Anwar et al v. Fairfield Greenwich Limited et al
Filing
832
REPLY MEMORANDUM OF LAW in Support re: (141 in 1:10-cv-00920-VM) MOTION for Leave to File Second Amended Complaint by Maridom, Caribetrans and Abbott.. Document filed by Abbot Capital, Inc.. Filed In Associated Cases: 1:09-cv-00118-VM-THK, 1:10-cv-00920-VM(Brodsky, Richard)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
MASTER NO. 09-cv-118 (VM) (THK)
PASHA ANWAR, et al.,
v.
Plaintiffs,
FAIRFIELD GREENWICH LIMITED,
et al.,
Defendants.
This filing relates to Maridom Ltd., et al.,
v. Standard Chartered Bank International
(Americas), Ltd.
____________________________________________/
REPLY BRIEF IN SUPPORT OF MOTION
FOR LEAVE TO FILE SECOND AMENDED COMPLAINT
This is the Maridom Plaintiffs’ Reply Brief in Support of Motion for
Leave to File Second Amended Complaint (“Motion”).
The cases establish that a motion for leave to amend must be granted
in the absence of a compelling reason to do so, such as undue delay, bad faith,
futility of the amendment, coupled with resulting prejudice to the opposing
party. See Motion at 5-6 (citing cases). In their Opposition, the Standard
Chartered Defendants do not deny that this is the applicable standard.
In their Motion, the Maridom Plaintiffs made an overwhelming
showing that it should be granted, because:
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they have not engaged in dilatory conduct; together with the other
Plaintiffs, they have pursued discovery diligently;
•
the motion was not filed after a deadline established in a
scheduling order; in fact, there is no such deadline;
•
there is no trial date scheduled;
•
no motion for summary judgment has been filed;
•
the two parties sought to be added are already defendants in other
Standard Chartered cases;
•
the additional factual allegations will not require any additional
discovery; and
•
the claim under the Florida Blue Sky Act will not require any
additional discovery.
The Defendants do not and cannot dispute these basic facts. Rather,
they advance a pastiche of arguments, one weaker than the next. Although
many of their specific arguments are made without citation to any authority,
the cases they do cite are plainly distinguishable. And they make an
especially weak case for the existence of prejudice, a requisite element of a
successful argument that leave to amend should be denied.
The Court should grant the Motion for Leave to Amend and direct a
prompt response.
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REPLY TO THE DEFENDANTS’ ARGUMENTS
The Defendants make three basic arguments -- timeliness, “disruption”
of the schedule, and futility -- and they claim they would be prejudiced were
the Motion granted. None of their arguments can stand up to scrutiny. The
Maridom Plaintiffs reply to each of these arguments in turn.
1.
Timeliness/Delay
a.
Repleading the Affirmative Misrepresentation Claim
The Defendants’ principal argument relates to Judge Marrero’s
decision dated October 4, 2010, when, in Anwar v. Fairfield Greenwich Ltd.,
745 F. Supp. 2d 360, 372, (S.D.N.Y. 2010) (“Standard Chartered”), he upheld
the Maridom Plaintiffs’ claims of breach of fiduciary duty and fraud and
negligent misrepresentation by omission, but held that the affirmative
misrepresentation claims (“premised on SCBI’s falsely stating that Fairfield
Sentry itself, rather than another entity, would manage the Maridom
Plaintiffs’ investments”) did not comply with Rule 9(b) because they did not
“specify the speaker of these statements, or where and when these
statements were made to each of the three Maridom Plaintiffs.” The Court
gave the Maridom Plaintiffs and the other Plaintiffs twenty-one days to
submit “an application plausibly showing how such repleading would correct
the deficiencies identified in the Court’s findings discussed above, and thus
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would not be futile.” Id. at 379. The Maridom Plaintiffs did not do so at that
time.1
The Defendants seize on this fact to argue that the entire proposed
Second Amended Complaint should not be permitted to be filed. In other
words, the Maridom Plaintiffs should be forever barred from seeking to
amend their complaint in any respect -- even in ways wholly unrelated to this
single pleading deficiency. There is no authority of which we are aware for
this truly radical proposition, which would stand Rules 15(a) and 21(a) on
their head. The cases they cite say or even imply no such thing. Nor do their
cases support even the more limited proposition that the Maridom Plaintiffs
should not be permitted, under the present circumstances, to cure the one
pleading deficiency just because they did not seek to replead within twentyone days of the order in Standard Chartered.
The cases cited by the Standard Chartered Defendants surely involve
courts’ finding undue delay and prejudice, but obviously all leave to amend
decisions are fact-specific, and not a single case cited by the Defendants
remotely involves the facts at hand: no trial date, no summary judgment
filed, discovery not complete, no additional discovery required by the
1
The Maridom Plaintiffs have cured this pleading deficiency in the
proposed Second Amended Complaint, at Paragraph 81, by identifying these
things.
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proposed amendment, no lateness under a scheduling order, and addition of
proposed allegations unrelated to the pleading deficiency found by the Court.
Rather, the cases cited by the Defendants involve far more extreme factual
situations, all absent in this case:
•
multiple failures to cure defects in plaintiff’s complaint and
failure, in the proposed amended pleading, to cure the defects or to show facts
that could be alleged to cure the defects (here, at most, the Maridom
Plaintiffs did not cure the one pleading deficiency found by the Court within
the time permitted, but do cure the deficiency in the proposed SAC, and add
many additional allegations learned during discovery);2
2
In re Eaton Vance Mut. Funds Fee Litig., 380 F. Supp. 2d 222 (S.D.N.Y.
2005), adhered to on reconsideration, 403 F. Supp. 2d 310 (S.D.N.Y. 2005)
aff’d sub nom. Bellikoff v. Eaton Vance Corp., 481 F.3d 110 (2d Cir. 2007)
(two waived opportunities to cure defects in their complaints, including being
given notice of defects in the Consolidated Amended Complaint; “strong
argument that amendment would be futile”); Payne v. Malemathew, No. 09CV-1634 CS, 2011 WL 3043920 (S.D.N.Y. July 22, 2011) (denying leave to file
fourth pleading after plaintiff had “repeatedly failed to cure the defects in his
claims despite having received detailed instructions and despite the bases of
the dismissals having been specified in advance, and he has not identified
any additional facts he could advance now that would address these defects”);
Berman v. Morgan Keegan & Co., Inc., No. 10-cv-5866, 2011 WL 1002684
(S.D.N.Y. Mar. 24, 2011), aff’d, 11-2725-CV, 2012 WL 147907 (2d Cir. Jan.
19, 2012) (denying leave “[b]ecause plaintiffs have already been afforded an
opportunity to amend when they had knowledge of Morgan Keegan’s
perceived deficiencies and because they have failed to set forth any additional
facts indicating how the pleading deficiencies would be cured by amending
the Complaint”).
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•
seeking amendment after the discovery deadline in a scheduling
order (here, there is no such deadline in any existing order);3
•
failure to explain or justify substantial delay (here, there was no
“delay,” because the amendment was filed shortly after learning the facts
giving rise to the amended allegations in the proposed pleading);4
•
seeking leave to amend after discovery was concluded (here, the
motion was filed before the deadline for conducting discovery and after the
parties had already agreed among themselves to seek an extension of the
discovery deadline);5
380544 Canada, Inc. v. Aspen Tech., Inc., No. 07 CIV. 1204 JFK, 2011
WL 4089876 (S.D.N.Y. Sept. 14, 2011) (seeking leave to amend securities
fraud claim to add allegations of misrepresentations in meetings prior to
purchase; good cause not found for filing after deadline for amended pleading;
filing made after close of fact discovery without explaining delay; plaintiffs
had learned facts giving rise to new claim shortly after going to work at
company years before filing complaint); Sly Magazine, LLC v. Weider
Publications L.L.C., 241 F.R.D. 527 (S.D.N.Y. 2007) (motion, seeking leave to
add twelve new defendants unaffiliated with existing defendant, filed seven
months after the deadline for seeking to file amended pleadings established
in the parties, discovery schedule, after discovery was closed; “undue delay”
in pursuing relevant discovery; “undue prejudice” to the defendants through
additional costs because of the additional required discovery and “significant
further delays”).
3
4
380544 Canada, supra; Sly Magazine, supra.
Leber v. Citigroup, Inc., No. 07 Civ. 9329(SHS), 2011 WL 5428784
(S.D.N.Y. Nov. 8, 2011) (proposed filing of new claim with “minimal factual
overlap with plaintiffs’ previous allegations—almost three years after they
filed their original complaint, two years after amending that complaint, and
on the eve of defendants’ motion for summary judgment”; plaintiffs on notice
5
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•
seeking leave to amend to add new factual allegations requiring
substantial new discovery (here, there are no allegations requiring additional
discovery);6
•
seeking leave to add parties independent of the existing
defendants, thus requiring substantial new discovery (here, the proposed
additional defendants are affiliates of the one defendant in the Maridom
Amended Complaint, and are already named as defendants in the other
Standard Chartered Cases).7
Inexplicably, having cited no cases that support their basic argument,
the Defendants do not address, not to mention distinguish, cases cited by the
Maridom Plaintiffs that affirmatively support their entitlement to amend.
These cases include, most notably, Bridgeport Music, Inc. v. Universal Music
Group, Inc., 248 F.R.D. 408, 412 (S.D.N.Y. 2008) (Marrero, J.) (granting
motion for leave to amend after deadline for amending; “federal courts have
consistently granted motions to amend where, as here, ‘it appears that new
of facts giving rise to new claim almost two-and-one-half years before filing
complaint; prejudice to defendants, where prior discovery been limited to
limitations issues, discovery closed, defendants had moved for summary
judgment on timeliness grounds and new claim would require additional
discovery into when plaintiffs had become aware of facts giving rise to new
claim); 380544 Canada, supra; Sly Magazine, supra.
6
Sly Magazine, supra; Leber, supra.
7
Sly Magazine, supra.
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facts and allegations were developed during discovery, are closely related to
the original claim, and are foreshadowed in earlier pleadings.’”) (citation
omitted); and State Teachers Ret. Bd. v. Fluor, 654 F.2d 843, 856 (2d Cir.
1981) (reversing denial of leave to amend filed promptly after learning new
facts, where “no trial date had been set by the court and no motion for
summary judgment had yet been filed by the defendants,” and where “the
amendment will not involve a great deal of additional discovery”).
b.
Other “Delay” Arguments
The Defendants proceed to make additional arguments without even
citing any legal authority, inapposite or otherwise.
They argue that “the proposed Second Amended Complaint adds few
substantive allegations in support of Maridom plaintiffs’ claims that were not
available to them in October 2010 when the Court first granted leave to
amend.” Opp., 11. One must wonder whether Standard Chartered must have
been reading a different proposed Second Amended Complaint than the one
filed, since in making this argument they ignore the page upon page of
factual allegations gathered during discovery, none of which was available
before this discovery was obtained -- the many ways that the “due diligence”
of Fairfield Sentry violated their own standards, the knowledge of these
deficiencies on the part from the very outset on the part of senior Standard
Chartered officials, the involvement and knowledge of SCB after the
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acquisition, the refusal by senior Standard Chartered management to
recommend Fairfield Sentry to its clients without first negotiating a secret
“trailer fee” (kickback) from Fairfield, etc. These allegations form the basis of
the allegations that the Defendants violated their fiduciary duty by making
recommendations to invest in Fairfield Sentry without having a proper basis
to do so.
Obviously seeking to avoid the weight of such allegations, the
Defendants use a basic sleight of hand to try to make them go away. The
sleight of hand consists of recasting the Maridom Plaintiffs’ claims as solely
ones for misrepresentations and omissions. Opp., 11-12. Yes, there are such
claims, but, as described above, there are also detailed allegations concerning
the precise ways in which the Defendants’ due diligence on Fairfield Sentry
woefully failed to meet their own internal standards, as well as applicable
industry standards, thus amounting to a breach of fiduciary duty independent
of the Defendants’ material omissions and misrepresentations. These
allegations the Defendants choose totally to ignore.
Even aside from that tactic, the Defendants suggest, Opp., 11-12, that,
before discovery, the Maridom Plaintiffs possessed information concerning all
but a “few” of the misrepresentations and omissions made to them is fully
rebutted on the face of the proposed pleading. This argument is plainly
inaccurate. One example is the kickback/“trailer fee” from Fairfield, which
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the Maridom Plaintiffs allege was never disclosed before discovery
commenced.8 Another is the inadequate due diligence and Standard
Chartered’s failure to disclose how it conflicted with their own internal
standards. None of these sets of allegations could have been made before
discovery was obtained.
Moreover, the Maridom Plaintiffs’ not attempting to cure the one,
isolated pleading deficiency in 2010 did not in any way cause a change in the
discovery “as framed by that complaint.” Opp., 5. The allegation in the
Amended Complaint that the Defendants falsely stated that the securities
trading was conducted by Fairfield was matched by the allegation in that
same pleading of failure to disclose the role of Madoff. Therefore, Defendants’
claim that their discovery strategy was adversely affected by the failure to
cure the fraud allegation deficiency is wholly spurious. It need not detain the
Court.
The desperation of the Defendants is illustrated by their pointing,
Opp., 12, to a vague reference in another Plaintiff’s complaint to
“commissions’ received from FGG, which, according to the Defendants, told
them all they needed to know to allege the existence of the kickbacks/“trailer
fees” in their original pleadings. Even assuming, arguendo, that what
another independent plaintiff alleged before the cases were consolidated has
any relevance, this passing reference did not remotely put anyone on notice of
what the Plaintiffs have learned in discovery: that Standard CharteredI
bargained hard with Fairfield for a 0.5% per annum kickback/“trailer fee”
from Fairfield before finally agreeing to distribute Fairfield Sentry to
Standard CharteredI’s private banking clients.
8
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The Defendants next argue that there was “delay” in naming SCBI’s
parent and Standard Chartered Bank as defendants. Opp., 12. The basis of
this baseless argument is that other Standard Chartered Plaintiffs had
named these parties as defendants. Suffice it to say that the Maridom
Plaintiffs waited until they and their counsel were satisfied that there was a
proper basis to bring in such defendants. They should not be penalized
because other unrelated parties and their counsel apparently reached that
conclusion earlier.
c.
Prejudice
On page 12 of their Opposition, the Defendants finally get
around to arguing prejudice. Naturally, given the patent lack of
prejudice that granting this Motion would cause them, the Defendants
are required to make short shrift of this important point. Their
attempts to show prejudice include the irrelevant -- that proceedings
will be delayed if they are forced to consider and file motions to
dismiss, etc. -- and the even-more-irrelevant -- that other plaintiffs
might follow suit if the Court grants leave to amend to these Plaintiffs.
Importantly, they do not argue that there will be additional discovery
required if the motion is granted, nor do they allege there will be a
delay in trying the cases. All they allege is the possibility of delay in
completing discovery caused by their motion practice. (They ignore the
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question of whether every complaint needs to be greeted by a motion to
dismiss.)
Their prejudice arguments are as baseless as their claims of
undue delay. Granting leave to amend always results in some delay. It
is only “undue” delay that causes prejudice that matters; prejudice is
measured by whether a proposed amendment “significantly” adds to
the defendant’s discovery burden or “significantly” delays the case.
Bridgeport Music, Inc. v. Universal Music Group, Inc., 248 F.R.D. 408,
414 (S.D.N.Y. 2008) (citing cases). There is no dispute that neither is
present here. Moreover, while the Standard Chartered Plaintiffs are
joined in this case for pretrial purposes, they are not consolidated for
trial and each complaint stands alone. Each Plaintiff must be given his,
her or its own opportunity to state their claims. Thus, if other Plaintiffs
seek leave to amend, their entitlement to do so should be
independently examined by the Court and the filing of other motions
for leave to amend should have no bearing on the Maridom Plaintiffs’
right to do so.9
Moreover, the Court has ample authority to impose deadlines for
amending pleadings or otherwise limit the burden imposed by hypothetical
requests to amend by other plaintiffs.
9
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2.
Alleged Futility
The Defendants next argue that the proposed amendments are
futile. It is the arguments, not the claims, that are futile.10
a.
Rule 9(b)
The Defendants argue that the fraud-based claim (which, by definition,
does not include the negligent misrepresentation claim or the Florida Blue
Sky Act claim),11 fail under Rule 9(b) by failing to allege fraud with sufficient
particularity. It is nigh unto risible to argue that, this long into this case, the
Defendants are not on notice of what they are accused of doing and not doing.
And the weakness of their “Hail Mary” 9(b) arguments demonstrates this
fact.
The Plaintiffs acknowledge that Judge Marrero, in Almiron, held that
those plaintiffs’ negligence claims are barred by the Florida economic loss
doctrine. Respectfully, we disagree with that ruling. We will not burden the
Court with a full explanation of why the claim should be upheld, other than
to state that the negligence claim does not arise out of a customer agreement.
Irrespective of any customer agreement, the Defendants owed the Maridom
Plaintiffs at least a duty of ordinary care. For this reason, the economic loss
doctrine does not apply. See Indem. Ins. Co. of N. Am. v. Am. Aviation, Inc.,
891 So. 2d 532, 537 (Fla. 2004) (“courts have held that a tort action is barred
where a defendant has not committed a breach of duty apart from a breach of
contract”).
10
The Defendants argue that all of the claims are “fraud-based,” thus
subjecting them to Rule 9(b). Opp., 7-8. To the contrary, the negligent
misrepresentation and Florida Blue Sky Act claims do not allege knowing
misrepresentations or omissions and thus do not sound in fraud; Rule 9(b)
does not apply.
11
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They first argue that the proposed Second Amended Complaint
does not allege with particularity the circumstances surrounding
SCBI’s alleged recommendations of Sentry to each Maridom
plaintiff. Instead, the Second Amended Complaint merely lists
the dates and amounts of Maridom plaintiffs’ Sentry purchases,
and alleges that three SCBI employees made recommendations.
(Second Am. Compl. ¶¶ 78-81.) Nor does the Second Amended
Complaint identify the person(s) responsible for any alleged
failures to disclose information about Sentry. (Id.) In fact,
Maridom plaintiffs do not allege with particularity any single
interaction between them and representatives of SCBI, SCI or
SCB, and thus have not even attempted to plead the context in
which any alleged omissions occurred or the manner in which
they were misled by alleged omissions at the time they decided
to purchase Sentry. (Id.)
Opp. at 15-16.
It is noteworthy that the Standard Chartered Defendants cite no case
in support of their 9(b) argument, least of all one that requires anything more
than what is alleged in the proposed pleading. Indeed, with this argument,
the Defendants outdo themselves in ignoring what the Maridom Plaintiffs
actually do allege. First, as to the identity of the persons who made the
representations and recommendations, they allege that the
representations and recommendations were made in writing by
SCI, and were also orally communicated by one or more of the
following SCBI employees: Gregorio Echevarria, Rudolfo (‘Rudy’)
Pages, and John Dutkwoski. Most often, the recommendations
and representations were communicated in person to the
Plaintiffs in Santo Domingo, D.R., but sometimes they were
communicated in person in Miami, Florida.
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Prop. SAC, ¶ 81.12 Moreover, the “context” of these representations and
recommendations was amply alleged: Standard Chartered acted as their
private bankers and periodically made investment recommendations. To fill
out the picture, the Maridom Plaintiffs allege the organizational structure of
Standard Chartered, including the role of “GIG”. They allege the details of
the internal standards governing approval and ongoing monitoring of
recommended investments. They allege the specific deficiencies in the due
diligence procedures that were followed and the important elements of proper
due diligence that were not. They allege the identity of the person responsible
for conducting due diligence of Fairfield Sentry. They allege the identity of
the person in charge of GIG. They allege the identities of the salesmen
(“Relationship Managers” and “Investment Specialists”) who made the
specific recommendations to the Maridom Plaintiffs. There is no need to
As for the argument that the Maridom Plaintiffs fail to “identify the
person(s) responsible for any alleged failures to disclose information about
Sentry,” the Defendants, inexplicably, do not inform the Court that Judge
Marrero specifically rejected this very argument in Standard Chartered, 745
F.Supp. 2d at 372-73: “Though the Maridom Plaintiffs have not specified by
name the particular SCBI employees who failed to disclose this information,
this is not fatal to their claims, particularly because SCBI should know which
of their agents interacted with the Maridom Plaintiffs.” Further, Judge
Marrero stated that it was “not inclined to require the Maridom Plaintiffs to
list every SCBI employee who, during the course of a multi-year relationship,
may have been in the position to tell them information concerning Fairfield
Sentry.” Id. at 373. The Maridom Plaintiffs have done so, in the Proposed
Second Amended Complaint, to cure the deficiency in the affirmative
misrepresentation claim.
12
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allege the specifics of one particular interaction, when the Plaintiffs, among
them, made five different investments in Fairfield Sentry over a five-year
period. There is nothing else the Maridom Plaintiffs must allege about the
context in which these recommendations and representations occurred to
provide adequate notice to these Defendants and their counsel.
The Defendants also argue, Opp. 16, that the proposed Pleading fails
to allege how the Defendants obtained from the alleged fraud. Their brief in
this respect is singularly misleading. They cite Anwar v. Fairfield Greenwich
Ltd. No. 09 CIV. 0118 VM, 2011 WL 5282684, *5 (S.D.N.Y. Nov. 2, 2011)
(“Almiron”), where Judge Marrero found a failure to comply with Rule 9(b)
where the plaintiffs in that case alleged that “‘[u]pon information and belief,’
SCBI charged an annual fee to clients investing in Fairfield Sentry, but ‘[a]t
this time it is unknown whether [Almiron and Carrillo were] charged this
fee.’” Id. at *5. Of course, in this case, the Maridom Plaintiffs allege not only
Standard Chartered’s receipt of the annual fee charged to its clients -- which,
unlike in Almiron, is affirmatively alleged to have been occurred, Prop. SAC,
¶ 46 -- but also the secret undisclosed kickback/“trailer fee” Standard
Chartered negotiated to receive from Fairfield. The existence of that “fee” is
not referred to in Almiron. Citing the Almiron decision on this point is
therefore wholly unconvincing, to put it in the most decorous terms.
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b.
Materiality of Alleged Immaterial Omissions and
Misrepresentations
The Defendants follow with another baseless argument -- that the
alleged misrepresentations and omissions are not material. First they argue,
again without citation to any authority, that amendment would be futile
because the Maridom Plaintiffs have not alleged facts that would “support an
inference that Maridom plaintiffs would have disregarded SCBI’s alleged
recommendation to invest in Sentry if they had known of Madoff’s
involvement in the fund.” Opp., 17. They have cited no authority to support
the argument that such an allegation is required under Rule 9(b), because
there is none. Moreover, in seeking to dismiss the Maridom Amended
Complaint, the Defendants did not argue that these facts (whether stated as
an omission or a misrepresentation) were immaterial. Judge Marrero has
already held that these same basic allegations satisfy Rule 9(b). Standard
Chartered, 745 F.Supp. 2d at 373-73. They should not be entitled to relitigate
this issue.
Even if the Defendants are given a second bite at the apple, their
arguments are singularly meritless. A lack of materiality is not properly
found at the pleading stage except where, unlike here, the
misrepresentations or omissions “are so obviously unimportant to a
reasonable investor that reasonable minds could not differ on the question of
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their importance.” Litwin v. Blackstone Group, L.P., 634 F.3d 706, 717 (2d
Cir.), cert. denied, 132 S. Ct. 242, 181 L. Ed. 2d 138 (2011). The Defendants
do not even approach the foothills of that mountain.
For the Defendants to prevail on this point, the Court would have to
conclude that no reasonable juror could conclude that the purchaser of a
security would find it important the promoter had falsely disclosed that it
was executing the transactions, when, in fact, a third party, which just
happened to have custody of 95% of the assets, was doing the trading. The
Plaintiff allege that had this been disclosed to them, they would not have
invested. If this fact is not deemed material as a matter of law, then it is for
the jury to decide whether the information is material, and it is the
Defendants’ argument, not the allegation, that severely strains credulity.
Moreover, Judge Marrero has already upheld these claims against the
Defendants’ motion to dismiss. Standard Chartered. Accord People ex rel.
Cuomo v. Merkin, 26 Misc. 3d 1237(A), 907 N.Y.S.2d 439 (Sup. Ct. 2010)
(“With respect to Merkin’s alleged omissions in failing to reveal Madoff’s
actual role, and the actual investment strategy being employed, the
complaint sufficiently pleads that these omitted facts are material, that is,
that there is a substantial likelihood that disclosure of these facts would have
been viewed by the reasonable investor as having significantly altered the
total mix of information made available”). See 6 Bromberg & Lowenfels on
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Securities Fraud § 19:18 (2d ed.). See also In re Beacon Associates Litig.,745
F. Supp. 2d 386, 412 (S.D.N.Y. 2010), reconsideration denied (Dec. 7, 2010)
(upholding claims under ERISA for arising from Madoff fraud).
The Defendants also argue that Standard Chartered’s failure to
disclose its receipt of a kickback from Fairfield for each investment by its
clients and its failure to disclose its inadequate due diligence are not
material. Opp., 17. The Defendants do not come close to sustaining this
argument.
The Proposed Second Amended Complaint alleges that “SCBI held
itself out to its private banking clients, including the Plaintiffs, as an expert
in the financial markets, including financial products such as hedge funds. In
that connection, SCBI held out to its clients, including the Plaintiffs, that it
based each investment recommendation on a comprehensive, careful and
professional assessments of the risks and benefits of each investment product
that it recommended.” Prop. SAC, ¶ 22. It also alleges that SCBI failed to
disclose, in connection with its recommendations and representations,
the nature of the due diligence SCI performed on Sentry, and
the fact that SCI failed to conduct due diligence procedures that
their own guidelines required and that were necessary to
perform reasonable a reasonable investigation of Sentry,
including failing to visit BLMIS until the perfunctory visit in
April 2008, failing to obtain audited financial statements of
BLMIS before recommending an investment in Sentry, and
failing to mitigate known or obvious risks associated with
investing, through Sentry, in BLMIS.
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Id., 84(e).
To sustain Standard Chartered’s position on this point, the Court
would have to be able to conclude that no one could rationally believe that a
private bank client would care whether the private banker had bothered to
follow standard due diligence procedures. The Defendants presumably know
that they cannot make that showing, so they completely recast the allegation
by eliminating its most important element -- describing the allegation as one
of failure to disclose its due diligence standards, instead of failing to disclose
that it had materially violated those standards (“Maridom plaintiffs do not
plead any facts demonstrating that they would have disregarded SCBI’s
alleged recommendation if . . . they were aware of Standard Chartered’s
internal policies and procedures.” Opp., 17.) There is a world of difference
between the allegation and how Standard Chartered misleadingly describes
it, and therein lies the materiality of the omission.13
As to the kickback/“trailer fee” non-disclosure, the Defendants’
argument -- that it is immaterial as a matter of law that a private bank
The Defendants also make this illogical argument: “Indeed, they plead
just the opposite—that they “justifiably accepted” statements of SCBI and
‘relied on them because they were made by investment experts in whom they
had placed their trust.’” Opp., 17. In other words, precisely because you
placed trust in us, you cannot sue us (your fiduciary) for not being candid
with you.
13
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decided to recommend a particular investment to its client only after securing
a healthy payment from the promoter of the security based on each successful
recommendation -- is simply wrong-headed. That a fiduciary must disclose
this type of inducement to his principal is so basic that there should be no
need to cite case authority. A few such citations in the securities arena should
suffice: Operating Local 649 Annuity Trust Fund v. Smith Barney Fund
Mgmt. LLC, 595 F.3d 86, 95 (2d Cir. 2010) (“defendant’s misrepresentations
were material because there exists a substantial likelihood that a reasonable
investor would consider it important that her fiduciary was, in essence,
receiving kickbacks”); Swack v. Credit Suisse First Boston, 383 F. Supp. 2d
223, 237 (D. Mass. 2004) (holding that failure to disclose that analyst’s
research report was issued in exchange for personal benefit constitutes
omission of material fact); United States v. Marchese, 838 F. Supp. 1424, 1427
(D. Colo. 1993) (finding broker’s failure to disclose kickbacks to promote stock
recommended to investor was material omission).); SEC v. Hasho, 784
F.Supp. 1059, 1110 (S.D.N.Y. 1992) (holding that “the failure to disclose
[receipt of] commissions deprives the customer of the knowledge that his
registered representative might be recommending a security based upon the
registered representative’s own financial interest rather than the investment
value of the recommended security” and “constitutes a violation of the antifraud provisions.”).
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c.
Florida Blue Sky Act
Finally, the Defendants argue that amending to add the proposed
Florida Blue Sky Act claim would be futile. Opp., 17-18. They make two
arguments. Both are easily dismissed.
First, they argue that the Blue Sky Act claims fail under Rule 9(b).
because of the same alleged deficiencies with respect to the fraud and
negligent misrepresentation claims. Rule 9(b) does not apply, however,
where, as here, there is no allegation in Count Six of fraud (meaning a
knowing or severely reckless misrepresentation or omission). By contrast,
while Almiron recognizes “that the scienter requirement under Florida law is
satisfied by a showing of negligence,” Judge Marrero applied Rule 9(b)
because the plaintiffs’ allegations were “based on fraud.” Almiron, 2011 WL
5282684 at *4. Cf. Rombach v. Chang, 355 F.3d 164, 171 (2d Cir. 2004)
(“while a plaintiff need allege no more than negligence to proceed under
Section 11 and Section 12(a)(2), claims that do rely upon averments of fraud
are subject to the test of Rule 9(b).”). Here, the Blue Sky Act claim does not
allege scienter. Even if Rule 9(b) applied, however, the argument fails for the
same reasons discussed above.
Second, the Defendants argue that the Maridom Plaintiff have failed
to allege, as required, that the sale of the securities occurred in Florida.
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Judge Marrero held in Almiron that the Blue Sky Act claim failed because it
did not allege that “the purchase/sale of Fairfield Sentry occurred in Florida.”
Almiron, at *7 n.4 (“Almiron and Carrillo’s allegations that their investment
accounts were located in Florida, without more, is [sic] insufficient to
establish their claims”). By contrast, the Maridom Plaintiffs have satisfied
the pleading requirement of showing connexity to Florida.
Perhaps this might not be the conclusion were one to rely on the
Defendants’ description of the actual allegations: the proposed “Second
Amended Complaint asserts only that ‘the sales of the shares of Sentry did
not occur entirely outside the State of Florida.’” Opp., 18. Unfortunately, the
misleading nature of that description is revealed by what actually is alleged:
120. The recommendations that each of the Plaintiffs make the
investment in Sentry were formulated in Florida, in that SCBI
employees responsible for formulating those recommendations
operated out of SCBI’s offices in Miami, Florida. SCBI met from
time to time with representatives of the Plaintiffs to discuss
their investments being managed by SCBI, including
recommendations. SCBI employees made written
communications to the Plaintiffs concerning the sales from
SCBI’s offices in Miami, Florida, including to addresses located
in Florida. As a result, the sales of the shares of Sentry did not
occur entirely outside the State of Florida, and the Act applies to
these sales.
Proposed SAC, ¶ 120. It is also elsewhere alleged, and incorporated in Count
Six, that meetings with the Plaintiffs occurred both in the D.R. and in
Florida. Proposed SAC, ¶ 81. Thus, the Maridom Plaintiffs have
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unquestionably alleged that substantial portions of the sale process occurred
in Florida.
These allegations suffice under Florida law. The only state court
decision on the subject holds that sales taking place entirely outside the state
do not satisfy the requirements of s. 517.211(2), Fla.Stat. Allen v. Oakbrook
Sec. Corp., 763 So. 2d 1099, 1100 (Fla. Dist. Ct. App. 1999) (dismissing claim
where “undisputed that the sales of the securities involved were not made in
Florida. They occurred entirely in other states.”). Allen thus stands for the
proposition that the plaintiff must allege “some act in connection with the
sale of a security that occurred in the State of Florida.” Jenkins v. Last
Atlantis Partners, LLC, No. 09 CV 3581, 2010 WL 3023490 (N.D. Ill. July 30,
2010) (emphasis added). This the Maridom Plaintiffs have done, and there is
no “persuasive data”14 that the Florida Supreme Court would interpret this
statute differently. Instead, it is highly likely that that court would hold that
where, as here, a private bank is located in Florida, is staffed with people
from Florida, formulates investment recommendations in Florida, and meets
with private banking clients in Florida, otherwise violative offers and sales of
securities made by that bank to non-resident clients fall squarely within the
protection of Florida’s Securities and Investor Protection Act.
See Standard Chartered, 745 F.Supp. 2d at 375 (quoting New York v.
Nat’l Serv. Indus., 460 F.3d 201, 211 (2d Cir.2006).
14
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CONCLUSION
For the reasons set forth in the Motion for Leave to File Second
Amended Complaint and this Reply Brief, the Maridom Plaintiffs -- Maridom
Limited, Caribetrans, S.A. and Abbot Capital, Inc., respectfully request hat
the Court grant their Motion and order a prompt response.
Dated: March 8, 2012
Respectfully submitted,
/s/ Richard E. Brodsky
_________________________
Richard E. Brodsky
Florida Bar No. 322520
The Brodsky Law Firm
66 West Flagler Street, Ninth Floor
Miami, FL 33130
rbrodsky@thebrodskylawfirm.com
786-220-3328
Attorney for Maridom Plaintiffs
Admitted pro hac vice
CERTIFICATE OF SERVICE
I hereby certify that on March 8, 2012, I electronically filed the foregoing
document with the Clerk of the Court using CM/ECF.
/s/ Richard E. Brodsky
_________________________
Richard E. Brodsky
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