, the Court must first
determine, in light of the language, history and purpose of SLUSA, whether the SC Cases
are a "covered class action," and then, only if it determines that they are, must analyze each
allegation made by each SC Plaintiff to decide which allegations would be precluded by
SLUSA and which would not. The Court could save substantial judicial labor if it decides
that the SC Cases are not a covered class action and declines to examine the different SC
Complaints separately to determine exactly which allegations are precluded. It is within
the Court's discretion whether to decline to rule on the second issue if it decides the
"covered class action" issue in favor of the SC Plaintiffs. (To avoid repetition, statements
made in this letter about the preclusion of claims by SLUSA are not a waiver of our position
that the SC Cases are a covered class action.)
1

200 S. BISCAYNE 80Ul.EVARD, STE. 1930 •MIAMI, FLORIDA 33131
WWW. THEBRODSKYLAWFIRM.COM

786-220-3328 • [e-mail]

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From: Richard E. Brodsky

Fax: (888) 391·5819

To: Hon. Victor Marrero

Fax: [phone]·6382

Page 3 of 6 06/08/2015 6 :46 PM

Honorable Victor Marrero
June 8, 2015
Page 2
one stays true to the facts and the law. 2
The "round hole" is Kingate's holding, 784 F.3d at 132, that "state law claims
that do not depend on false conduct are not within the scope of SLUSA, even if the
complaint includes peripheral, inessential mentions of false conduct." (emphasis in
original). The "square pegs" are claims that "do not depend on false conduct"-here,
both what we have called "Due Diligence Claims" (the fundamental allegation that
the SC Defendants failed to conduct a proper investigation before recommending an
investment in Sentry) and "Non-Madoff Claims" (such as the claim that the SC
Defendants failed to disclose the receipt of a substantial "fee"/kickback from
Fairfield for every SC private client investing in Sentry). Only "Madoff Claims," e.g.,
the SC Defendants' failure to disclose that Madoffs claimed results could not be
replicated and did not stand up to analysis, would be precluded by SLUSA. See SC
Plaintiffs' letter brief, May 29, 2015, docketed at DE 1385 (June 4, 2015), at 5, 7-8.
The SC Defendants list three "reasons" they say support their theory that the
Due Diligence Claims would be precluded. None of these arguments holds water. 3
The first argument is that a claim that an "investment professional" has
recommended an investment without doing adequate due diligence "necessarily
involves" false conduct. DE 1384, 2. For this proposition, the SC Defendants cite no
Florida case or, for that matter, any case involving state law claims. Instead, they
rely on Hanly v. SEC, 415 F.2d 589, 595-97 (2d Cir. 1969), a challenge by a broker
suspended by the SEC in a statutory administrative proceeding. Hanly and its
progeny have no application here. It applies the SEC's "shingle theory," under
which, when a securities dealer deals with the public, it is said to have "hung out a
2

The SC Defendants inform the Court that "[i]n determining whether a state law claim
depends on the type of conduct that triggers SL USA, Kingate 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." DE 1384, at 2 (emphasis added).
They have simply lifted a passage out of context and omitted the passage from which this
sentence derives, thereby misstating the point the court was making. It was not, as the SC
Defendants claim, to qualify Kingate's "depends on" test, but rather to reiterate that,
"under the standard we set forth above, SLUSA's application to a claim turns on the claim's
theory of the defendant's liability, the inclusion of allegations in a claim that are irrelevant
to the claim's theory of the defendant's liability are irrelevant to SLUSA's application to the
claim." Id. (omitted language italicized).
The SC Defendants deal only with the Due Diligence Claims (recognizing that we had
previously informed the SC Defendants that we agreed that the Madoff Claims would be
precluded). No express reference had previously been made to the Non-Madoff Claims. See
Parties' joint letter, May 27, 2015, docketed at DE 1381 (May 27, 2015), at 2.
3

From: Richard E. Brodsky

Fax: [phone]

To: Hon. Victor Marrero

Fax: + 1 [phone]

Page 4 of 6 06/08/2015 6:46 PM

Honorable Victor Marrero
June 8, 2015
Page 3
shingle" and impliedly represented that it will deal with the public fairly. 4 This
construct of implied representations of fairness has been aptly described as
employing a "legal fiction". Arnold S. Jacobs, Theories governing broker-dealers'
responsibilities, 5D Disclosure and Remedies under the Sec. Laws, § 18.3 (available
on WestlawNext) ("The approach is a fiction-you imply a representation (which the
broker has no intention of making) and then impose liability when it is breached.").
The SEC may very well have concluded it needed to engage in this legal fiction to
bring broker-dealer misconduct not based on false conduct within the reach of its
powers to enforce statutes and rules it enforces that are based on false conduct.5
Whatever its importance to the SEC in policing broker-dealers, the shingle theory
has no applicability to banks (and therefore the claim that it applies to "investment
professionals" other than stockbrokers is specious), and has not been recognized or
applied in the common law. It is strictly limited to securities fraud cases. In re Refco
Sec. Litig., 759 F.Supp.2d 301, 320 (S.D.N.Y 2010) (shingle theory not part of New
York common law; collecting cases). There is simply no basis under Florida law to
import this legal fiction into the Due Diligence Claims.6
The SC Defendants' second argument is similar to the first. Omnicare, Inc. v.
Laborers Dist. Council Const. Indus. Pension Fund, 135 S.Ct. 1318 (2015) (holding
prospectus' disclosure of opinions not honestly believed or without disclosure of
conflicting facts known to speaker invokes '33 Act section 11 liability) in no way
leads to the conclusion that the Due Diligence Claims perforce "depend on" implied
misrepresentations. The Due Diligence Claims are based on the violation of a duty
4

For a review of the shingle theory, see Arnold S. Jacobs, Theories governing brokerdealers' responsibilities, 5D Disclosure and Remedies under the Sec. Laws, § 18.3 (available
on WestlawNext).
A similar need gave rise to the theory that "insider trading" violates the securities laws'
anti-fraud provisions. See In re Cady, Roberts & Co., 40 S.E.C. 907 (1961) (failure of insider
to disclose facts unknown to market before trading thereon).

5

G In

South Cherry LLC v. Hennessee Grp. LLC, 573 F.3d 98 (2d Cir. 2010), affirming the
dismissal of a breach of contract claim and a rule lOb-5 claim, the claims included separate
and affirmative misrepresentations, not merely implied representations. Likewise, the cited
SEC administrative proceedings against broker-dealers are inapplicable because they are
essentially grounded in the shingle theory and, in any event, are "without admitting or
denying" settlements involving no adjudication and therefore providing no precedential
value even in the context of an SEC proceeding. Another case cited by the SC Defendants,
Romanov. Kozacos, 609 F.3d 512 (2d Cir. 2010), is also inapposite. It merely holds that
fraudulent misrepresentations about the benefits of cashing out a pension and investing the
proceeds in covered securities satisfy the "in connection with" requirement of SLUSA.
Under Kingate, that issue is mooted here. Significantly, Kingate extensively analyzes the
meaning of the word "alleging" as used in SLUSA, but Romano does not deal with that
issue at all.

From: Richard E. Brodsky

Fax: [phone]

To: Hon. Victor Marrero

Fax: [phone]

Page 5 of 6 06/0812015 6:46 PM

Honorable Victor Marrero
June 8, 2015
Page4
not to recommend an investment without making a careful investigation of risks
and attending to those risks. This is the theory that has been pleaded and has been
upheld in the various SC Cases. E.g., Anwar v. Fairfield Greenwich Ltd., 745 F.
Supp. 2d 360, 375, 376 (S.D.N.Y. 2010) ("Here, Plaintiffs sufficiently state causes of
action for breach of fiduciary duty. All Plaintiffs allege that Standard Chartered's
recommendation that they invest in the Fairfield Funds without conducting proper
diligence was a breach of fiduciary duty.") (emphasis added). Florida law contains
no rule or rubric that converts such a claim into one dependent on the existence of
implied misrepresentations.
The third argument advanced by the SC Defendants consists of various
allegations made by SC Plaintiffs alleging misrepresentations and omissions. The
SC Defendants say, without basis and without support, that these allegations are a
"predicate" to the Due Diligence Claims, but this is, of course, inaccurate both
textually and as a matter oflaw. The SC Defendants ignore that there are several
duties that a fiduciary such as the bank owes to its clients: the quoted allegations
stem from the duty of full disclosure, which is a separate duty from the duty
violated when a recommendation is made without a proper investigation. E.g., Ward
v. Atlantic Sec. Bank, 777 So.2d 1144, 1177 (Fla. Dist. Ct. App. 2001) (listing
fiduciary duties of bank to customer, including "studying" before recommending an
investment, disclosure of risks and non-misrepresentation of any material fact);
Capital Bank v. MVB, Inc., 644 So. 2d 515, 520 (Fla. Dist. Ct. App. 1994) ("A
fiduciary owes to its beneficiary the duty to refrain from self-dealing, the duty of
loyalty, the overall duty to not take unfair advantage and to act in the best interest
of the other party, and the duty to disclose material facts."). The SC Defendants
would have the disclosure duties swallow the rule and do away with all other duties
arising from a fiduciary relationship. This, again, is not the law of Florida.
Respectfully, for the reasons stated in this letter brief and our prior letter
briefs dated November 17, 2014 and May 29, 2015, the Court should rule that the
SC Cases are not a "covered class action," and if the Court reaches the issues of
preclusion, it should rule that the Due Diligence Claims and Non-Madoff Claims
would not be precluded. As previously suggested, if the Court so rules, it should
solicit from each of the SC Plaintiffs and from the Defendants their analyses of
precisely which allegations would be precluded and which would not.
Sincerely yours,

SO ORDERED.

6-:t"'-1/
DATE

From: Richard E. Brodsky

Fax: [phone]

To: Hon. Victor Marrero

Fax: [phone]

Page 6 of 6 06/0812015 6:46 PM

Honorable Victor Marrero
June 8, 2015
Page 5
cc:

Attorneys for SC Plaintiffs and SC Defendants
Attorneys for Anwar Plaintiffs and remaining Anwar Defendants