Anwar et al v. Fairfield Greenwich Limited et al

Filing 1392

ENDORSED LETTER addressed to Judge Victor Marrero from David A. Barrett dated 6/8/2015 re: For these reasons, and others discussed above and in the Anwar Plaintiffs' Letter, SLUSA does not bar any of plaintiffs' remaining claims against PwC and Citco, except Count 25. 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 Anwar plaintiffs. The Court considers the SLUSA issue herein now fully briefed and will not accept any further submission from any party to this action related thereto. (Signed by Judge Victor Marrero on 6/9/2015) (lmb)

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Anwar, et al. v. Fairfield Greenwich Limited, et al
Master File No. 09-CV-00118 (VM) (FM)

Dear Judge Marrero:
The Anwar Plaintiffs respectfully submit this letter memorandum regarding In re Kingate
Management Ltd. Litig., 784 F.3d 128 (2d Cir. 2015), in response to (i) the May 29, 2015 letter
from Timothy Duffy ("PwC Letter") on behalf of the PricewaterhouseCoopers defendants
("PwC"); and (ii) the May 29, 2015 letter from Walter Rieman ("Citco Letter") on behalf of the
Citco defendants ("Citco").

INTRODUCTION
Despite the plain language of Kingate to the contrary, PwC and Citco argue that every
one of the remaining common law claims is precluded by SLUSA. The letters submitted by
PwC and Citco, however, contain no discussion whatever of the Supreme Court's decision in
Chadbourne & Parke LLP v. Troice, 134 S.Ct. 1058 (2014). PwC and Citco have failed to
explain how their arguments square with the Supreme Court's directive that that SLUSA
"defines 'covered security' narrowly," id. at 1064, and that SLUSA must not be construed too
broadly so as to "interfere with state efforts to provide remedies for victims of ordinary statelaw frauds." Id. at 1068 (emphasis added).
Defendants' letters likewise ignore the "elephant in the room" - that if their interpretation
of Kingate were correct, there would have been no need for the Court of Appeals to do anything
much more than dismiss plaintiffs' claims on the authority of Herald II. The Second Circuit's
analytical framework establishing five distinct groups of claims for purposes of applying SLUSA
would have been unnecessary. That analysis - and particularly its discussion of "Group 4"
claims - would have been superfluous because the state law claims in Kingate, like those here,
alleged that defendants misrepresented facts about their own actions and about the value of
"uncovered" securities notwithstanding that the ultimate cause of plaintiffs' losses was Madoffs
fraud involving SLUSA "covered" securities.

The Honorable Victor Marrero
June 8, 2015
Page2
The claims against PwC and Citco here stand in stark contrast to the claims against the
banks in In re Herald, 730 F.3d 112 (2d Cir. 2013), where "the plaintiffs' allegations with
respect to BNY and JPMorgan relate directly to Madoff s purported transactions in covered
securities." Id at n.5. Unlike PwC and Citco, "the liability of JPMorgan and BNY is predicated
not on these banks' relationship with plaintiffs or their investments in the feeder funds but on the
banks' relationship with, and alleged assistance to, Madoff Securities' Ponzi scheme, which
indisputably engaged in purported investments in covered securities on U.S. exchanges." Id. at
118-19.
The Kingate opinion specifically distinguished the preclusion of the common law claims
in Herald that were based upon "complicity" with Madoff from duty-based claims such as those
against Citco and PwC here, which Kingate held are not precluded. Kingate draws this
"crucial[]" distinction: "Only Groups 1, 2, and 3 allege Defendants to have been, in varying
degrees, complicit in [Madoffs fraudulent scheme]." Kingate, at 152 n.23 (emphasis added).
The Anwar Plaintiffs, however, do not allege that PwC and Citco were complicit in Madoffs
false statements about covered securities. Instead, these are Group 4 claims that PwC and Citco
were negligent or breached other duties, which had the ultimate effect of"allowing Madoffs
frauds to go undetected, causing Plaintiffs' loses." Kingate, at 151. As the Second Circuit said
in Kingate, "[u]nder the Group 4 theories ofliability, Defendants, like Plaintiffs, were victims of
Madoffs fraud." Kingate, at 152. Proof of claims that arise from defendants' breach of contract
and duty-based obligations to plaintiffs "would not require any showing of false conduct the part
of Defendants." Id
Kingate explicitly held that SLUSA does not bar allegations which "predicate liability on
Defendants' breach of contractual, fiduciary, or tort-based duties owed to Plaintiffs, resulting in
failure to detect the frauds ofMadoff and BMIS." Id. at 135. The Kingate opinion is explicit
that Madoffs role in the causative chain is insufficient to trigger SLUSA preclusion. Id at 147
("we understand this to mean that Xis accused of having committed fraud, and not that he is
charged with negligence or breach of contract in failing to detect someone else's fraud").
Kingate further makes plain that - contrary to defendants' arguments - not just any
misrepresentation will trigger SLUSA. SLUSA preclusion only applies to claims that allege the
defendant "committed false conduct conforming to SLUSA's specifications," id. at 149, that is, a
misrepresentation or omission concerning covered securities. The Court did not say, as
defendants would have it, that all claims involving misrepresentations or omissions are barred
once the structure of the transaction (here, plaintiffs' investment in a "feeder fund") is sufficient
to implicate SLUSA. Instead, the Group 1 or Group 2 allegations that are barred by SLUSA
"predicate the named Defendants' liability on their own fraudulent misrepresentations and
misleading omissions ... made in connection with the Funds' investments with Madoff in
covered securities and with their oversight of these investments." Id at 134 (emphasis added).
As shown in the Anwar plaintiffs' letter of May 29, 2015 ("Anwar Plaintiffs' Letter"), the claims
against PwC and Citco are based on misstatements and omissions regarding defendants' own
conduct implicating the value of uncovered securities. See id. at 9-10, 12-13.

The Honorable Victor Marrero
June 8, 2015
Page 3
Defendants repeat the mistake of the district court in Kingate which held that "because
some allegations in the complaint involved material misstatements in connection with the
purchase or sale of a covered security, the Complaint should be dismissed in its entirety."
Kingate, at 142. The Second Circuit rejected this argument: "SLUSA requires courts to inquire
whether the allegation is necessary to or extraneous to liability under the state law claims. If the
allegation is extraneous to the complaint's theory ofliability, it cannot be the basis for SLUSA
preclusion." Id at 142-43. Defendants ignore this distinction between allegations and claims, a
distinction which means that claims are precluded only if they depend in their entirety on
precluded allegations. 1 Thus, "state law claims that do not depend on false conduct involving
covered securities are not within the scope of SLUSA, even ifthe complaint includes peripheral,
inessential mentions of false conduct." Id at 132 (emphasis in original).
ARGUMENT

I.

Claims against PwC
A. Negligence (Count 13)

Count 13 asserts a negligence claim against PwC. The "essential" allegations of this
claim do not require any misrepresentation. See Anwar Plaintiffs' Letter at 8-9. PwC does not
dispute this. PwC contends, however, that "[b]ecause plaintiffs do not have privity with the PwC
Defendants, their negligence claim must satisfy all the elements required by Credit Alliance
Corp. v. Arthur Andersen & Co., 65 N.Y.2d 536, 553 (N.Y. 1985), including reliance on alleged
false statements by the PwC Defendants." PwC Letter at 2. According to PwC, "[t]his puts their
claims into Group 2," and thus precluded by SLUSA. Id. PwC is wrong for several reasons.
The Credit Alliance test does not require a representation, much less a misrepresentation.
Rather, it focuses on the auditors' knowledge that known parties will be relying on the audit and
linking conduct evincing the defendant's understanding of that reliance. In a recent case
involving both negligence and negligent misrepresentation claims, the Second Circuit described
Credit Alliance as requiring plaintiffs to show "that (1) the defendant had awareness that its work
was to be used for a particular purpose; (2) there was reliance by a third party known to the
defendant in furtherance of that purpose; and (3) there existed some conduct by the defendant
linking it to that known third party evincing the defendant's understanding of the third party's
reliance." Fin. Guar. Ins. Co. v. Putnam Advisory Co., LLC, 783 F.3d 395, 405-06 (2d Cir.
2015) (quoting Bayerische Landesbank v. Aladdin Capital Mgmt. LLC, 692 F.3d 42, 59 (2d Cir.
1

Footnote 6 of the Kingate opinion, which defendants misinterpret, relates to how allegations
should be categorized - not to whether claims are precluded: "If the allegations that otherwise fit
within the description of Group 3, 4 or 5, require proof that the Defendants committed such
misrepresentations [i.e., relating to a covered security], then those allegations belong in Group 1
or 2, rather than in Group 3, 4 or 5." Kingate, at n. 6 (emphasis added). The Court did not say
that the presence of one such allegation suffices for the entire claim to be precluded.

The Honorable Victor Marrero
June 8, 2015
Page4

2012)). In fact, this Court did not mention misrepresentations or "false conduct" in "explicitly
find[ing] that Plaintiffs can show sufficient common evidence to demonstrate that the
transmission of PwC's audit opinions to the Funds' investors was the 'end and aim of the
transaction."' See Anwar v. Fairfield Greenwich Ltd, 2015 WL 935454, at *7-8 (S.D.N.Y. Mar.
3, 2015). 2
Moreover, even if a misrepresentation by PwC were essential to the negligence claim,
there is no allegation that PwC made any misrepresentation with respect to a covered security.
As Kingate found, a claim alleging negligence by an auditor similar to allegations here against
PwC is not barred by SLUSA. In the Second Circuit's example, "[t]he auditor examines the
accounts of the plaintiffs' securities transactions, does so negligently, and finds everything in
order." Kingate, 784 F.3d at 148. The Court of Appeals held the claim did not involve the type
of conduct barred by SLUSA: "It is true that the negligence claim includes an allegation of fraud
in connection with transactions in covered securities and that the alleged fraud by the broker is
an essential predicate of the plaintiffs' claims against the defendant auditor. However, the
auditor is not alleged to have committed any of the conduct specified in SLUSA." Id
Furthermore, the Credit Alliance test is a standing requirement that delineates who can
bring a claim against service providers such as auditors. Standing is not an "element" of a
negligence claim. See Anwar II, 728 F. Supp. 2d 372, 432 (S.D.N.Y. 2010) (quoting Di
Benedetto v. Pan Am World Serv., Inc., 359 F.3d 627, 630 (2d Cir. 2004) (elements of negligence
are (1) "a cognizable duty of care; (2) that the defendant breached that duty; and (3) that the
plaintiff suffered damage as a proximate result of that breach")).
The negligence claim against PwC is a traditional state law claim, of the kind to which
Troice found SLUSA should not apply. 134 S.Ct. at 1068. Kingate followed Troice in holding
that while claims based on misrepresentations about Madoff s investments in covered securities
and oversight over such investments are barred, claims predicated on "negligence or breach of
contract in failing to detect" Madoffs fraud are not. Kingate, 784 F.3d at 147.

B. Negligent Misrepresentation (Count 14)
PwC contends that Count 14 alleging negligent misrepresentation "also falls into Group
2." PwC Letter at 5. PwC argues that in addition to Credit Alliance, "plaintiffs' particular
allegations" in Count 14 are that the PwC induced investors to hold their positions and make
subsequent investments by falsely representing "'that (i) [PwC] had conducted [its] audits in
accordance with GAAS or ISA and (ii) the Funds' financial statements 'present[ed] fairly, in all
2

PwC gains no support from Cromer Finance Ltdv Berger, 137 F. Supp. 2d 452 (S.D.N.Y.
2001 ), where the district court simply analyzed the Credit Alliance factors, but did not hold or
suggest that a negligence claim required proof of a misrepresentation. Nor does Thomas
Mackey's law review note (PwC Letter at 2-3 n.2) support PwC, as the student author relied on a
dissenting opinion to criticize a California Supreme Court decision under California law.

The Honorable Victor Marrero
June 8, 2015
Page 5
material respects, the financial positions of [the Funds],"' PwC Letter at 5 (quoting SCAC ~
440).
As discussed, the Credit Alliance test does not trigger SLUSA preclusion. The Kingate
opinion emphasizes that the Group 1 and Group 2 allegations are precluded because they are
based on the named defendants' own misrepresentations or omissions relating to "covered
securities." Kingate, at 151. Accordingly, not all claims involving misrepresentations by a
defendant implicate SLUSA. Here, PwC is alleged to have made misrepresentations about (i) its
own conduct, i.e., that PwC had conducted its audits in accordance with the relevant standards,
and (ii) uncovered securities, i.e., that the Funds' financial statements were accurate. These
allegations are akin to the example in Kingate which makes clear that a claim against an auditor
for giving a "clean" audit opinion, i.e., "find[ing] everything in order," Kingate, 784 F.3d at 148,
after negligently failing to detect a fraud involving covered securities, is "outside the concerns of
the federal securities laws, the PSLRA, and SLUSA." Id.
PwC's one-page audit reports made no mention of covered securities, of course, nor any
other assets of the funds. Even the attached fund financial statements show only the funds' yearend holdings. Those holdings never included any common stocks or options, but were invariably
limited U.S. Treasury bills, which are not covered securities.
Finally, PwC is not alleged to have aided and abetted or participated in Madoffs fraud
involving covered securities. See id. at 152 n.23. "Only Groups 1, 2, and 3 allege Defendants to
have been, in varying degrees, complicit in the falsity." Id. Instead, PwC negligently
misrepresented that it was "provid[ing] ... auditing ... services to the Funds, thus allowing
Madoff s frauds to go undetected, causing Plaintiffs' losses." Id. at 151.

II.

Claims against Citco

None of the state law claims against Citco, except aiding and abetting the Fairfield
Defendants' fraud (Count 25), is precluded under Kingate. Claims for breach of contract, breach
of fiduciary duty, gross negligence and negligence "predicate liability on Defendants' breach of
contractual, fiduciary, and or tort-based duties to Plaintiffs to provide competent management,
consulting, auditing or administrative services to the Funds, thus, allowing Madoffs frauds to go
undetected, causing Plaintiffs' losses." Id. at 151. Kingate held that these claims are not
precluded because they do not require a showing of false conduct by the defendant of the sort
specified by SLUSA, i.e., involving covered securities. The state law claims against Citco here
similarly are not precluded as they do not depend upon misrepresentations by Citco concerning
covered securities, or complicity in such a scheme.

A. Third-Party Breach of Contract (Count 20)
Citco argues that the breach of contract claim, an exemplar of what the Kingate court said
is not precluded, is barred because it involves allegations that the Citco Administrators "among
other omissions, grossly fail[ed] to discharge its responsibility to accurately calculate the Fund's
NAV," Citco Letter at 10, because the administration agreement required the Citco

The Honorable Victor Marrero
June 8, 2015
Page6
Administrators to render specific performance directly to class members, and because allegedly
the Citco's Administrators' untruthful conduct caused plaintiffs' investment decisions. See id.
These arguments do not come close to transforming a cause of action for breach of
contract into a precluded claim. The "omissions" referred to by Citco are clearly presented as
"omissions" in fulfilling its duties under the contract. SCAC ~ 484. The fact that the
administration agreement requires performance directly to class members only means that there
is an enforceable third-party contract claim. And, as noted, Kingate rejected Citco's causationbased argument in finding no preclusion even though plaintiffs' injuries would not have occurred
but for Madoffs fraudulent acts. Kingate, at 147.
None of the elements of a breach of contract claim require proof of a misrepresentation or
omission implicating SLUSA. This claim is predicated on failure of Citco to perform its
contractual duties, which included "'reconciliation of cash and other balances at brokers';
'reconciliation of bank accounts'; .. .'independent reconciliation of the Fund's portfolio
holdings'; .. .'Preparation of monthly financial statements, in conformity with the International
Accounting Standards,' including 'Statement of Assets and Liabilities,' 'Statement of
Operations,' 'Statement of Changes in Net Assets,' 'Statement of Cash Flows,' and 'Portfolio
listings'; [and] 'Preparation of books and records (including specific schedules and analysis) to
facilitate external audit, and liaising with the Fund's auditors in their review and preparation of
the annual financial statements,"' among other things. SCAC ~ 476; see also Ex. 3 to Citco's
Letter at 20 (interrogatory response identifying contract provisions allegedly breached). None of
these duties involves complicity in Madoffs fraud involving covered securities.

B. Breach of Fiduciary Duty (Count 21)
Citco as administrator is alleged to have breached fiduciary duties for numerous reasons.
See, e.g, SCAC ~~ 476, 488-89, 492-95. Citco focuses on one of those breaches: its failure to
calculate NAVs accurately and communicating false fund valuations to plaintiffs. Citco Letter at
9. But miscalculation is not false conduct, and as shown above, misstatements about the
Fairfield Funds' financial condition do not necessarily implicate SLUSA because they involve
uncovered securities. The fact that the Citco Administrators were responsible for
communicating with investors does not preclude a standard state law claim for breach of
fiduciary duty. Indeed, breach of fiduciary duty claims were expressly identified in Kingate as
an example of claims that are not precluded. Kingate, at 151 (discussing "Group 4" claims)3

3

Romanov. Kazacos, 609 F.3d 512, 523 (2d Cir. 2010) (Citco Letter at 4), is inapposite. That
case dealt with whether an 18-month time lag between defendants' alleged misrepresentations
and plaintiffs' purchases of covered securities rendered the misrepresentations not "in connection
with" such transactions. The court did not discuss the elements of breach of fiduciary duty, and
obviously did not apply the Kingate framework to such claims.

The Honorable Victor Marrero
June 8, 2015
Page 7
In its capacity as custodian, Citco argues the fiduciary duty claim is barred because the
alleged misconduct "includes allegations that the Citco Custodians misrepresented the activities
they had undertaken." Citco Letter at 11. This claim does not require any "false conduct" as
defined in Kingate by the Citco Custodians with respect to covered securities. Rather, it involves
misstatements about Citco's performance of its own duties. It is comparable to the example
described in Kingate where the defendant custodian "negligently failed" to discover that a
contractor it engaged "to perform services related to the custody" had been convicted of
securities fraud. See Kingate, 784 F.3d at 148. Here, the Citco Custodians allowed Madoffto
serve as sub-custodian responsible for safekeeping billions of dollars worth of supposed assets
without any monitoring or due diligence and failed even to have him execute a sub-custodian
agreement laying out his obligations. 4 That is not a precluded claim.
The elements of breach of fiduciary duty claims against both the Citco Administrators
and Custodians can be satisfied without any "essential" allegations concerning
misrepresentations. See, e.g., Johnson v. Nextel Comm 'ns, Inc., 660 F.3d 131, 138 (2d Cir.
2011) ("The elements of a claim for breach of a fiduciary obligation are: (i) the existence of a
fiduciary duty; (ii) a knowing breach of that duty; and (iii) damages resulting therefrom.").
Contrary to Citco' s assertion, there is no requirement under New York law that a plaintiff
establish reliance on a misstatement or omission to show causation. As the Second Circuit held
in LNC Inves., Inc. v. First Fidelity Bank, "no controlling authority ... suggest[ s] that reliance is
required to establish causation in a breach of fiduciary duty or a breach of contract case." 173
F.3d at 461 (Sotomayor, J.). There, the Court of Appeals addressed whether a trustee had acted
prudently to safeguard trust assets - an issue analogous to the fiduciary duty claims here - and
held: "This duty of prudence was not qualified, either in the Trust Indenture or in the common
law, by the concept of reliance." Id. at 462. "Reliance is not necessary to show causation on
these duty-based claims." Plaintiffs' Supp. Memo in Support of Motion for Class Certification,
dated August 1, 2014, at Class Cert Motion, at 21. "If Citco or PwC had performed their duties
properly, they would have sought to obtain independent evidence of the Funds' assets. If unable
to do so (as in fact was the case), Citco and PwC should have withheld their financial reports or
qualified them based on the lack sufficient evidence of the Funds' assets. If either Citco or PwC
contacted independent third parties, they would have learned that the Funds had virtually no
assets. Under either scenario, the Class members would not have incurred losses." Id. In
4

Citco selectively refers to the Anwar Plaintiffs' responses to interrogatories, but disregards that
these responses contend that the Citco Custodians "breached fiduciary duties to Plaintiffs by
failing to reconcile from sources independent of Madoff the Funds' purported cash balances;
failing to reconcile from sources independent of Madoffthe Funds' portfolio holdings; failing to
confirm the existence of the Funds' assets from sources independent of Madoff; failing to insist
on an audit ofBLMIS/Madoffby a qualified accounting firm; failing to adequately investigate
the significant concerns of its internal auditors; ... ; failing to monitor BLMIS/Madoff in any
meaningful way; failing to enter into contracts with BLMIS/Madoff." Ex. 1 to Citco's Letter at
10-11.

The Honorable Victor Marrero
June 8, 2015
Page 8
addition, if Citco had raised its grave internal concerns regarding Madoff to the Fairfield
Defendants and Madoff refused to allow inquiries to truly independent parties to confirm the
existence of the assets, Fairfield would not have continued to send plaintiffs' money to Madoff.
Finally, Count 21 alleges that Citco breached fiduciary duties by, among other things, not
performing the duties of an administrator in independently reconciling the Fund's holdings, see
SCAC ii 327, and by not performing duties as a custodian in holding the securities of the fund or
ensuring that the securities were in the custody of a sub-custodian. See Anwar II, at 441 (citing
SCAC ii 330). Citco again disregards the Anwar Plaintiffs' interrogatory responses which
contend that the Citco Administrators breached their fiduciary duties by "failing to reconcile
from sources independent of Madoff the Funds' purported cash balances; failing to reconcile
from sources independent of Madoffthe Funds' portfolio holdings; failing to confirm the
existence of the assets from sources independent of Madoff; failing to insist on an audit by a
qualified accounting firm; failing to adequately investigate the significant concerns of its internal
auditors." Ex. 3 to Citco' s Letter at 12-13. These claims can be established without proof of any
misstatements by Citco. See Kingate, at 142-43, 146-48.

C. Gross Negligence (Count 22) and Negligence (Count 23)
For the same reasons as the breach of fiduciary duty claims, plaintiffs' claims for
negligence and gross negligence against the Citco Administrators and the Citco Group are not
barred by SLUSA. Citco does not contend, nor could it, that misrepresentations or omissions are
essential elements of a negligence claim. Instead, similar to PwC, Citco argues that a "necessary
implication" of the Court's ruling that the Funds' investors can satisfy the Credit Alliance test as
to Citco "is that Plaintiffs' negligence-based claims depend on alleged untrue statements about
covered securities transactions." Citco Letter at 8. As explained above, Credit Alliance does not
imply this at all and does not trigger SLUSA preclusion.
The Second Circuit identified duty-based and tort-based claims as falling within Group 4,
and as set forth in plaintiffs' initial letter, these claims against the Citco Administrators are no
exception. Anwar Plaintiffs' Letter at 12. In interrogatory responses, Plaintiffs contended that
these claims can be established based on the same breaches of duty-based obligations discussed
in the breach of fiduciary duty section above. See, e.g., Ex. 3 to Citco's Letter at 18-20. Finally,
the Citco Group is not alleged to have made any misstatements; its liability is predicated on its
failure to properly supervise the Citco Administrators and to properly follow up on concerns
raised by Citco' s internal audit department.

D. Aiding and Abetting Fairfield's Breach of Fiduciary Duty (Count 24)
Like the contract- and duty-based claims discussed above, the claims for aiding and
abetting the Fairfield Defendants' breaches of fiduciary duty do not require any false conduct as
defined in Kingate. These claims are akin to the custodian example in the Kingate decision. The
Fairfield Defendants hired Madoffto serve as the investment manager, broker, and sub-custodian
without conducting proper due diligence into his operations. No misstatements are "essential"

The Honorable Victor Marrero
June 8, 2015
Page 9
and the claim can be established based the Fairfield Defendants' breaches of duty which do not
implicate SLUSA and Citco's awareness of and assistance to those breaches.
E. Negligent Misrepresentation (Count 28)
The false NAVs issued by the Citco Administrators and omissions regarding their failure
to follow Citco's own and industry-standard procedures are not the type of misrepresentations
that fall into Group 1 or 2 under Kingate. See Anwar Plaintiffs' Letter at 12-13. The false NAVs
involve the value of uncovered securities - which, unlike the covered securities purportedly
traded by Madoff and lied about by the Fairfield Defendants - are not traded on any U.S.
national exchange.
Citco's Letter argues that the false NAVs issued by the Citco Administrators "are the
same statements underlying Plaintiffs' claims under the federal securities laws." Citco Letter at
10. This argument, however, ignores that the definition of a "security" under the 1933 and 1934
Acts is far broader than SLUSA' s definition of a "covered security." As the Supreme Court
recognized in Troice, "[t]he term 'security' under§ lO(b) covers a wide range of financial
products beyond those traded on national exchanges." Troice, at 1069-70. Thus, while shares in
the Fairfield funds are indisputably not SLUSA "covered securities," they are no less
indisputably "securities" under § 1O(b). There is consequently no inconsistency between
allowing plaintiffs' federal securities claims to proceed alongside state law claims that involve
the same facts. And as Troice held, "the only issuers, investment advisers, or accountants that
today's decision will continue to subject to state-law liability are those who don't sell or
participate in selling securities traded on U.S. national exchanges." Troice, at 1069 (emphasis in
original). 5
III.

Where Proving the Essential Elements of a Claim Does Not Require Proof of
Matters Precluded by SLUSA, the Claim Is Not Barred

The Second Circuit expressly held that a claim is not precluded by SLUSA merely
because it contains allegations that might otherwise lead to preclusion, in addition to other
allegations that are not precluded. See Kingate, at 142-43. Under Kingate, each allegation must
be analyzed separately. Id. "SLUSA requires courts to inquire whether the allegation is
necessary to or extraneous to liability under the state law claims. If the allegation is extraneous
to the complaint's theory of liability, it cannot be the basis for SLUSA preclusion." Id. Kingate
requires preclusion of claims where the "essential" allegations include that a defendant made a
false statement or material omission in connection with covered securities or was complicit in
Madoffs fraud. Id. at 151. However, a claim is not precluded where its essential elements can
5

"We concede that this means a bank, chartered in Antigua and whose sole product is a fixedrate debt instrument not traded on a U.S. exchange, will not be able to claim the benefit of
preclusion under [SLUSA]. But it is difficult to see why the federal securities laws would beor should be-concerned with shielding such entities from lawsuits." Troice, at 1069.

The Honorable Victor Marrero
June 8, 2015
Page 10

be established without showing such a showing; in that case the precluded matters are treated, in
the Second Circuit's lexicon, as "extraneous." Id. at 142-43. Thus, even if certain allegations
within one of plaintiffs' claims or causes of action were to be deemed precluded, the claim can
proceed if it can be established on the basis of other allegations that are not precluded. That is
the case with all of plaintiffs' claims in Anwar.

CONCLUSION
Citco and PwC falsely told investors for 14 years that there were billions of dollars of
assets in the Fairfield funds when in fact there were virtually none. Citco's arguments largely
boil down to reciting where plaintiffs have alleged that Citco misrepresented the Fairfield funds'
NAVs. PwC likewise attempts to identify misstatements supposedly embedded in plaintiffs'
claims. The SCAC references defendants' failures, whether negligently or in breach of other
duties, to obtain independent evidence to support their false valuations. It is true that plaintiffs
have alleged these and related misrepresentations and omissions in connection with multiple
claims. But to summarize, there are at least three reasons why defendants are wrong in arguing
these allegations create SLUSA preclusion.
First, most of plaintiffs' state law claims do not require any allegations of
misrepresentations. Those that do involve misrepresentations as to the value of Fairfield fund
shares, which are uncovered securities, and not misrepresentations regarding covered
securities. Only the latter are representations concerning "conduct by the defendant that is
specified in SLUSA's operative provisions." Kingate, at 146.
Second, defendants ignore that miscalculating the NAV (and defendants' many other
misdeeds) constitute breaches of contract, of fiduciary duty, and of duties to exercise reasonable
care, all of which are state law causes of action that Kingate made clear are not subject to
SLUSA preclusion. "Interpreting SLUSA to apply more broadly to state law claims that are
altogether outside the prohibitions of the federal securities laws, and could not be subject to the
PSLRA, would ... construe ambiguous provisions of SLUSA in a highly improbable manner as prohibiting state law claims involving matters that were not Congress's concern in passing
SLUSA .... " Id. at 146. The illustrations given by the Court of Appeals include the very types
of claims not directly involving covered securities, such as accounting negligence and custodial
failures, that plaintiffs have pleaded.
Third, if a certain allegation is covered by SLUSA, then it is only that allegation that is
precluded and the remainder of the claim survives because its essential elements may be proven
by other non-precluded allegations. Defendants' arguments ignore all of plaintiffs' other
allegations giving rise to state law claims that do not involve any type of misrepresentation or
omission, let alone one concerning covered securities.
For these reasons, and others discussed above and in the Anwar Plaintiffs' Letter, SLUSA
does not bar any of plaintiffs' remaining claims against PwC and Citco, except Count 25.

The Honorable Victor Marrero
June 8, 2015
Page 11

Res7t~l~yours,

/~~

David A. Barrett
cc: All counsel in Anwar and Standard Chartered cases (by e-mail)

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