Pacific West Health Medical Center Inc. Employees Retirement Trust et al v. Fairfield Greenwich Group et al

Filing 130

JOINT REPLY MEMORANDUM OF LAW in Support re: (66 in 1:09-cv-02222-VM, 10 in 1:09-cv-08500-VM, 62 in 1:09-cv-04031-VM, 360 in 1:09-cv-00118-VM-THK, 54 in 1:09-cv-02410-VM, 87 in 1:09-cv-00134-VM, 103 in 1:09-cv-02366-VM, 74 in 1:09-cv-00301-VM, 76 in 1:09-cv-02269-VM) MOTION to Dismiss. CORRECTED JOINT REPLY MEMORANDUM OF LAW. Document filed by Fairfield Greenwich Limited, Fairfield Greenwich (Bermuda) Ltd., Fairfield Greenwich Advisors LLC, Walter M. Noel, Jr, Andres Piedrahita, Jeffrey Tucker, Amit Vijvergiya, Mark Mckeefry, Fairfield Risk Services Ltd., Fairfield Greenwich Advisors L.L.C., Amit Vigayvergia, Fairfield Greenwich Limited, Fairfield Greenwich (Bermuda) Limited, Fairfield Greenwich Advisors, L.L.C., Amit Vijayvergiya, Daniel Lipton, Fairfield Heathcliff Capital LLC, Jeffrey H. Tucker, Walter Noel, Jr, Andres Piedrahta, Andreas Piedrahita, Fairfield Greenwich (Bermuda) LTD. (Attachments: # 1 Appendix A, # 2 Appendix B)Filed In Associated Cases: 1:09-cv-00118-VM-THK et al.(Cunha, Mark)

UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK -----------------------------------------------------------------x ANWAR, et al., Plaintiffs, v. FAIRFIELD GREENWICH LIMITED, et al., Defendants. This Document Relates To: All Actions -----------------------------------------------------------------x :: :: :: :: :: :: :: :: MASTER FILE NO. 09-CV-0118 (VM) :: :: :: :: :: ::

REPLY MEMORANDUM OF LAW IN FURTHER SUPPORT OF THE MOTION TO DISMISS THE SECOND CONSOLIDATED AMENDED COMPLAINT ON BEHALF OF DANIEL LIPTON, MARK MCKEEFRY, WALTER NOEL, ANDRÉS PIEDRAHITA, JEFFREY TUCKER, AMIT VIJAYVERGIYA, FAIRFIELD GREENWICH LIMITED, FAIRFIELD GREENWICH (BERMUDA) LTD., FAIRFIELD GREENWICH ADVISORS LLC, FAIRFIELD RISK SERVICES LTD., AND FAIRFIELD HEATHCLIFF CAPITAL LLC (THE "FG DEFENDANTS")

TABLE OF CONTENTS Page PRELIMINARY STATEMENT ..................................................................................................1 I. PLAINTIFFS LACK STANDING TO BRING THEIR STATE LAW CLAIMS ................3 A. B. The Law Of The Place Of Incorporation Determines Whether Plaintiffs Have Standing To Bring Claims .....................................................................................3 Plaintiffs Lack Standing To Bring Their Claims Regardless of What Law Applies .................................................................................................................3 1. 2. II. Plaintiffs Lack Standing Under BVI Law ...................................................3 Plaintiffs Lack Standing Under Both Delaware and New York Law ...........4

THE MARTIN ACT PREEMPTS THE NON-FRAUD COMMON LAW CLAIMS ..........6 A. B. C. Recent Decisions Confirm Martin Act Preemption of Plaintiffs Claims .................6 Martin Act Preemption is Not Limited to Causes of Action Pleading Violations of Martin Act Regulations .....................................................................................7 The Martin Acts Geographic Prong is Satisfied ....................................................8

III.

SLUSA PREEMPTS PLAINTIFFS STATE LAW CLAIMS ............................................9 A. B. SLUSA Does Not Require Direct Purchases of Covered Securities By Plaintiffs ....9 The "In Connection With" Element is Satisfied ................................................... 10

IV. V. VI.

THE EXCULPATORY PROVISIONS IN THE INVESTMENT MANAGEMENT AGREEMENTS BAR CLAIMS BY SENTRY AND SIGMA PLAINTIFFS .................. 12 PLAINTIFFS FAIL PROPERLY TO ALLEGE THAT EACH FG DEFENDANT WAS PART OF A PARTNERSHIP ........................................................................................ 12 PLAINTIFFS FAIL TO SAVE THEIR FEDERAL SECURITIES FRAUD CLAIMS ...... 13 A. Plaintiffs Have Not Pled Scienter ........................................................................ 14 1. 2. Plaintiffs Motive Allegations are Insufficient and Undermined by the FG Defendants Personal Investments in Madoff ..................................... 14 Plaintiffs Do Not Plead Conscious Misbehavior or Recklessness .............. 14 a. Plaintiffs Cannot Use the FG Defendants Self-Imposed Due Diligence and Monitoring Standards to Prove Fraud ..................... 14 i

b. c. d. 3. 4. B. C. VII.

The SCAC Does Not Allege the FG Defendants Had Information Contradicting Statements Made in the PPMs ............. 16 The FG Defendants Were Not Reckless with Respect to Disclosures in the PPMs about Madoff-Related Risks................... 19 The Alleged Red Flags Were Not Obvious Signs of Fraud ............ 20

The Most Compelling Inference Is that the FG Defendants Were Deceived by Madoffs Elaborate Fraud .................................................... 24 Plaintiffs Still Fail to Address Scienter on a Defendant-by-Defendant Basis ....................................................................................................... 24

Plaintiffs Do Not Allege Justifiable Reliance ....................................................... 26 Plaintiffs Fail to Plead Loss Causation................................................................. 27

PLAINTIFFS FAIL TO PLEAD THE ELEMENTS OF THEIR TORT CLAIMS ............ 28 A. B. C. Plaintiffs Do Not and Cannot Allege Proximate Causation ................................... 28 Plaintiffs Common Law Fraud Claim Fails ........................................................ 28 Plaintiffs Fail to State a Claim for Negligent Misrepresentation ........................... 28 1. 2. 3. 4. 5. D. E. Plaintiffs Do Not Allege A Special Relationship ...................................... 28 The Purchaser Claims Are Flawed ........................................................... 29 Plaintiffs Do Not Allege that Each FG Defendant Was Negligent ............. 30 The Exculpatory Clauses Shield the FG Defendants from Liability for Simple Negligence .................................................................................. 30 The Economic Loss Doctrine Bars the Negligent Misrepresentation Claim...................................................................................................... 30

Plaintiffs Fail to State a Claim for Breach of Fiduciary Duty ................................ 31 Plaintiffs Fail to State a Claim for Gross Negligence............................................ 32

VIII. PLAINTIFFS ARE NOT ENTITLED TO PUNITIVE DAMAGES OR TO FURTHER AMEND THEIR COMPLAINT ..................................................................................... 32 CONCLUSION ......................................................................................................................... 32

ii

TABLE OF AUTHORITIES Page Other Authorities Abercrombie v. Andrew Coll., 438 F. Supp. 2d 243 (S.D.N.Y. 2006) ........................................... 31 Acito v. IMCERA Group, Inc., 47 F.3d 47 (2d Cir. 1995) ............................................................ 20 Aldridge v. A.T. Cross Corp., 284 F.3d 72 (1st Cir. 2002) ........................................................... 26 Anderson v. Transglobe Energy Corp., 35 F. Supp. 2d 1363 (M.D. Fla. 1999) ................................................................................................................................... 24 Ashland Inc. v. Morgan Stanley & Co., No. 09 Civ. 5415(RPP), 2010 WL 1253932 (S.D.N.Y. Mar. 30, 2010) ................................................................................... 9, 16 Backus v. Conn. Cmty. Bank, N.A., No. 3:09-CV-1256, 2009 WL 5184360 (D. Conn. Dec. 23, 2009) ............................................................................................... 10, 11 Baker v. Andover Assocs. Mgmt. Corp., Index No. 6179/09 (N.Y. Sup. Ct. Nov. 30, 2009) ..................................................................................................................... 32 Banc of Am. Sec. LLC v. Solow Bldg. Co. II, LLC, 47 A.D.3d 239 (N.Y. App. Div. 2007) ................................................................................................................... 31 Bangkok Crafts Corp. v. Capitolo di San Pietro in Vaticano, No. 03 Civ. 0015(RWS), 2006 WL 1997628 (S.D.N.Y. July 18, 2006) .................................................... 29 Barron v. Igolnikov, No. 09 Civ. 4471(TPG), 2010 WL 882890 (S.D.N.Y. Mar. 10, 2010) ............................................................................................................. 7, 9, 10 Bruhl v. PricewaterhouseCoopers Int'l, No. 03 Civ. 23044, 2007 WL 983263 (S.D. Fla. Mar. 27, 2007) ......................................................................................... 24 BSS Norwalk One, Inc. v. Raccolta, Inc., 60 F. Supp. 2d 123 (S.D.N.Y. 1999) .....................................................................................................................................3 Burekovitch v. Hertz, No. 01-CV-1277(ILG), 2001 WL 984942 (E.D.N.Y. July 24, 2001) ...................................................................................................................... 11 Castellano v. Young & Rubicam Inc., 257 F.3d 171 (2d Cir. 2001) ................................................8 Century Pac., Inc. v. Hilton Hotels Corp., 528 F. Supp. 2d 206 (S.D.N.Y. 2007) ................................................................................................................................... 30 Chalverus v. Pegasys., Inc., 59 F. Supp. 2d 226 (D. Mass. 1999)................................................. 26

iii

Champion Home Builders Co. v. ADT Sec. Servs., Inc., 179 F. Supp. 2d 16 (N.D.N.Y. 2001) .................................................................................................................. 30 Cherny v. Emigrant Bank, 604 F. Supp. 2d 605 (S.D.N.Y. 2009) ................................................ 32 Cohen v. Koenig, 25 F.3d 1168 (2d Cir. 1994) ............................................................................ 26 Cornwell v. Credit Suisse Group, No. 08 Civ. 3758(VM), 2010 WL 537593 (S.D.N.Y. Feb. 11, 2010) ..................................................................................................... 18 Cosmas v. Hassett, 886 F.2d 8 (2d Cir. 1989) ............................................................................. 26 County of Suffolk v. Long Island Lighting Co., 728 F.2d 52 (2d Cir. 1984) ............................ 31, 32 CPC Int'l Inc. v. McKesson Corp., 519 N.Y.S.2d 804 (N.Y. 1987) ............................................ 7, 8 CRT v. Merkin, No. 601052/09 (N.Y. Sup. Ct. May 5, 2010)................................................... 7, 19 DeBlasio v. Merrill Lynch & Co., No. 07 Civ. 318(RJS), 2009 WL 2242605 (S.D.N.Y. July 27, 2009) ...................................................................................................... 29 Dommert v. Raymond James Fin. Servs., Inc., No. Civ. A. 1:06-cv-102, 2007 WL 1018234 (E.D. Tex. Mar. 29, 2007) ....................................................................... 11 Dura Pharm., Inc. v. Broudo, 544 U.S. 336 (2005) .................................................................... 28 Edison Fund v. Cogent Inv. Strategies Fund, Ltd., 551 F. Supp. 2d 210 (S.D.N.Y. 2008)................................................................................................................... 14 Ellington Mgmt. Group, LLC v. Ameriquest Mortgage Co., No. 09 Civ. 0416(JSR), 2009 WL 3170102 (S.D.N.Y. Sept. 29, 2009) ..................................................... 17 Emergent Capital Inv. Mgmt., LLC v. Stonepath Group, Inc., 343 F.3d 189 (2d Cir. 2003) ...................................................................................................................... 19 Epstein v. Itron, Inc., 993 F. Supp. 1314 (E.D. Wash. 1998)........................................................ 26 Estate of Detwiler v. Offenbecher, 728 F. Supp. 103 (S.D.N.Y. 1989) ................................... 16, 27 Fairfield Sentry Limited v. Fairfield Greenwich Group, No. 601687/09 (N.Y. Sup. Ct. filed May 29, 2009) .........................................................................................4 Falkowski v. Imation Corp., 309 F.3d 1123 (9th Cir. 2002) ......................................................... 10 First Equity Corp. of Fla. v. Standard & Poor's Corp., 690 F. Supp. 256 (S.D.N.Y. 1998)................................................................................................................... 26 Fitzer v. Sec. Dynamics Techs., Inc., 119 F. Supp. 2d 12 (D. Mass. 2000) ................................... 16 Flickinger v. Harold C. Brown & Co., Inc., 947 F.2d 595 (2d Cir. 1991) ..................................... 32 iv

G.F. Thomas Invs., L.P. v. Cleco Corp., 317 F. Supp. 2d 673 (W.D. La. 2004) ................................................................................................................................... 11 Gaidon v. Guardian Life Ins. Co. of Am., 679 N.Y.S.2d 611 (N.Y. App. Div. 1998) ........................................................................................................................... 29 Glickman v. Alexander & Alexander Servs., Inc., No. 93 Civ. 7594, 1996 WL 88570 (S.D.N.Y. Feb. 29, 1996) .................................................................................... 25 Gusmao v. GMT Group, Inc., No. 06 Civ. 5113(GEL), 2008 WL 2980039 (S.D.N.Y. Aug. 1, 2008)....................................................................................................... 28 Hart v. Internet Wire, Inc., 145 F. Supp. 2d 360 (S.D.N.Y. 2001)................................................ 18 Henneberry v. Sumitomo Corp. of Am., 532 F. Supp. 2d 523 (S.D.N.Y. 2007) ................................................................................................................................... 31 Horattas v. Citigroup Fin. Mkts. Inc., 532 F. Supp. 2d 891 (W.D. Mich. 2007) ................................................................................................................................... 10 In re Aegon N.V. Sec. Litig., No. 03 Civ. 0603, 2004 WL 1415973 (S.D.N.Y. June 23, 2004) ..................................................................................................... 26 In re Atlas Air Worldwide Holdings, Inc. Sec. Litig., 324 F. Supp. 2d 474 (S.D.N.Y. 2004)................................................................................................................... 26 In re Bausch & Lomb, Inc. Sec. Litig., 592 F. Supp. 2d 323 (W.D.N.Y. 2008) ................................................................................................................................... 23 In re Bayou Hedge Fund Litig., 534 F. Supp. 2d 405 (S.D.N.Y. 2007)............................. 14, 15, 24 In re Citigroup, Inc. Sec. Litig., 330 F. Supp. 2d 367 (S.D.N.Y. 2004)................................... 16, 21 In re Comverse Tech., Inc. Sec. Litig., 543 F. Supp. 2d 134 (E.D.N.Y. 2008) ............................... 24 In re eSpeed, Inc. Sec. Litig., 457 F. Supp. 2d 266 (S.D.N.Y. 2006)............................................. 25 In re Goldman Sachs Mut. Funds Fee Litig., No. 04 Civ. 2567(NRB), 2006 WL 126772 (S.D.N.Y. Jan. 17, 2006) .....................................................................................3 In re JP Morgan Chase Sec. Litig., 363 F. Supp. 2d 595 (S.D.N.Y. 2005) ................................... 24 In re Keyspan Corp. Sec. Litig., 383 F. Supp. 2d 358 (E.D.N.Y. 2003) ........................................ 16 In re Loral Space & Commc'ns Ltd. Sec. Litig., No. 01 Civ. 4388(JGK), 2004 WL 376442 (S.D.N.Y. Feb. 27, 2004) .......................................................................... 16 In re Marsh & Mclennan Cos., Inc. Sec. Litig., 501 F. Supp. 2d 452 (S.D.N.Y. 2006)............................................................................................................. 18, 27 v

In re NovaGold Resources Inc. Sec. Litig., 629 F. Supp. 2d 272 (S.D.N.Y. 2009) ................................................................................................................................... 25 In re PXRE Group, Ltd., Sec. Litig., 600 F. Supp. 2d 510 (S.D.N.Y. 2009) .................................. 25 In re Refco, 503 F. Supp. 2d 611 (S.D.N.Y. 2007) ...................................................................... 24 In re Sec. Capital Assurance Ltd. Sec. Litig., No. 07 Civ. 11086(DAB), 2010 WL 1372688 (S.D.N.Y. Mar. 31, 2010) ....................................................................... 24 In re Sterling Foster & Co., Inc. Sec. Litig., 222 F. Supp. 2d 216 (E.D.N.Y. 2002) ................................................................................................................................... 29 In re Tremont Sec. Law, State Law & Ins. Litig., 08 Civ. 11117(TPG), 2010 WL 1257580 (S.D.N.Y. Mar. 30, 2010) ..................................................................................7 In re Veeco, Instruments, Inc. Sec. Litig., 235 F.R.D. 220 (S.D.N.Y. 2006).................................. 26 In re WorldCom, Inc., 263 F. Supp. 2d 745 (S.D.N.Y. 2003) ....................................................... 10 In Teamsters Allied Benefit Funds v. McGraw, No. 09 Civ. 140(PGG), 2010 WL 882883 (S.D.N.Y. Mar. 11, 2010) .................................................................................. 25 Indep. Order of Foresters v. Donald, Lufkin & Jenrette, Inc., 157 F.3d 933 (2d Cir. 1998) ...................................................................................................................... 31 Joffee v. Lehman Bros., Inc., No. 04 Civ. 3507(RWS), 2005 WL 1492101 (S.D.N.Y. June 23, 2005) .......................................................................................................6 Kassover v. UBS AG, 619 F. Supp. 2d 28 (S.D.N.Y. 2008) ...........................................................8 Kimmell v. Schaefer, 652 N.Y.S.2d 715 (1996) ........................................................................... 29 Kinsey v. Cendant Corp., No. 04 Civ. 0582, 2005 WL 1907678 (S.D.N.Y. Aug. 10, 2005) ..................................................................................................................... 25 Kottler v. Deutsche Bank AG, 607 F. Supp. 2d 447 (S.D.N.Y. 2009) ........................................... 29 Landy v. Mitchell Petroleum Tech. Corp., 734 F. Supp. 608 (S.D.N.Y. 1990) ................................................................................................................................... 30 LaSalle Nat'l Bank v. Duff & Phelps Credit Rating Co., 951 F. Supp. 1071 (S.D.N.Y. 1996)................................................................................................................... 24 Levinson v. PSCC Servs., Inc., No. 3:09-CV-00269(PCD), 2009 WL 5184363 (D. Conn. Dec. 23, 2009) ................................................................................. 10, 11 Makor Issues & Rights, Ltd. v. Tellabs Inc. (Tellabs II), 513 F.3d 702 (7th Cir. 2008) ............................................................................................................................ 18 vi

Manhattan Motorcars, Inc. v. Automobili Lamborghini, S.P.A., 244 F.R.D. 204 (S.D.N.Y. 2007) ............................................................................................................ 31 Martin v. W.B. Rest. Inc., 703 N.Y.S.2d 212 (App. Div. 2000) .................................................... 28 Meridian Horizon Fund, LP v. Tremont Group Holdings, Inc., No. 09 Civ. 3708(TPG), 2010 WL 1257567 (S.D.N.Y. Mar. 31, 2010) ............................................ 7, 9, 21 Muller-Paisner v. TIAA, 289 F. Appx 461 (2d Cir. 2008)........................................................... 29 Murray v. Xerox Corp., 811 F.2d 118 (2d Cir. 1987)................................................................... 30 Musalli Factory for Gold & Jewellry v. JPMorgan Chase Bank, N.A., 261 F.R.D. 13 (S.D.N.Y. 2009) ................................................................................................... 31 N.Y. Univ. v. Ariel Fund, Ltd., No. 603803/08 (N.Y. Sup. Ct. Feb. 22, 2010) .................................8 Nathel v. Siegal, 592 F. Supp. 2d 452 (S.D.N.Y. 2008) ............................................................... 18 Novak v. Kasaks, 216 F.3d 300 (2d Cir. 2000) ...................................................................... 18, 20 Official Comm. of Unsecured Creditors v. Donaldson, Lufkin & Jenrette Sec. Corp., No. 00 Civ. 8688(WHP), 2002 WL 362794 (S.D.N.Y. Mar. 6, 2002) ............................................................................................................................... 31 Pension Comm. of the Univ. of Montreal Pension Plan v. Banc of Am. Sec., LLC, No. 05 Civ. 9016(SAS), 2010 WL 546964 (S.D.N.Y. Feb. 16, 2010) ................................................................................................................................... 11 People v. Merkin, No. 450879/09, 2010 WL 936208 (N.Y. Sup. Ct. Feb. 8, 2010) ............................................................................................................................. 29, 32 Plumbers & Steamfitters Local 773 Pension Fund v. Canadian Imperial Bank of Commerce, No. 08 Civ. 8143(WHP), 2010 WL 961596 (S.D.N.Y. Mar. 17, 2010) ......................................................................................... 14, 16, 25 Port Auth. of N.Y. & N.J. v. Arcadian Corp., 189 F.3d 305 (3d Cir. 1999) ................................... 28 Pro Bono Invs., Inc. v. Gerry, No. 03 Civ. 4347(JGK), 2005 WL 2429787 (S.D.N.Y. Sept. 30, 2005) ......................................................................................................6 Robehr Films, Inc. v. Am. Airlines, Inc., No. 85 Civ. 1072(RPP), 1989 WL 111079 (S.D.N.Y. Sept. 19, 1989) ........................................................................................ 31 S. Cherry St., LLC v. Hennessee Group LLC, 573 F.3d 98 (2d Cir. 2009) ........................ 14, 15, 16 San Diego County Employees Ret. Ass'n v. Maounis, No. 07 Civ. 2618(DAB), 2010 WL 1010012 (S.D.N.Y. Mar. 15, 2010) ................................................... 26

vii

SEC v. Bonventre, 10 Civ. 1576, 2010 WL 666226 (S.D.N.Y. filed Feb. 24, 2010) ................................................................................................................................... 24 SEC v. Cohmad Sec. Corp., No. 09 Civ. 5680(LLS), 2010 WL 363844 (S.D.N.Y. Feb. 2, 2010) ..................................................................................... 13, 21, 22, 24 SEC v. O'Hara and Perez, 09 Civ. 9425, 2009 WL 3794411 (S.D.N.Y. filed Nov. 13, 2009) ..................................................................................................................... 24 Sedona Corp. v. Ladenburg Thalmann & Co., No. 03 Civ. 3120(LTS)(THK), 2005 WL 1902780 (S.D.N.Y. Aug. 9, 2005) ..............................................9 Seybold v. Groenink, No. 06 Civ. 772(DLC), 2007 WL 737502 (S.D.N.Y. Mar. 12, 2007) .......................................................................................................................3 Sheldon v. Khanal, No. 08-cv-3676(KAM)(LB), 2009 WL 3233093 (E.D.N.Y. Sept. 30, 2009) .................................................................................................... 29 Shields v. Citytrust Bancorp, Inc., 25 F.3d 1124 (2d Cir. 1994) ................................................... 21 Shuster v. Symmetricom, Inc., No. C 94-20024(RMW), 1997 WL 820967 (N.D. Cal. June 25, 1997) ..................................................................................................... 27 Siepel v. Bank of Am., 526 F.3d 1122 (8th Cir. 2008) .................................................................. 10 Simon v. Castello, 172 F.R.D. 103 (S.D.N.Y. 1997) .................................................................... 30 Steed Fin. LDC v. Nomura Sec. Int'l Inc., No. 00 Civ. 8059, 2001 WL 1111508 (S.D.N.Y. Sept. 20, 2001) ...................................................................................... 27 Stephenson v. Citco Group Ltd., No. 09 Civ. 00716(RJH), 2010 WL 1244007 (S.D.N.Y. Apr. 1, 2010) .................................................................................. passim Strassman v. Fresh Choice, Inc., No. C-95-20017(RPA), 1995 WL 743728 (N.D. Cal. Dec. 7, 1995)....................................................................................................... 27 Sullivan v. Holland & Knight LLP, No. 8:09-CV-531-T-17AEP, 2010 WL 1558553 (M.D. Fla. Mar. 31, 2010) ................................................................................ 10, 11 Teamsters Local 445 Freight Div. Pension Fund v. Dynex Capital, Inc., 531 F.3d 190 (2d Cir. 2008) ............................................................................................ 16, 22, 26 Transit Rail, LLC v. Marsala, No. 05-CV-0564, 2007 WL 2089273 (W.D.N.Y. July 20, 2007) .................................................................................................... 27 U.S. Mortgage, Inc. v. Saxton, 494 F.3d 833 (9th Cir. 2007) ....................................................... 10 U.S. W. Fin. Servs., Inc. v. Tollman, 786 F. Supp. 333 (S.D.N.Y. 1992) ...................................... 30 Vermeer Owners, Inc. v. Guterman, 578 N.Y.S.2d 128 (N.Y. 1991) ..............................................8 viii

Walton v. Morgan Stanley & Co., 623 F.2d 796 (2d Cir. 1980) .....................................................3 Zucker v. Sasaki, 963 F. Supp. 301 (S.D.N.Y. 1997) ................................................................... 14 Zuckerman v. Smart Choice Auto. Group, Inc., No. 6:99-Civ.-237-ORL28A, 2000 WL 33996254 (M.D. Fla. Aug. 29, 2000) ............................................................ 26 13 15 U.S.C. § 78bb(f) ................................................................................................................... 11 Gregory A. Markel & Martin L. Seidel, `Core Operations' Doctrine May Undermine PSLRA, N.Y. L. J., Apr. 29, 2010 ....................................................................... 25

ix

PRELIMINARY STATEMENT In the last five months, eight courts in this district and elsewhere have dismissed Madoffrelated claims substantially identical to those asserted here. These claims were dismissed for the same reasons the FG Defendants have moved to dismiss the SCAC. Copies of these decisions are submitted herewith as Appendix A: In Stephenson v. Citco Group Ltd., Judge Holwell held that the Martin Act preempted breach of fiduciary duty, gross negligence, and negligence claims arising out of investments in a feeder fund, Greenwich Sentry, one of the funds at issue here; In Meridian Horizon Fund, LP v. Tremont Group Holdings Inc., Judge Griesa dismissed securities fraud and common law fraud claims for failure to plead scienter and dismissed negligence claims as preempted by the Martin Act; In In re Tremont Sec. Law, State Law & Ins. Litig., Judge Griesa dismissed securities fraud and common law fraud claims for failure to plead scienter and dismissed claims for negligent misrepresentation and breach of fiduciary duty as preempted by the Martin Act; In Barron v. Igolnikov, Judge Griesa held that both the Martin Act and SLUSA preempted claims against a feeder fund for breach of fiduciary duty, gross negligence, and unjust enrichment; In SEC v. Cohmad, Judge Stanton dismissed a securities fraud claim against a broker-dealer with offices on the actual premises of BMIS; In Backus v. Connecticut Community Bank, N.A., Judge Dorsey held that SLUSA preempted plaintiffs breach of contract claim; In Levinson v. PSCC Servs., Inv., Judge Dorsey held that SLUSA preempted fraud, negligent misrepresentation, breach of contract, breach of fiduciary duty, negligence, unjust enrichment, and constructive trust claims; and In CRT v. Merkin, Justice Lowe III of the Supreme Court of the State of New York held that the Martin Act preempted negligent and gross negligent misrepresentation claims. Plaintiffs offer no basis grounded in the law as to why this Court should depart from this consistent and growing authority. Rather, the Plaintiffs rely on mis-citations to case law and to the

1

pleadings in their own complaint to cobble together arguments that are contrary to the governing law. The recent cases and prior authority correctly apply the law dispositive here, as follows: Regardless of which state or countrys law applies, Plaintiffs lack standing because their injuries are entirely derivative of the injuries suffered by the Funds in which they invested. Plaintiffs cannot overcome the authority in this district preempting their claims under the Martin Act and SLUSA. Plaintiffs contention that preemption is limited only to claims alleging violations of the Martin Act or its implementing regulations is contrary to recent decisions and inconsistent with relevant guidance from the New York Court of Appeals. And Plaintiffs claim that a sufficient New York nexus does not exist for the Martin Act has rightly been rejected by the courts in other Madoff cases and is internally inconsistent with their choice of law analysis. Plaintiffs argument that SLUSA does not apply because Plaintiffs did not purchase covered securities directly from Madoff conflicts with the Supreme Courts clear directive that SLUSA should be read broadly, a directive courts around the country have followed in analogous cases. The exculpatory provisions in the investment management agreements shield the FG Defendants from liability. Plaintiffs fail to overcome the fact that far from being partners, the FG companies each were incorporated ­ a fact disclosed to Plaintiffs. No partnership was either intended or established. Plaintiffs have not stated claims under Sections 10(b) and 20(a) of the Exchange Act. Plaintiffs assertion that the FG Defendants were privy to information that contradicted statements in the offering memoranda is not based on any well pled factual allegations in the SCAC, and their attempt to use self-imposed due diligence standards to prove fraud fails as a matter of law. Plaintiffs also do not allege reasonable reliance or loss causation. The § 20(a) claim similarly fails because Plaintiffs have not pled a primary securities fraud violation or the required elements of control and culpable participation. See Reply Brief of the Other Fairfield Defendants, which is incorporated by reference herein. Plaintiffs Opposition does not cure the defects in their common law fraud, negligent misrepresentation, breach of fiduciary duty, and gross negligence claims. Nor does the Opposition salvage Plaintiffs contract-related claims. See Reply Brief of the Fairfield Fee Defendants, which is incorporated by reference herein. Plaintiffs request for punitive damages must be rejected because the SCAC does not come close to alleging that the FG Defendants acted with the requisite high degree of moral culpability. To the contrary, the FG Defendants were victims of the fraud perpetrated by Madoff, and the moral culpability lies with Madoff.

2

Plaintiffs Opposition actually underscores the SCACs deficiencies. Plaintiffs heavy and improper reliance on unsubstantiated allegations by an unidentified, so-called "Confidential Witness" ­ who is not referenced even once in the SCAC ­ is, in essence, an admission of the insufficiency of their pleadings. And the gross overstatements in their brief of the thin facts actually pled in their SCAC also points to the insufficiency of their pleading. Plaintiffs mischaracterizations of their own pleadings in their SCAC are set forth in Appendix B hereto. I. PLAINTIFFS LACK STANDING TO BRING THEIR STATE LAW CLAIMS A. The Law Of The Place Of Incorporation Determines Whether Plaintiffs Have Standing To Bring Claims

Contrary to Plaintiffs argument, New York courts consistently apply the internal affairs doctrine when determining whether shareholders have standing to bring direct claims. 1 Plaintiffs allegations plainly concern the internal affairs of the Funds.2 And contrary to Plaintiffs assertions, the internal affairs doctrine applies to claims against third parties that "relate[] fundamentally to the conduct of the internal affairs" of the corporation.3 Because Sentry and Sigma are British Virgin Islands ("BVI") corporations, and GS and GSP are Delaware limited partnerships, BVI and Delaware law govern whether Plaintiffs have standing to bring their claims directly. B. Plaintiffs Lack Standing To Bring Their Claims Regardless of What Law Applies 1. Plaintiffs Lack Standing Under BVI Law

1

Walton v. Morgan Stanley & Co., 623 F.2d 796, 798 n.3 (2d Cir. 1980); Seybold v. Groenink, No. 06 Civ. 772(DLC), 2007 WL 737502, at *5-6 (S.D.N.Y. Mar. 12, 2007); In re Goldman Sachs Mut. Funds Fee Litig., No. 04 Civ. 2567(NRB), 2006 WL 126772, at *5 n.11 (S.D.N.Y. Jan. 17, 2006).
2

Plaintiffs allege: (1) Noel served as a director of Sentry and Sigma (SCAC ¶ 124); (2) Noel and Tucker were the General Partners of GS at certain points (SCAC ¶ 406) (3) FGBL was the General Partner of GS at certain points and the General Partner of GSP since that Funds inception (SCAC ¶ 119); (4) FGL was the General Partner of GS at certain points (SCAC ¶ 118); and (5) the FG Defendants had significant discretion and control over assets in the funds (SCAC ¶ 124-129).
3

See BSS Norwalk One, Inc. v. Raccolta, Inc., 60 F. Supp. 2d 123, 129 (S.D.N.Y. 1999); see also Stephenson v. Citco Group Ltd., No. 09 Civ. 00716(RJH), 2010 WL 1244007, at *7 (S.D.N.Y. Apr. 1, 2010).

3

Plaintiffs do not contest that under BVI law, shareholders are barred from pursuing a direct claim where their loss is reflective of the companys loss. Pl. Br. at 67; FG Def. Br. at 12-14; Farara Aff. ¶¶ 7-19. Plaintiffs argue that the reflective loss principle does not apply here because the Funds claims may differ from theirs. Pl. Br. at 67. Plaintiffs are wrong. The rule against reflective loss applies even where the shareholder and the company have different claims, as long as they suffer the same loss. Farara Aff. ¶¶ 7-19. Here, the alleged losses are the same: the complete loss of the Funds investments in Madoff. Id.4 Plaintiffs claim that the amounts recoverable by the Funds and the shareholders are different is premised on a ruling by Judge Lifland with respect to the payment of SIPA claims, which obviously differs from the measurement of damages available to the Funds in private actions against the FG Defendants. Plaintiffs argument that the in pari delicto defense may bar Sentry and Sigma (collectively, the "Offshore Funds") from recovery fails under BVI law because Plaintiffs improperly conflate the Funds with the management companies being sued here, and because Plaintiffs do not allege that the contracts the Funds would be suing under ­ the investment management agreements ("IMAs") ­ were illegal or unenforceable. Farara Aff. ¶¶ 42-48. Contrary to Plaintiffs assertions, a BVI court would dismiss the Complaint at this stage of the litigation. Farara Aff. ¶¶ 49-52. 2. Plaintiffs Lack Standing Under Both Delaware and New York Law

Under both Delaware and New York law, a shareholder must suffer "an injury separate and distinct from the injury suffered by the Funds" to have standing.5 Plaintiffs fail to meet this test. They do not complain of separate injury but rather allege harm by Fairfields alleged failure to conduct adequate due diligence and monitoring of BMIS. Far from helping their argument, such
4

Indeed, the Sentry Fund, through its Liquidators, has brought a direct lawsuit in New York state court seeking compensatory damages for the same losses alleged by Plaintiffs. Fairfield Sentry Limited v. Fairfield Greenwich Group, No. 601687/09 ¶ 6 (N.Y. Sup. Ct. filed May 29, 2009).
5

Fraternity Fund Ltd. v. Beacon Hill Asset Mgmt., 376 F. Supp. 2d 385, 408 (S.D.N.Y. 2005) (citation omitted); see also Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031, 1033 (Del. 2004).

4

claims sound in corporate mismanagement and waste6 and as such, are derivative in nature.7 Plaintiffs argument also fails that they have direct claims against the FG Defendants as "thirdparty investment advisors" to the Offshore Funds.8 The cases they cite are inapposite because they involve investors who were advised directly by their own independent investment advisor.9 Here, the FG Defendants were investment managers of the Funds, not investment advisors to the investors, and the SCAC contains no particularized allegations that any specific FG Defendant had direct contact with any Plaintiff. Plaintiffs argument that their claims are direct because they are based on misrepresentations that induced them to maintain their investments in the Funds is also wrong.10 The alleged misrepresentations concern Fairfields risk management practices. Again, claims for mismanagement are derivative in nature. Recasting such a claim as one for misrepresentation fails. See, e.g., Crossen v. Bernstein, No. 91 Civ. 3501(PKL), 1994 WL 281881, at *3 (S.D.N.Y. June 23, 1994); Goldman Sachs, 2006 WL 126772, at *6 (applying Delaware law).11 3. Plaintiffs Improperly Rely on the In Pari Delicto Defense

6

See In re Evergreen Mutual Funds Fee Litig., 423 F. Supp. 2d 249, 261 (S.D.N.Y. 2006); Albert v. Alex. Brown Mgmt. Servs., Inc., Nos. Civ. A. 762-N, 763-N, 2005 WL 2130607, at *13 (Del. Ch. Aug. 26, 2005).
7

See Primavera Familienstifung v. Askin, 130 F. Supp. 2d 450, 494 n.37 (S.D.N.Y. 2001), amended in part by 137 F. Supp. 2d 438 (S.D.N.Y. 2001); Jones v. PricewaterhouseCoopers, LLP, No. 602962/06, 2004 WL 3140909, at *4 (N.Y. Sup. Ct. Nov. 5, 2004).
8

Plaintiffs argue incorrectly that the LPAs confer standing to directly pursue breach of fiduciary duty claims. Pl. Br. at 64 n.61. Standing is a constitutional requirement that cannot be conferred by contract. Primavera Familienstiftung v. Askin, No. 95 Civ. 8905(RWS), 1996 WL 494904, at *12 (S.D.N.Y. Aug. 30, 1996).
9

Rolf v. Blyth, Eastman Dillon & Co., 570 F.2d 38, 41 (2d Cir. 1978); Rasmussen v. A.C.T. Envtl. Servs. Inc., 739 N.Y.S.2d 220, 222 (App. Div. 2002). Moreover, a funds investment adviser owes fiduciary duties only to the fund, not to its investors. See Goldstein v. SEC, 451 F.3d 873, 880-81 (D.C. Cir. 2006).
10

Plaintiffs incorrectly state that the FG Defendants do not contest that Plaintiffs have standing to pursue fraudulent and negligent misrepresentation claims. See FG Def. Br. at 17-18.
11

See also San Diego County Employees Retirement Assoc. v. Maounis, No. 07 Civ. 2618(DAB), 2010 WL 1010012, at *20 (S.D.N.Y. Mar. 15, 2010) (citation omitted); Aboushanab v. Janay, No. 06 Civ. 13472(AKH), 2007 WL 2789511, at *6 (S.D.N.Y. Sept. 26, 2007); Lee v. Marsh & McLennan Cos., No. 009717/06, 2007 WL 4303514, at *5-6 (N.Y. Sup. Ct. Dec. 7, 2007).

5

Plaintiffs reliance on in pari delicto (the Wagoner rule) as a basis for standing is misguided. Pl. Br. at 65-66. The Wagoner rule prohibits a bankruptcy trustee from suing third parties for injuries to the debtor corporation where the corporation would have been barred from bringing such a claim by virtue of its involvement in the wrongdoing. Shearson Lehman Hutton, Inc. v. Wagoner, 944 F.2d 114, 118 (2d Cir. 1991). It does not provide an independent basis for shareholder standing. Id. See, e.g., ABF Capital Mgmt. v. Askin Capital Mgmt., L.P., 957 F. Supp. 1308, 1333-34 (S.D.N.Y. 1997); Primavera Familienstiftung v. Askin, No. 95 Civ. 8905(RWS), 1996 WL 494904, at *12 (S.D.N.Y. Aug. 30, 1996).12 II. THE MARTIN ACT PREEMPTS THE NON-FRAUD COMMON LAW CLAIMS A. Recent Decisions Confirm Martin Act Preemption of Plaintiffs' Claims

The overwhelming majority of New York state and federal court decisions hold that Martin Act preemption applies in analogous circumstances (see FG Def. Br. at 18-20).13 Plaintiffs claim that the more recent authority goes the other way is plainly wrong. Since the filing of the motions to dismiss, five additional decisions in federal and state courts have been rendered in Madoffrelated cases holding that the Martin Act preempts Plaintiffs non-fraud common law claims here. See cases attached in Appendix A. Stephenson v. Citco Group Ltd., No. 09 Civ. 00716(RJH), 2010 WL 1244007 (S.D.N.Y. Apr. 1, 2010) is particularly instructive. There, as here, plaintiff asserted claims for losses in his
12

Plaintiffs argue that where a trustee lacks standing, it ,,accrues to the creditors" (Pl. Br. at 65), but Plaintiffs are equity investors, not creditors. In Hirsch v. Arthur Andersen & Co., the Second Circuit held that a bankruptcy trustee does not have standing to pursue claims that can be pursued by shareholders as direct claims, but here the shareholders and limited partners do not have standing to bring direct claims. 72 F.3d 1085, 1093-94 (2d Cir. 1995); see also Stephenson v. Citco Group Ltd., No. 09 CV 00716 (RJH), 2010 WL 1244007, *8 (S.D.N.Y Apr. 1, 2010) (finding that Hirsch did not support argument that limited partner had standing to pursue claims properly belonging to Greenwich Sentry).
13

Plaintiffs instead rely on a small minority of cases that have not been followed in recent cases. See Pro Bono Invs., Inc. v. Gerry, No. 03 Civ. 4347(JGK), 2005 WL 2429787, at *16 (S.D.N.Y. Sept. 30, 2005) (Cromer and Scalp & Blade ",,stand as solitary islands in a stream of contrary opinion") (quotations omitted); Joffee v. Lehman Bros., Inc., No. 04 Civ. 3507(RWS), 2005 WL 1492101, at *13 (S.D.N.Y. June 23, 2005) (same).

6

investment in Greenwich Sentry which invested in BMIS and alleged that defendants failed to carry out their duties and investigate purported "red flags" that should have alerted them to Madoffs fraud. Id. at *5-6. Judge Holwell dismissed the claims for, inter alia, breach of fiduciary duty and gross negligence based on Martin Act preemption, joining the "multitude of courts [that] have dismissed claims materially similar" to those asserted here. Id. at *12, 15 (citations omitted). In the Tremont feeder fund cases, Judge Griesa similarly held that the Martin Act preempts non-fraud claims arising out of investment funds losses in BMIS. The court noted that "the Second Circuit has adopted the First Departments rule that the Martin Act preempts common law tort claims in the securities context." 14 And just this month, State Supreme Court Justice Lowe held that the Martin Act preempted negligent misrepresentation claims against a general partner and investment manager of funds invested in Madoff. See CRT v. Merkin, No. 601052/09, slip op. at 10 (N.Y. Sup. Ct. May 5, 2010).15 B. Martin Act Preemption is Not Limited to Causes of Action Pleading Violations of Martin Act Regulations

Plaintiffs attempt to limit preemption only to claims alleging a violation of the Act or its implementing regulations has been rejected. See Stephenson v. Citco Group Ltd., No. 09 Civ. 00716(RJH), 2010 WL 1244007, at *12-13 (S.D.N.Y. Apr. 1, 2010). Also wrong is Plaintiffs representation that no New York Court of Appeals decision supports preemption. In CPC Int'l Inc. v. McKesson Corp., 519 N.Y.S.2d 804 (N.Y. 1987), the Court of Appeals held that there is no implied private right of action under Act because it would be inconsistent with the legislative
14

See Meridian Horizon Fund, LP v. Tremont Group Holdings, Inc., No. 09 Civ. 3708(TPG), 2010 WL 1257567, *8 (S.D.N.Y. Mar. 31, 2010) (citation omitted) (noting that complaint was centered on allegations of misrepresentations and omissions with respect to the diligence performed on the funds) (negligence); In re Tremont Sec. Law, State Law & Ins. Litig., 08 Civ. 11117(TPG), 2010 WL 1257580 (S.D.N.Y. Mar. 30, 2010) (breach of fiduciary duty, aiding and abetting breach of fiduciary duty, and negligent misrepresentation).
15

See also Barron v. Igolnikov, No. 09 Civ. 4471(TPG), 2010 WL 882890 (S.D.N.Y. Mar. 10, 2010) (breach of fiduciary duty, gross negligence, and unjust enrichment). As here, the core of the complaints was "that defendants failed to perform adequate due diligence before investing the [funds] assets with Madoff." Id. at *6.

7

scheme providing the Attorney-General with broad regulatory and remedial powers to prevent fraudulent securities practices. Id. at 807. In light of that clear directive, the majority of New York state and federal courts appropriately have determined that Martin Act preemption applies to nonfraud common law causes of action because to hold otherwise ,,"would effectively permit a private claim under the Martin Act." Castellano v. Young & Rubicam Inc., 257 F.3d 171, 190 (2d Cir. 2001); see also Kassover v. UBS AG, 619 F. Supp. 2d 28, 39 (S.D.N.Y. 2008).16 Plaintiffs misstate the holding in Kerusa Co. v. W10Z/515 Real Estate Ltd. P'ship, 12 N.Y.3d 236 (N.Y. 2009), in which the Court of Appeals held that the Martin Act preempts common law fraud claims where the fraud is based solely on alleged violations of the Attorney Generals implementing regulations in light of § 352-e of the Act. Id. at 243-45. The court did not address preemption under § 352-c, the provision applicable here. In fact, Judge Holwell recently held "[t]he reasoning of Kerusa supports the traditional application of preemption to claims that are covered by § 352-c of the Martin Act." Stephenson v. Citco Group Ltd., No. 09 Civ. 00716(RJH), 2010 WL 1244007, at *13 (S.D.N.Y. Apr. 1, 2010) (emphasis added).17 C. The Martin Act's Geographic Prong is Satisfied

Plaintiffs try to avoid Martin Act preemption by arguing that the shares in the Funds were not "primarily" sold within or from New York and some plaintiffs may have interacted with the FG Defendants exclusively outside New York. But Plaintiffs misconstrue the legal test, which requires only that a substantial portion of the events giving rise to the claim occurred in New York.
16

Similarly off the mark is Plaintiffs reliance on N.Y. Univ. v. Ariel Fund, Ltd., No. 603803/08 (N.Y. Sup. Ct. Feb. 22, 2010). See Pl. Br. at 98 n.83. There, the court awarded attorneys fees to NYU after it discontinued its derivative action to allow it to be "subsumed by the AGs action." Slip op. at 5. The award was based on the determination that NYU, in having pursued derivative claims on behalf of the fund, conferred a "substantial benefit" to the fund and its investors, and not, as Plaintiffs suggest, on any notion that a private right of action would deter securities fraud and should not be preempted. Slip op. at 9.
17

Furthermore, in Vermeer Owners, Inc. v. Guterman, 578 N.Y.S.2d 128 (N.Y. 1991), the Court of Appeals extended its reasoning in McKesson, holding that there is no private right of action under Section 352-e of the Martin Act. Id. at 129.

8

See FG Def. Br. at 19 n.22; see also Ashland Inc. v. Morgan Stanley & Co., No. 09 Civ. 5415(RPP), 2010 WL 1253932, at *16 (S.D.N.Y. Mar. 30, 2010). That test is easily met here because (i) the FG entity defendants had offices and were registered to do business in New York; (ii) a majority of the FG individual defendants were residents or based out of New York; (iii) partnership and equity interests were sold from and to investors in New York; (iv) offering and other fund-related materials were disseminated from New York; and, not least important, (v) Madoffs fraud was perpetrated from New York.18 Cf. Meridian Horizon, No., 2010 WL 1257567, at *8; Barron, 2010 WL 882890 at *6. On these facts, the court in Stephenson ruled that the Martin Act geographic nexus is met with respect to one of the Funds, Greenwich Sentry. 2010 WL 1244007, at *14-15. Plaintiffs own allegations that venue is proper in New York and that their claims arise under New York law further support preemption.19 Finally, the fact that the New York AG has brought claims under the Martin Act against another feeder fund actually "highlights the appropriateness of Martin Act-preemption here." Meridian Horizon, 2010 WL 1257567, at *8. III. SLUSA PREEMPTS PLAINTIFFS' STATE LAW CLAIMS A. SLUSA Does Not Require Direct Purchases of Covered Securities By Plaintiffs

Plaintiffs concede that the "equity securities" the Funds purchased through BMIS are "covered securities" under SLUSA. Pl. Br. at 86. The fact that Plaintiffs did not purchase those securities directly is irrelevant. The Supreme Court has held that SLUSA preemption applies where "the fraud alleged ,,coincides with a securities transaction-whether by the plaintiff or by someone else." Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit, 547 U.S. 71, 85 (2006)

18 19

See SCAC ¶¶ 118, 120, 122, 125, 126, 128, 129, 132-134, 136-138, 140, 142, 143, 146, 172, 173.

SCAC ¶ 7; Pl. Br. at 46-49. See Ashland, 2010 WL 1253932 at *17; Sedona Corp. v. Ladenburg Thalmann & Co., No. 03 Civ. 3120(LTS)(THK), 2005 WL 1902780, at *22 (S.D.N.Y. Aug. 9, 2005).

9

(emphasis added). Courts following that directive have applied SLUSA in cases where plaintiffs were not the direct purchasers.20 The holdings of two recent Madoff cases are directly applicable here. In Barron, the court held that "the securities transaction need not have been performed by plaintiff" in order for SLUSA to apply and concluded that the "covered securities" requirement was satisfied where plaintiffs "purchased limited partnership interests in the UBP Funds ­ which in turn invested in covered securities ­ rather than covered securities directly from Madoff." 2010 WL 882890 at *5. In Backus v. Conn. Cmty. Bank, N.A., No. 3:09-CV-1256, 2009 WL 5184360, at *5 (D. Conn. Dec. 23, 2009), the court held that SLUSA applied where plaintiffs invested in the defendant Bank, which in turn invested in Madoff, because the "covered securities" were those "represented to be bought, sold, and held by the BLM 1 and 2 entities." B. The "In Connection With" Element is Satisfied

The "in connection with" element is satisfied here because "the fraud alleged ,,coincide[s] with [the] securities transaction." Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit, 547 U.S. 71, 85 (2006). Here, the crux of the SCAC is that Fairfield misrepresented the diligence and monitoring it was performing to confirm that Madoff was, in fact, purchasing covered securities. See FG Def. Br. at 24. As recent cases demonstrate, this is sufficient to establish the "in connection with" element. See, e.g., Backus, 2009 WL 5184360, at *8 (banks alleged misrepresentations concerning the value of securities invested with Madoff "not only coincide[d] with, but center[ed] on, the purchase and sale of securities"); see also Levinson v. PSCC Servs.,

20

See, e.g., Siepel v. Bank of Am., 526 F.3d 1122, 1127 (8th Cir. 2008); U.S. Mortgage, Inc. v. Saxton, 494 F.3d 833, 844-45 (9th Cir. 2007), abrogated on other grounds as recognized in Proctor v. Vishay Intertech. Inc., 584 F.3d 1208, 1220 n.8 (9th Cir. 2009); Sullivan v. Holland & Knight LLP, No. 8:09-CV-531-T-17AEP, 2010 WL 1558553, at *6 (M.D. Fla. Mar. 31, 2010); Horattas v. Citigroup Fin. Mkts. Inc., 532 F. Supp. 2d 891, 903 (W.D. Mich. 2007); Falkowski v. Imation Corp., 309 F.3d 1123, 1129 (9th Cir. 2002); In re WorldCom, Inc., 263 F. Supp. 2d 745, 753-54, 769 (S.D.N.Y. 2003).

10

Inc., No. 3:09-CV-00269(PCD), 2009 WL 5184363, at *11-12 (D. Conn. Dec. 23, 2009); Sullivan v. Holland & Knight LLP, No. 8:09-CV-531-T-17AEP, 2010 WL 1558553, at *3-4, *6 (M.D. Fla. Mar. 31, 2010) (SLUSA barred claims where complaint centered on alleged failure to "do adequate due diligence"). 21 The "in connection with" requirement also is satisfied here because the "nature of the parties relationship...necessarily involved the purchase and sale of securities." Levinson, 2009 WL 5184363, at *11 (holding this requirement satisfied where the parties agreement "authorized the custodians to transmit Plaintiffs funds to BLMIS for investment"); see also Dommert v. Raymond James Fin. Servs., Inc., No. Civ. A. 1:06-cv-102, 2007 WL 1018234, at *11-12 (E.D. Tex. Mar. 29, 2007) (SLUSA preempted claims against investment manager because the parties agreement specified that defendant would utilize and expand upon plaintiffs assets and "[t]he very reason that the parties entered into that Agreement was for the ,,purchase or sale of securities."). Here, the PPMs explicitly state that the Funds objective is to "seek to obtain capital appreciation" through the SSC strategy. See, e.g., 8/14/06 Sentry PPM (Ex. 1) at 9 (Unless otherwise noted, "Ex. __" refers to exhibits attached to the December 22, 2009 Declaration of Michael Thorne).22
21

Plaintiffs incorrectly assert that in Backus and Levinson there were no separate independently managed entities like the Funds here. Pl. Br. at 92. In both cases plaintiffs alleged that PSCC, a firm providing retirement fund investment consulting services, advised plaintiffs to invest in BLMIS-managed funds, Backus, 2009 WL 5184360, at *1; Levinson, 2009 WL 5184363, at *1, and that PSCC, together with defendant banks, made false statements. Levinson, 2009 WL 5184363, at *1, *4. Barron, Backus, and Levinson are the only decisions to address SLUSA preemption in the context of Madoff-related lawsuits, and all find that preemption applies. And in Pension Comm. of the Univ. of Montreal Pension Plan v. Banc of Am. Sec., LLC, No. 05 Civ. 9016(SAS), 2010 WL 546964 (S.D.N.Y. Feb. 16, 2010), on which Plaintiffs rely (see Pl. Br. at 91 n.80; 92-93), the court expressly distinguished the Madoff situation, noting that the plaintiffs in Backus invested in an intermediate investment vehicle "for the purpose of purchasing covered securities." Id. at *3 n.27. The court reasoned that "[u]nlike Backus . . . the covered securities are not ,,at the heart of this case." Id.
22

Plaintiffs reliance on the "Delaware carve-out" is misplaced. The carve-out by its terms is inapplicable to any claim other than the breach of fiduciary duty claim. 15 U.S.C. § 78bb(f). And as to that claim, the carve-out is inapplicable because it requires that the shares at issue be sold exclusively to current shareholders of the issuer, which is not the case here. 15 U.S.C. § 78bb(f)(3)(A)(ii)(I) (2000); see also Burekovitch v. Hertz, No. 01-CV1277(ILG), 2001 WL 984942, at *6 (E.D.N.Y. July 24, 2001); G.F. Thomas Invs., L.P. v. Cleco Corp., 317 F. Supp. 2d 673, 681-85 (W.D. La. 2004) ("[O]nly when shares of stock are purchased or sold to a limited market (that of the corporations current shareholders) will the Delaware carve-out provision apply.")

11

IV.

THE EXCULPATORY PROVISIONS IN THE INVESTMENT MANAGEMENT AGREEMENTS BAR CLAIMS BY SENTRY AND SIGMA PLAINTIFFS The exculpatory provisions in the IMAs bar the claims brought by Plaintiffs who invested

in the Offshore Funds. See FG Def. Br. at 24-26. Plaintiffs concede that under Bermuda law, these provisions bar all claims other than those based on willful misconduct, bad faith, or reckless disregard. Pl. Br. at 79. Because, contrary to the rhetoric in Plaintiffs brief, the SCAC does not allege such misconduct, all of Plaintiffs claims are barred as a matter of Bermuda law. Supplemental Affidavit of Rod Attride-Stirling ("Attride-Stirling Aff.") ¶¶ 65, 67. Plaintiffs argument that the exculpatory provisions are inapplicable to claims that are "independent of the contract between the Funds and FGBL" (Pl. Br. at 81) is wrong because, as discussed supra, all of Plaintiffs claims belong to the Funds. Nor can Plaintiffs assert that these provisions do not apply because the FG Defendants owed them a separate duty. The SCAC fails to establish any such duty under Bermuda law. Attride-Stirling Aff. ¶ 22. Finally, the argument that the Bermuda Supply Services Act ("SoSA") "invalidates" the exculpatory provisions is unavailing. Pl. Br. at 79. SoSA does not prohibit the parties to a contract from limiting liability for a breach of its terms, whether express or implied. Attride-Stirling Aff. ¶¶ 56-59.23 V. PLAINTIFFS FAIL PROPERLY TO ALLEGE THAT EACH FG DEFENDANT WAS PART OF A PARTNERSHIP The Opposition does not remedy the SCACs failure properly to allege that each FG Defendant was part of a partnership ­ real or de facto.24 Plaintiffs do not identify any agreement indicating the FG Defendants intended to be partners. To the contrary, the FG Defendants intention not to form a partnership is evidenced by the distinct corporate status held by each of the
23

By their terms, the exculpatory provisions apply to FGBL and to the individual FG Defendants as directors and officers of FGBL. To the extent other FG Defendant entities were agents of FGBL, they also are protected. Attride-Stirling Aff. ¶ 60.
24

The Opposition does not argue "partnership by estoppel" and thus that theory is not addressed herein, but is discussed in the FG Defendants opening brief (see FG Def. Br. at 28).

12

entity FG Defendants. See SCAC ¶¶ 118-121; see FG Def. Br. at 26-27. And the offering memoranda indisputably provided notice of the entity FG Defendants corporate form. 25 Also, as Plaintiffs concede, the PPMs clearly disclosed that the individual FG Defendants held director or officer positions. Pl. Br. at 77; see also 12/01/08 Sigma PPM (Ex. 2) at 5-8 & Form ADV Part II. Plaintiffs attempt to draw attention from their failure to plead a partnership by arguing that Fairfield Greenwich Group ("FGG") is a legal entity that can be sued. Even setting aside the fact that FGG was only a marketing name (see FG Def. Br. at 1 n.1), this would not absolve Plaintiffs of their obligation to plead facts that show FGG operated as a partnership and that each FG Defendant was a partner. The application of the factors New York courts consider in testing for the existence of a partnership confirms that the FG Defendants were not partners.26 VI. PLAINTIFFS FAIL TO SAVE THEIR FEDERAL SECURITIES FRAUD CLAIMS Plaintiffs have sued the FG Defendants for securities fraud without alleging that they knew, or even suspected, that Madoff was a fraud. See Pl. Br. at 1 ("The Defendants are not being sued for their purported ignorance in not knowing Madoff was himself the worlds biggest fraudster."). This is counterintuitive and contrary to recent authority in this district. See SEC v. Cohmad Sec. Corp., No. 09 Civ. 5680(LLS), 2010 WL 363844, at *1 (S.D.N.Y. Feb. 2, 2010) ("[T]he complaint does not allege statements or omissions by defendants that are fraudulent absent awareness or

25

The Oppositions reliance on marketing materials is inappropriate. Plaintiffs do not contest that the offering memoranda were the only documents on which they properly could rely. See FG Def. Br. at 29.
26

Plaintiffs do not adequately address these factors. First, they point to no facts suggesting that the FG Defendants shared in losses, which alone is fatal to Plaintiffs claim. See FG Def. Br. at 27-28. Second, the assertion that the FG Defendants jointly controlled the management of the business is undermined by allegations in the SCAC (see ¶¶ 118-129) and disclosures in the offering memoranda, which clearly delineate the different corporate functions and corporate positions held by each FG Defendant. 12/01/08 Sigma PPM (Ex. 2) at 5-8 & Form ADV Part II. Third, Plaintiffs have not pointed to any facts showing that the FG Defendants contributed property or financial resources to FGG. A partnership cannot be inferred from the mere fact that the individual FG Defendants used their skills and knowledge in working for incorporated FG companies. Fourth, Plaintiffs have not alleged that the FG Defendants intended to form a legal partnership.

13

notice that Madoffs investment advisory business was a sham.").27 Moreover, nothing in the Opposition cures Plaintiffs failure to plead scienter, justifiable reliance, and proximate causation ­ each a required element of Section 10(b) claim liability. A. Plaintiffs Have Not Pled Scienter 1. Plaintiffs Motive Allegations are Insufficient and Undermined by the FG Defendants Personal Investments in Madoff

The FG Defendants purported earnings of large fees for their work with the Funds, even if true,28 does not establish motive. "To accept a generalized allegation of motive based on a desire to continue to obtain management fees would read the scienter requirement out of the statute." Edison Fund v. Cogent Inv. Strategies Fund, Ltd., 551 F. Supp. 2d 210, 227 (S.D.N.Y. 2008) (allegation of "extraordinarily high management fees" insufficient to plead motive). Further, the fact that five of the six individual FG Defendants had personal assets at stake with Madoff and all the FG Defendants had their reputations on the line ­ facts Plaintiffs completely ignore ­ is fatal to Plaintiffs motive allegations. See FG Def. MTD at 31-32.29 2. Plaintiffs Do Not Plead Conscious Misbehavior or Recklessness a. Plaintiffs Cannot Use the FG Defendants Self-Imposed Due Diligence and Monitoring Standards to Prove Fraud

27

Meridian Horizon Fund, LP v. Tremont Group Holdings, Inc., No. 09 Civ. 3708(TPG), 2010 WL 1257567, at *6 (S.D.N.Y. Mar. 31, 2010); see also Stephenson v. Citco Group Ltd., No. 09 Civ. 00716(RJH), 2010 WL 1244007, at *1 (S.D.N.Y. Apr. 1, 2010); cf. In re Bayou Hedge Fund Litig., 534 F. Supp. 2d 405, 417 (S.D.N.Y. 2007), aff'd, S. Cherry St., LLC v. Hennessee Group LLC, 573 F.3d 98 (2d Cir. 2009).
28

Plaintiffs do not allege in the SCAC that the fees were excessive as compared to other hedge fund managers, which they were not. In any event, such an allegation would be insufficient to plead motive. Cf. In re JP Morgan Chase Sec. Litig., 363 F. Supp. 2d 595, 602 (S.D.N.Y. 2005). Plaintiffs contention in their brief that the Fairfield defendants lacked the management experience to justify their fees is contradicted by their allegations in the SCAC. See, e.g. SCAC ¶¶ 124-129.
29

See also Plumbers & Steamfitters Local 773 Pension Fund v. Canadian Imperial Bank of Commerce, No. 08 Civ. 8143(WHP), 2010 WL 961596, at *9 (S.D.N.Y. Mar. 17, 2010); Zucker v. Sasaki, 963 F. Supp. 301, 310 n.12 (S.D.N.Y. 1997).

14

The assertion that an inference of scienter can be "drawn from the allegations concerning specific representations of undertakings made in the PPMs" is wrong. Pl. Br. at 26. In Bayou, Judge McMahon held that "[t]he allegation that Hennessee Group promised to conduct a uniquely comprehensive brand of due diligence but failed to do so is insufficient to establish the requisite strong inference of conscious recklessness," and the Second Circuit affirmed. In re Bayou Hedge Fund Litig., 534 F. Supp. 2d at 416, aff'd, S. Cherry St., LLC, 573 F.3d at 112.30 Plaintiffs attempt to distinguish Bayou is unavailing. The fact that the defendant in Bayou lacked its own fund, made other investment recommendations, and highlighted its due diligence process in a marketing brochure rather than in a PPM were not bases for the broad holding that self-imposed due diligence standards cannot be used to prove fraud. And contrary to Plaintiffs assertions, plaintiffs in that case did allege red flags, South Cherry, 573 F.3d at 112, and the defendants representations about its due diligence process were assumed to be specific. In re Bayou Hedge Fund Litig., 534 F. Supp. 2d at 416.31 Plaintiffs do not cite a single post-PSLRA case where a defendants self-imposed due diligence standards were sufficient to prove fraud. The reasons not to allow that are manifold. First, it violates public policy and is "unfair to use professionals self-imposed standards, which may exceed industry standards, against them to try to prove fraud." In re Bayou Hedge Fund Litig., 534 F. Supp. 2d at 416 (internal quotation marks and citation omitted). Second, the failure to perform promised due diligence is a contract issue, not securities fraud. Cf. S. Cherry St., 573

30

Even a failure "to perform due diligence commensurate with industry standards is inadequate to plead scienter." In re Bayou Hedge Fund Litig., 534 F. Supp. 2d at 416.
31

While the district court addressed only whether the defendants representations about its due diligence were actionable, the Second Circuit went further and rejected the theory that the defendant could be liable "when it represented, among other things, the performance history, investment strategy, principals track record and auditors identity for Bayou Accredited and its predecessor fund on the basis of thorough due diligence HG claimed to have performed, but did not." S. Cherry, 573 F.3d at 112 (emphasis omitted).

15

F.3d at 115.32 Finally, the claim that a defendant failed to perform adequate due diligence is virtually indistinguishable from the claim that the defendant failed to exercise appropriate risk management practices, which has been rejected as a basis for pleading securities fraud.33 b. The SCAC Does Not Allege the FG Defendants Had Information Contradicting Statements Made in the PPMs

Plaintiffs primary argument on scienter ­ that the FG Defendants had information that contradicted statements made in the PPMs ­ is a fiction without support in the SCAC. First, with respect to representations about strategy and performance, the SCAC does not point to a single document or any other source to which the FG Defendants had access that revealed Madoff was not executing the SSC strategy or that performance figures for the SSC Funds were inaccurate.34 Instead, Plaintiffs allege in entirely conclusory terms that Fairfield had "no independent factual basis about the Funds investment strategy" and that it did not "verify independently" the SSC Funds returns. SCAC ¶¶ 186, 189. Even if these allegations were true (and they are not), they would be insufficient to plead scienter. Cf. S. Cherry, 573 F.3d at 112 (scienter not alleged where complaint was "replete with allegations that HG ,,would have learned the truth as to those aspects of the Bayou funds if HG had performed the ,,due diligence it promised."); see also Teamsters Local 445 Freight Div. Pension Fund v. Dynex Capital, Inc., 531 F.3d 190, 196 (2d Cir. 2008).35
32

The prospective language used to describe the alleged fraud underscores the contractual nature of Plaintiffs case. See, e.g., SCAC ¶ 355. Indeed, Plaintiffs have brought a contract claim based on the same allegations. See SCAC ¶¶ 410-416.
33

See, e.g., In re Citigroup, Inc. Sec. Litig., 330 F. Supp. 2d 367, 377 (S.D.N.Y. 2004); Estate of Detwiler v. Offenbecher, 728 F. Supp. 103, 143 (S.D.N.Y. 1989).
34

The reference in the SCAC to an unidentified New York Times