Anwar et al v. Fairfield Greenwich Limited et al

Filing 1393

ENDORSED LETTER addressed to Judge Victor Marrero from Walter Rieman dated 6/8/2015 re: For the foregoing reasons, and those set forth in the Citco Defendants' May 29 letter and the letters submitted by the PwC defendants and the Standard Chartered defendants, SLUSA precludes all of Plaintiffs' state-law claims against the Citco Defendants. 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 Citgo defendants. 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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By Hand

Anwar, et al. v. Fairfield Greenwich Limited, et al.,
No. 09-cv-118 (S.D.N.Y.) (VM) (FM)
Dear Judge Marrero:
As the Citco Defendants showed in their May 29 letter, SLUSA precludes
Plaintiffs' state-law claims for two fundamental reasons. 1 First, class members'
purchases of shares in the Funds are transactions in "covered securities." Second, all of
Plaintiffs' state-law claims depend on (a) alleged untrue statements and/or omissions by
the Citco Defendants, and/or (b) the Citco Defendants' alleged complicity in alleged
untrue statements and/or omissions by Fairfield. (See Citco Ltr. 4.)
In an attempt to avoid SLUSA preclusion, Plaintiffs make three main
arguments. First, Plaintiffs suggest that the "in connection with" language in SLUSA
Capitalized terms have the meanings given to them in the Citco Defendants' letter brief dated May 29,
2015 ("Citco Ltr."). "Pls.' Ltr." refers to Plaintiffs' letter brief dated May 29, 2015.

PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP

The Honorable Victor Marrero

2

should be narrowly construed to exclude from SLUSA preclusion claims that supposedly
do not allege complicity in the Madoff Firm's fraud. Second, Plaintiffs argue that certain
of their state-law claims are not precluded because false conduct is not a formal element
of those claims. Third, Plaintiffs argue that their claim for negligent misrepresentation is
not precluded because the Citco Defendants' alleged untrue statements and/or omissions
supposedly do not concern transactions in "covered securities" within the meaning of
SLUSA.
.
None of these arguments is correct.

A.

Plaintiffs' State-Law Claims Allege Misrepresentations and/or
Omissions that Satisfy SLUSA's "in Connection with" Test

Plaintiffs appear to argue that SLUSA does not preclude their state-law
claims because those claims supposedly do not allege misrepresentations and/or
omissions "in connection with" a transaction in covered securities. To support that
argument, Plaintiffs suggest that Herald and Kingate are distinguishable because the
liability of the defendants in those cases as to the precluded claims was supposedly
premised on their alleged complicity in the Madoff Firm's underlying fraud. According
to Plaintiffs, the Citco Defendants' liability, in contrast, is premised only on their own
false conduct. (See Pls.' Ltr. 4, 8, 13.) This argument is unavailing.2
The Supreme Court has held that the "in connection with the purchase or
sale" requirement of§ lO(b) of the Securities Exchange Act of 1934 and Rule lOb-5 is
met if false conduct "coincide[ s]" with a purchase or sale of securities. SEC v. Zandford,
535 U.S. 813, 822 (2002); see also Superintendent ofIns. v. Bankers Life & Casualty
Co., 404 U.S. 6, 12-13 (1971). Because the "in connection with" language in SLUSA has
the same meaning, see Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit, 547 U.S. 71,
85-87 (2006), the "coincide" test applies to SLUSA, see, e.g., Romanov. Kazacos, 609
F.3d 512, 521 (2d Cir. 2010). That test "is broad in scope." Id.
Under SLUSA, then, a claim is precluded if it depends on an untrue
statement or omission that coincides with the purchase or sale of a covered security. And
under Herald and Kingate, class members' purchases and sales of shares in the Funds
were purchases and sales of covered securities for purposes of SLUSA. See In re Kingate
2

Plaintiffs also attempt to distinguish Herald on the ground that the court did not rule that the state-law
claims asserted against Madoff feeder fund service providers were precluded under SLUSA. (Pis.' Ltr.
4-5.) They argue that it is "[o]fparticular significance" that Herald instead dismissed those claims on
forum non conveniens grounds. (Id) That ruling ~as no significance at all. It is appropriate, and
routine, for a court to rule on a forum non conveniens motion before addressing, if at all, other issues,
including SLUSA preclusion. See, e.g., LaSala v. Bank of Cyprus Pub. Co. Ltd, 510 F. Supp. 2d 246,
253-54, 267 (S.D.N.Y. 2007). The Herald court's decision to dismiss state-law claims on forum non
conveniens grounds cannot reasonably be construed as an indication of the court's view as to whether
those claims would also be precluded by SLUSA.

PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP

The Honorable Victor Marrero

3

Mgmt. Ltd. Litig., 784 F.3d 128, 142 (2d Cir. 2015); In re Herald, 753 F.3d 110, 113 (2d
Cir. 2014). That is so because class members' purchases or sales of shares in the Funds
were considered "attempted investments in covered securities, albeit through feeder
funds." Kingate, 784 F.3d at 142 (quoting Herald II, 753 F.3d at 113). In consequence,
SLUSA precludes state-law claims in this case if they depend on alleged false conduct
that coincides with the purchase or sale of shares in the Funds.
As in Herald and Kingate, that is precisely the case here. Plaintiffs' statelaw claims all depend on allegations that coincide with class members' purchases and
sales of shares in the Funds, and with the Funds' attempted investments in covered
securities. Plaintiffs' state-law claims against the Citco Administrators allege
misrepresentations and/or omissions concerning the Funds' NAVs. According to
Plaintiffs, the Funds' NAVs are essentially a statement of the value of the Funds'
holdings in covered securities. Similarly, Plaintiffs' state-law claims against the Citco
Custodians allege misrepresentations and/or omissions concerning the Citco Custodians'
custody of covered securities and, like the defendants in Herald, their relationship with
the Madoff firm. Any untrue statement or omission made to induce any investor to
purchase or sell Fund shares is thus an untrue statement or omission made in connection
with the purchase or sale of covered securities for purposes of SLUSA. Romano, 609
F .3d at 522 (noting "in connection with" requirement satisfied where act complained of
induced the purchase or sale of the security at issue). 3
Contrary to Plaintiffs' suggestion, it does not matter that the Citco
Defendants' liability is supposedly premised on their own false conduct, as opposed to
complicity with the Madoff Firm's underlying liability.4 All that matters is whether the
claims against the Citco Defendants depend on false conduct that "coincides" with
transactions in covered securities. They clearly do. For that reason, Plaintiffs' state-law
claims easily satisfy SLUSA's capacious "in connection with" test.

Under Romano, a misrepresentation or omission is also made in connection with the purchase or sale
of covered securities if the misrepresentation or omission '"necessarily allege[ s],' 'necessarily
involve[s], ' or 'rest[ s] on' the purchase or sale of [covered] securities." 609 F .3d at 522 (quoting
Dabit v. Merrill Lynch, Fenner & Smith, Inc., 395 F.3d 25, 48, 50 (2d Cir. 2005)).
4

Underscoring this point, Plaintiffs concede that their claim for aiding and abetting fraud against the
Citco Defendants must be dismissed as precluded under SLUSA. (Pis.' Ltr. 13.) That claim, however,
predicates liability on the Citco Defendants' alleged complicity in Fairfield's false conduct-not
Madoffs. Plaintiffs do not explain why alleged complicity in Fairfield's false conduct is sufficient to
preclude their aiding and abetting fraud claim while, in their view, Herald supposedly requires
complicity in Madoffs fraud for SLUSA preclusion to apply.

PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP

The Honorable Victor Marrero

B.

4

Plaintiffs' State-Law Claims All Premise Liability
on the Citco Defendants' Alleged False Conduct

Plaintiffs argue that SLUSA does not preclude their state-law claims
(excluding their claim for negligent misrepresentation) because (i) false conduct
supposedly is not a formal element of those claims, and (ii) "there is no need to prove that
Citco made any false statements and, therefore, the claim[s] fall[] into [Kingate's] Group
5
4." (Pls.' Ltr. 11 (discussing third-party beneficiary breach of contract claim). ) This
argument misapprehends the law and ignores Plaintiffs' own allegations.
First, as the Citco Defendants explained in their May 29 letter, "Kingate
held that SL USA preclusion does not depend on whether false conduct is a formal
element of the allegedly precluded claim. Instead, if the other requisites for SL USA
preclusion are met, SLUSA precludes claims that are based on allegations of false
conduct, including allegations of untrue statements or omissions." (Citco Ltr. 4 (citing
Kingate, 784 F.3d at 140).) Kingate explained that "plaintiffs should not be permitted to
escape SLUSA 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." 784 F.3d at 140 (collecting
cases). Herald I also recognized, in reliance on prior Second Circuit precedent and other
case law, that an analysis of preclusion under SL USA requires a court to focus on "both
the pleadings and the realities underlying the claims." In re Herald, 730 F.3d 112, 119
(2d Cir. 2013).
These precedents foreclose Plaintiffs' attempt to avoid SLUSA preclusion
merely by reciting the formal elements of certain of their state-law claims and insisting
that those claims do "not require any false representation." (Pls.' Ltr. 12.) As the Citco
Defendants showed in their May 29 letter, "the realities underlying" each of Plaintiffs'
state-law claims, including the claims for third-party beneficiary breach of contract, gross
negligence, negligence and aiding and abetting fiduciary duty, are that those claims all
predicate liability on the Citco Defendants' alleged false conduct.
Second, Plaintiffs may not avoid SLUSA preclusion by arguing that their
state-law claims fall within Kingate's "Group 4" claims simply because those claims rest
in part on allegations that the Citco Defendants did not fulfill their contractual or
common-law duties. Kingate did not rule that all claims predicating a defendant's
liability on breaches of contractual, fiduciary, and/or tort-based duties are necessarily
protected from SLUSA preclusion. To the contrary, Kingate made clear that the relevant
question for SLUSA purposes is whether the claim predicates liability on "false conduct
by the [d]efendant[] of the sort specified in SLUSA." 784 F.3d at 152 (emphasis

Plaintiffs make the same argument about their claims for gross negligence, negligence, and aiding and
abetting breach of fiduciary duty. (See Citco Ltr. 12.)

PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP

The Honorable Victor Marrero

5

omitted). As the Citco Defendants have shown, Plaintiffs' state-law claims all predicate
6
their liability on precisely such conduct.

C.

Plaintiffs' Claim for Negligent Misrepresentation
Is Based on Alleged Misrepresentations that
Coincided with Transactions in "Covered Securities"

Plaintiffs argue that SLUSA does not preclude their claim for negligent
misrepresentation because "[t]he false statements that Citco made about the Funds'
NAVs are representations made by Citco about the value of the Funds, which are
indisputably not covered securities." (Pls.' Ltr. 12.) Herald and Kingate foreclose this
argument. 7
Kingate held that "that the essential element of SL USA that requires
falsity 'in connection with' a purchase or sale of a covered security is satisfied in this
case" because class members, "like the Herald plaintiffs, 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." Kingate, 784 F.3d at 142. Kingate thus ruled that
SLUSA precluded the claim for negligent misrepresentation asserted in that case because,
like Plaintiffs' claim for negligent misrepresentation here, it predicated liability on
"Defendants' negligent misrepresentations and misleading omissions in connection with
the Funds' investments with Madoff and with oversight ofMadoff s operations." Id. at
151.
Under Herald and Kingate, then, class members' investments in the Funds
here are transactions in "covered securities" for purposes of SLUSA. And for reasons
already stated, the Citco Defendants' alleged untrue statements and/or omissions,
including statements respecting the Funds' NAVs, manifestly coincided with class
members' purchases and sales of shares in the Funds.
Plaintiffs nonetheless attempt to distinguish Kingate and Herald by
arguing that their negligent misrepresentation claim against the Citco Administrators is
6

Plaintiffs also argue that Kingate's first of three "illustrative examples" is "on all fours with the
claims" in this case and supports their view that SLUSA does not preclude their state-law claimsalthough they do not specify which ones. (Pis.' Ltr. 7.) In that example, Kingate reasoned that
SLUSA would not preclude a negligence claim by clients of a stockbroker against the broker's auditor
based on the auditor's failure to detect the broker's fraud because the auditor would not be "alleged to
have committed any of the conduct specified in SLUSA." 784 F.3d at 148. This example does not
apply here. As the Citco Defendants explained in their May 29 letter, Plaintiffs' state-law claims
necessarily depend on alleged misrepresentations and/or omissions by the Citco Defendants in
connection with covered securities transactions. Unlike the auditor in the Kingate example, the Citco
Defendants are thus alleged to have engaged in conduct specified in SLUSA.
Plaintiffs appear to limit this argument to their negligent misrepresentation claim, but to the extent it is
meant to apply to any other of Plaintiffs' state-law claims, it would fail for the same reasons.

PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP

6

The Honorable Victor Marrero

different from the negligent misrepresentation claims asserted in those cases. They argue
that their negligent misrepresentation claim "alleges that Citco is liable for its own
misconduct in issuing false NAVs and omitting information about Citco's own conduct,"
while the Herald and Kingate negligent misrepresentation claims supposedly premised
the defendants' liability on their alleged complicity in Madoff s fraud. (Pls.' Ltr. 13.)
Kingate dooms this argument. The Kingate plaintiffs alleged that the
Madoff feeder fund administrator defendant had a contractual duty to calculate the fund's
NAV accurately; that the NAV was critical to class members' investment decisions; and
that the administrator did not fulfill its duties by failing, among other things, to accurately
calculate the NAV, to independently confirm pricing information provided by Madoff,
and to reconcile trading information provided by Madoff. (Amended Consol. Class
Action Compl. ilil 187-88, 200-01, 372, In re Kingate Mgmt. Litig., 09-cv-05386 (May
18, 2010 S.D.N.Y.), ECF No. 53.) Kingate held that these allegations were sufficient to
warrant SLUSA preclusion. 784 F.3d at 151. As the Citco Defendants explained in their
May 29 letter, these allegations are virtually identical to the allegations underlying
Plaintiffs' negligent misrepresentation claims against the Citco Administrators. (Citco
Ltr. 6; see also SCAC ilil 531-40.) Kingate therefore requires dismissal of Plaintiffs'
claim for negligent misrepresentation as precluded under SLUSA.
Further, as noted above, the "in connection with" test is satisfied where
any untrue statement or omission made is alleged to induce any investor to purchase or
sell Fund shares. (Supra p. 3.) Class members must allege such an untrue statement or
omission in support of their claim for negligent misrepresentation: if the alleged
misrepresentations at issue did not induce the class members' investment decisions, class
members cannot demonstrate reliance, proximate causation, or damages.
Conclusion
For the foregoing reasons, and those set forth in the Citco Defendants'
May 29 letter and the letters submitted by the PwC defendants and the Standard
Chartered defendants, SLUSA precludes all of Plaintiffs' state-law claims against the
Citco Defendants. Those claims should therefore be dismissed.
Respectfully submitted,

cc:

All counsel in Anwar (by e-mail)

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